ANALYSIS: Minister will spread the pain to the better-off but they will regroup quickly, writes Cliff Taylor, Economics Editor
Most taxpayers will be worse off after tomorrow's Budget. That much seems inevitable due to the pressure on Exchequer finances. However, when compared with the significant reductions in tax over the past five years, the increases necessary to balance the Budgetary books should be relatively modest.
The reduction in the tax take over the past five years has been significant. Figures compiled by PricewaterhouseCoopers show, for example, that the effective income tax rate on a single person on the average industrial wage (around €24,500 this year) fell from 27.9 per cent in 1997/98 to 16.5 per cent this year. Other types of taxpayers benefited from similar falls - for example a married couple with one working on the average wage has seen as drop from 20.4 per cent to 7.6 per cent.
The better-off have also done well - disproportionately so argue many, as they also benefited from the big cut in the capital gains tax rate and have got significant cash gains from the fall in the top tax rate. A higher-income couple (earning more than three times the average industrial wage ) saw their effective income tax rate drop from 37.1 per cent to 27.1 per cent over the five years.
However, because of individualisation of the standard rate income tax band, the single-income couple earning the same amount has done less well, with the effective rate falling from 36.3 per cent to 30.6 per cent over the five years.
The 2003 Budget is likely to see some reversal of this trend, with a stabilisation of the income tax burden for some and a small increase for many. We will all see an extra chunk disappear from our income through higher excise duties, while changes in capital taxes and the closing of allowances may hit the better off.
The main instrument of tax policy are tax credits - which replaced the old tax allowances - and the standard rate income tax band. They currently stand at €1,520 for a single person and €3,040 for a married couple, with an additional €660 credit for PAYE taxpayers. To protect incomes fully from extra exposure to tax due to wage inflation, the Minister would have to raise credits in line with expected wage growth - probably around 6-7 per cent. However, because increasing credits is costly, there is speculation that he will not do this.
A long-term Government target is to take everyone on the minimum wage (€6.35 per hour) out of the tax net. This is unlikely this year, as it would require an expensive increase in credits.
The other way in which Mr McCreevy may increase his take somewhat is by not adjusting the standard rate income tax band fully for inflation. This would mean more income would be taxable at the higher 42 per cent rate. Again, this runs against Government promises to bring more people onto the standard rate, but the Government will hope to be able to afford this in its later years.
Close attention will also be paid to whether Mr McCreevy continues " individualisation". This is adjusting the standard rate band to the favour of couples were both earn, meaning they pay less tax at the higher rate than do their single-income counterparts. Already a single-income couple enters the higher rate at €37,000, while a two-income couple may not enter the higher rate until they earn €56,000 (the precise figure depends on the break down of income between the two earners). Single-income couples could be Budget-day losers if this trend continues, although they may be compensated by an increase in the tax credit available to stay-at-home spouses.
The final major area where income taxpayers could be hit would be by changes in the employee PRSI regime. At the moment, for private-sector employees, this is levied at 4 per cent up to an income of €38,740 (with some exemptions). There had been speculation of an abolition of this ceiling and a reduction of the rate, similar to the reforms to employers' PRSI. However, perhaps more likely is a rise in the ceiling, with the Tánaiste, Ms Harney, fighting against any increase on taxes on work.
Last year senior civil servants examined the possibility of applying PRSI to benefit-in-kind payments, such cars and other perks. They reasoned that following the abolition of the ceiling on employer PRSI, there was an incentive for companies to pay staff through perks, rather than cash, to reduce the PRSI charge.
The better-off would be the ones to suffer from any PRSI changes. They are also likely to be hit by the closing of tax loopholes and allowances. Among those being examined by the Government are reliefs and allowances, many of them related to property, which have allowed wealthy taxpayers to lower liability. In a year when, politically, he will want to be seen to spread the pain to the wealthy, it may suit the Minister to close some of the allowances, or restrict them so that they can only be claimed at the standard tax rate. Doing so, however, may raise only limited sums in extra revenue as the tax advisers move on to try to discover new loopholes.
