ESRI questions tax and USC strategy

Cutting the top rates of Universal Social Charge (USC) and income tax in the next budget would have a strong positive impact effect on the wealthiest 10 per cent of taxpayers but little effect on households at low and middle income levels, according to an assessment by the ESRI.

In a paper to be published at today's annual Budget Perspectives conference, the think tank also says cuts in the standard rates of income tax and USC, increases in tax credits or widening the bands at which people pay income tax would all benefit those mainly in upper middle and middle income households.

Increasing income for those at lower income levels would be most effectively done by increasing welfare payments, the report, Exploring Tax and Welfare Options, states.

Cutting USC

The Government has agreed that cutting the rate of USC will be the main focus of the budget tax package in a move confirmed earlier this month by Taoiseach Enda Kenny and Tánaiste Joan Burton in separate speeches.

However, rising wages could see half of the Government’s maximum €1.5 billion Budget 2016 package required just to preserve the current real value of social welfare payments and tax credits and bands, never mind improving people’s position. the ESRI suggests.

The paper, written by Prof Tim Callan, Brian Colgan, Michael Savage and John Walsh, says wage growth of 2.5 per cent could see the Government having to spend over €450 million just to ensure welfare recipients to do not lose out. *

A “standstill” position for taxpayers would see a further €311 million spent in widening tax bands and increasing credits.

‘Fiscal space’

Speaking about the Spring Economic Statement, Minister for Finance Michael Noonan said there would be “fiscal space” for tax reductions and public service investment of between €1.2 and €1.5 billion.

Analysis by the ESRI says indexing benefits, tax bands and credits would account for anything from a third of the available funds at the lower end – assuming 1 per cent wage growth – to a half of the maximum leeway given, assuming wages jump 2.5 per cent this year.

The ESRI paper looks at various scenarios, involving income tax reductions, adjustments to tax bands, increases in the personal tax credit, lower rates of USC and changes to welfare payments.

It questions the long-term viability of Ireland’s current three-strand approach to income taxes – income tax, PRSI and USC, noting that most countries settle for two strands.

* This copy was edited on June 17th