Negotiations between the Progressive Democrats and Fianna Fáil on a cut in the top tax rate of 42 per cent are expected to intensify in advance of the Budget on December 6th.
While Minister for Finance Brian Cowen has firmly signalled that he favours increasing personal tax credits and tax bands rather than tax cuts, the PDs are determined to push for a reduction of 2 per cent in the top rate as outlined in the Programme for Government.
Senior PD sources said yesterday, however, that even a 1 per cent cut in the top tax rate to 41 per cent would be seen as an achievement and may be something they would be prepared to compromise on.
"Any cut in the top tax rate would be clearly identifiable with us. The collective view in the party is that we must get something on tax for our constituency."
Taoiseach Bertie Ahern will chair a special pre-Budget Cabinet meeting in Dublin tomorrow during which Ministers will have an opportunity to outline their final Budget "wish list".
Tax changes are not expected to be discussed at tomorrow's meeting, however, but will be thrashed out in the next few weeks between the PD leader, Tánaiste Michael McDowell, Mr Ahern and Mr Cowen.
In recent weeks Mr McDowell and PD deputy leader Liz O'Donnell have publicly stated that they will be looking for a cut in the top tax rate.
Mr McDowell called for "significant middle-class tax cuts" earlier last month, while last Sunday Ms O'Donnell said in a TV3 interview that she was "hopeful" of a cut in the top rate in the Budget.
She pointed out that the Programme for Government contained a commitment to cut the top rate from 42 to 40 per cent.
Ms O'Donnell said tax cuts were "always on the agenda with the Progressive Democrats in government". She said she would "be very hopeful" that there would be tax cuts in this Budget because it is in our Programme for Government.
In an address to a Network Ireland conference in Galway last month Ms O'Donnell said 10 per cent of the gains from economic growth should go on tax cuts. She said tax cuts could be targeted at low and middle-income workers, and that the top rate could be cut to 40 per cent.
However, it is known that Mr Cowen sees little merit in cutting the top rate and instead favours widening allowances and increasing tax credits, measures that would benefit all taxpayers but would confer an additional benefit on lower and middle-income earners.
Fianna Fáil is worried about the perception that the Budget would be seen as favouring the rich and better off.
A source said yesterday that Mr McDowell will want to come out of his first budget as PD leader "with something" and with a change in stamp duty unlikely, he will be hoping to deliver on a tax cut.