Tax and high earners: Six key points in the budget debate

Nothing makes people's blood boil like tax. That much is clear from the reaction to this morning's paper from the Irish Tax Institute, which looks at part of the Government's stated tax plan – the abolition of the PAYE credit for higher earners.

Judging by the reaction on Twitter and other social media this morning, this is going to be a difficult area for the Government to gain any political points. People are still exercised about the tax take on their own income, and about the structure of the whole system. So lets’s look at what we know – and what we don’t know.

1. The Government has indicated that it is trying to develop a plan under which everyone will gain from tax cuts, but said that there will be measures to claw back some – or perhaps most – of the gains from higher earners. Minister for Finance Michael Noonan has said: "We want everyone on an income to gain from this. But we want the gains to be proportionate." The elimination of the PAYE credit – worth €1,650 per annum – for those on higher incomes is seen as one of the key ways to take back some of the gains from other changes from the better off.

2. The Institute of Tax's paper looks specifically at the impact of the likely phasing out of the PAYE tax credit, and some problems it believes this will throw up. It warns that this will add to the tax burden for those earning above the level at which the phase out starts – it suggests these might be either €70,000 or €80,000, though we don't know. The likely net position for higher earners when other budget measures are counted in is not clear.

The report highlights one particular factor, which is that the phasing out of the credit could lead to a big jump in the marginal rate of tax, the amount paid on every extra bit of income, for a portion of salary. For example, if the credit was phased out between €70,000 and €80,000,someone on €75,000 would face a tax take of 68.5 per cent on additional income up to €80,000. After that level the marginal rate reverts to 52 per cent.

3. As the institute made clear, we don't know how this will be structured, or how the cuts in the tax credit will play against planned reductions in USC – likely to involve a cut in the main 5.5 per cent rate – and other measures. The Government has also referred to a "solidarity levy" on higher earners. Does this refer to the PAYE credit cut or something different? We don't know yet.

4. The marginal tax rate matters because it affects people's decisions on whether to, say, work overtime, or the sums involved when people get a pay increase. A separate calculation looks at the so-called effective rate – the percentage of all income taken by income tax, USC and employee PRSI. The institute calculates that this is 36.4 per cent now on someone on a €75,000 salary. This is lower than Frankfurt (43.97 per cent) and Amsterdam (40.47 per cent), but higher than Paris (35.87 per cent), Stockholm (35.22 per cent), Madrid (32.47 per cent) and London (29.23 per cent).

5. One thing this all highlights is the complexity of the impact of the variety of taxes and charges now imposed on people's incomes – and how changing this is complicated and can have a variety of consequences. As the institute points out, we already have separate income tax, USC and PRSI systems, all with separate entry points and a variety of bands and credits. There are two income tax rates, five USC rates, one employee PRSI rate and two rates for employers' PRSI.

6. Politically, there is a big challenge here for the Government, particularly as most of the extra resources available in the budget are to go on extra spending. Creating a package that will deliver meaningful gains, while at the same time being accepted as "fair" and workable, will not be straightforward. Business lobby groups are also calling for income tax reductions as a reaction to Brexit. Meanwhile, the Government has promised to focus gains on lower earners, and to also improve the lot of the self-employed and entrepreneurs.