The Minister for Finance could well make changes to ensure that those on the average industrial wage pay tax only at the standard rate, writes Cliff Taylor, Economics Editor

At the height of the Celtic Tiger boom, it was only a question of how much tax relief we could expect on budget day. Income tax rates tumbled in successive budgets.

Over the past couple of budgets, the position has changed - reliefs have been minimal and, after wage inflation, most taxpayers have found a higher proportion of their income taken in tax, and have been subjected to a range of other "stealth" charges.

Budget 2005 should stop the rot for taxpayers. But will it make things much better?

Over the past couple of budgets, the failure to index tax credits and the standard rate band for inflation have done two things. First, more people have been pulled into the tax net. And second, more now have to pay at the higher 42 per cent rate on some of their income.

The figures on people being pulled into the higher 42 per cent rate are particularly striking.

In 2002 just 26.7 per cent of taxpayers had part of their income taxed at 42 per cent, with the rest liable only at the standard 20 per cent rate. By last year, the percentage caught by the higher rate had risen to 32.6 per cent. If there is no adjustment to the standard rate band - the income limit which determines how much income is taxed at the lower rate - then the percentage liable at the higher rate will increase to 35.9 per cent next year.

In other words, if the Minister for Finance, Mr Cowen, does not act, a further 63,000 taxpayers will become liable at the higher rate next year. Many of them would only pay a small amount at the higher 42 per cent rate, of course. But the important point is that their marginal rate - the rate which they would pay on an additional euro of income - would increase.

The Government has two key commitments in its programme in relation to income tax. One is to remove all those on the minimum wage from the tax net. The other is to ensure that just 20 per cent of taxpayers pay at the higher rate. Achieving either in full is likely to be impossible this year - the key question is where the priorities will be set.

Mr Cowen is likely to both increase the tax band and push up credits, but - with a limited amount of extra cash to spend - it remains to be seen where the extra cash will go.

The pre-Budget indications - reinforced by the Taoiseach's recent conversion to socialism - are that the focus will be on lower earners. This points towards a significant increase in the tax credits. Increasing credits benefits all taxpayers, but it gives the highest proportional benefit to the less well-off. An extra €20 a month in tax credits gives a bigger percentage boost to someone on on €20,000 than to someone on €50,000 - even if the cash boost in both cases is identical.

Increasing tax credits is also the best way to lift more of the very lowest earners out of the tax net completely and to move towards the goal of removing those on the minimum wage from the tax net completely.

Since February, the minimum wage is €7 per hour, or about €273 per week. At the moment, about 90 per cent of the income of someone on the minimum wage is exempt from income tax.

Exempting all income on the minimum wage may be too costly a step in one budget, although conceivably the Minister could go a lot of the way in relation to PAYE workers if he concentrated on just increasing the PAYE tax credit, currently €1,040 a year.

However, by doing this he could be accused of discriminating against low earners in other areas - such as small farmers or shopkeepers - who do not qualify for the PAYE credit, but do qualify for the more general credits.

There is, therefore, a decision for the Minister on how he wants to progress towards this key policy goal, which was underlined in the Sustaining Progress national agreement.

If he spends considerably on tax credits, then how much will be left for increasing the standard rate band?

Progress in this area is not cheap. An analysis published last week by the Department of Finance showed that to just maintain the percentage of taxpayers liable at the standard rate at 2004 levels next year would cost €261 million in a full year. This would involve increasing the standard rate band from €28,000 to €30,500 for a single person and double this to €61,000 for a married couple where both are working. However this costing does not involve an increase in the €37,000 band for single-income families.

Increasing the single band to more than €30,000 would allow the Minister to say that everyone on the average industrial wage is now only liable at the standard rate. So he is likely to go this far at least.

The question is whether he will go much further - and he may not have the cash to do so if he spends heavily on credits.

Another issue is how he will deal with single-income families. If he leaves the band for married couples with one earner at €37,000 and increases the other bands, he will be continuing the individualisation process, which led to some flak for his predecessor Mr McCreevy.

Elsewhere in the income tax system, few changes are anticipated. There have been loud calls for tax relief for childcare and, while this would be costly, it would be a very popular measure.

The Minister has already signalled in the estimates an increase in the employee PRSI ceiling - levied at 4 per cent for most taxpayers - from €42,160 this year to €44,180 next year. This is subject to change on Budget Day, but rumours that the ceiling might be abolished altogether have waned.

And what of tax breaks and the infamous 11 millionaires who paid no tax? The Minister may talk about this area and say that the Revenue are to collect more information. But with the main property tax relief schemes due to be abolished in 2006 and no information on stallion fee income due until late next year, further action is not expected in Budget 2005.