Only one month remains before Minister for Finance Michael Noonan unveils the 2015 budget. A modest income tax cut is likely, but the scope of any concession is still under negotiation. So what exactly is in play?
Minister for Health Leo Varadkar appeared to tell a tale last week when he said workers could be in line to gain by €5 or €10 a week. The notion stuck, all the more after Taoiseach Enda Kenny rebuked Varadkar for talking out of turn.
Quite how such cuts might be achieved is another matter, for the Government can’t please everyone. The debate turns on the amount of money ringfenced for this purpose and the political decision as to who benefits.
According to the Statement of Government Priorities during the summer, Ministers will be bound by a “triple-lock” of considerations.
They aim, first, to overhaul the tax system for years to come. Therefore, the budget represents phase one of a plan to be rolled out over three or four years.
Second, the focus is on the 52 per cent tax rate on low- and middle-income earners. The 52 per cent rate embraces the universal social charge (USC), pay-related social insurance (PRSI), and both the standard and higher income tax rates.
Ministers aim, thirdly, to preserve the “highly progressive” nature of the system, which means workers pay more and more tax the more they earn.
The emphasis is on the “squeezed middle”, shorthand for workers who don’t earn a huge amount and whose entitlement to the benefits of the welfare system is minimal.
Note that the “average” couple in the State earns some €56,000. So the Government will probably target income around this level and below it. The average working single person currently earns some €30,000.
Official figures seen by The Irish Times show that even relatively small concessions are very costly. For example, reducing each of the USC rates by one percentage point would cost almost €700 million.
Cutting the USC bit by bit
Cutting the lower band of the USC to 1 per cent from 2 per cent would cost €193 million on its own. People earning more than €10,036 would gain €100 a year on the first €10,035 of their earnings.
Cutting the next USC band to 3 per cent from 4 per cent would cost a further €107 million and deliver a further gain of €60 a year on earnings between €10,036 and €16,016.
Reducing the higher USC rate to 6 per cent from 7 per cent could cost another €398 million and would apply to income above €16,016. A single person on €25,000 would gain €90 per year and a single person on €50,000 would gain €340. Such gains would come on top of the net €160 gain on the first €16,016 earned.
This essentially means that cutting each of the USC bands by one percentage point would deliver some €250 per year, or roughly €5 per week, to a single worker on €25,000.
The same change would deliver some €500, or roughly €10 per week, to a single worker on €50,000.
The benefits of such cuts are far greater at higher income levels, but the Government’s focus is on lower income.
At €75,000, a single person would gain by a total of €750. A single person on €100,000 would gain a total of €840. To curtail the cost of USC cuts but deliver a benefit nonetheless, it’s not beyond possibility that the Government will curtail the gains made at higher income levels.
Gains from tax cuts
Another alternative is to cut the standard income tax rate to 19 per cent from 20 per cent. This would cost €491 million. The gain for a single person earning €25,000 would be €250 in a year. A single worker on €50,000 would gain by €328 per year, and workers on higher income would gain the same.
A decrease in the upper income tax rate to 40 per cent from 41 per cent would cost €205 million, but low earners would not benefit.
A single person on €50,000 would gain €172 per year while a single person on €75,000 would gain €422.
There are other options. These include a widening of tax bands and increasing personal tax credits.
The Government’s commitment, however, is to tackle tax rates.
It goes without saying that the idea of a “neutral” budget means that many of the gains from income tax cuts will find their way back to the Government coffers via increases to other taxes.