During Charlie McCreevy's term as Finance Minister, all income taxpayers have seen significant reductions in the amounts the Government has taken from them. In the second part of our series examining the economy on the eve of an election, Mary Canniffe suggests a new government will not have it so good
Over the five years and five budgets of the Fianna Fáil/Progressive Democrats Government, personal and business tax rates have been cut significantly but the Exchequer's tax take has continued to grow.
Helped by a buoyant economic environment in which the cost of tax rate reductions were more than compensated for by increases in business activity and the numbers at work, Exchequer tax receipts have risen from €18.1 billion in 1997 to €27.9 billion in 2001.
Department of Finance costings of the measures announced in each budget over that period indicate the full year costs of the personal and business taxation measures which were aimed at rewarding effort, improving the incentive to work and promoting enterprise.
Personal tax measures cost some €4.8 billion over the five budgets - £517 million (€656 million) for Budget 1998 measures, followed by £581 million (€738 million) for Budget 1999 measures, £942 million (€1,196 million) for Budget 2000, £1,231 million (€1,563 million) for Budget 2001 and €634 million for Budget 2002.
Business taxation measures - the main feature was the reduction in the standard rate of corporation tax - cost an estimated €1.1 billion over the five years.
The Minister for Finance, Mr McCreevy, described his budgets as chapters of a book - a planned programme or package of fundamental changes in the tax system to be implemented over his period in office.
Fundamental changes over the period in the personal tax system have included the move from allowances to tax credits, tax relief at source for medical insurance and mortgage interest payments, the introduction of the highly controversial measures to individualise the standard rate income band and the alignment of the tax year with the calendar year.
For business the major change has been the phasing in of a significant reduction in the standard corporation tax rate - down from 36 per cent in 1997 to 16 per cent this year.
Fundamental changes in capital taxes involved the halving of the capital gains tax rate to 20 per cent, the abolition of probate tax and a new 20 per cent standard rate of capital acquisition tax (down from a maximum of 40 per cent). On Mr McCreevy's watch, all income taxpayers have seen significant reductions in their average tax rates - the proportion of their income taken by the Government in tax and PRSI.
This was achieved through a combination of lower income tax rates and wider standard rate income bands so that less of a taxpayers income is taxed at the higher tax rate.
In its Action Programme for the Millennium, the Fianna Fáil/Progressive Democrat coalition promised to deliver a 20 per cent standard income tax rate and to reduce the top tax rate to 40 per cent. It promised reductions in corporation tax rates. Its theory was that lower taxes would reward work, promote enterprise and stimulate economic activity.
By 2001 the Minister for Finance had delivered the 20 per cent income tax rate and brought the top rate of tax down to 42 per cent. But against a background of deteriorating Government finances, the aim of a 40 per cent top rate was jettisoned in Budget 2002 in favour of removing lower income earners from the tax net and reducing the number of taxpayers in the higher tax bracket.
An examination of Mr McCreevy's five budgets shows the income tax rate cuts delivered.
The standard income tax rate has come down to 20 per cent from 26 per cent in 1996/97, while the top rate at 42 per cent is down from 48 per cent. In addition the standard rate band has been widened and allowances/credits have been increased. The total tax and PRSI bill of a single PAYE worker on the average industrial wage has fallen from 27.9 per cent of gross income in 1997/98 to 16.5 per cent in 2002, a reduction of 11.4 percentage points. Income tax and PRSI took 28 cents out of every euro (or 28p per £1 of income) this worker earned in 1997/98.
By 2002 the income tax and PRSI deduction had fallen to 16.5 cents per euro of income. For a single income married couple earning the average industrial wage, tax and PRSI took 20.4 per cent of their income in 1997/98, or 20.4 cent for every euro earned.
This year the tax take will fall to 7.6 per cent, a reduction of some 12.8 percentage points. Over the five budgets their tax and PRSI bill has fallen from just over 20 cents to just under eight cents per euro of income.
Workers on higher incomes have done well too. Some 43.9 per cent, or 43.9 cents per euro of the income of a single PAYE worker on just over three times the average industrial wage was taken away in income tax and PRSI deductions in 1997/98.
This year the tax take has fallen to 35.7 per cent or just under 36 cents per euro of income. The reduction is a less dramatic 8.2 percentage points. A single income married couple on just over three times the average industrial wage does not fare as well proportionately.
Their tax and PRSI bill has fallen from 36.3 per cent of income in 1997/98 to 30.6 per cent in 2002, a reduction of 5.7 percentage points. But a married couple where both spouses are working, earning between them just over three times the average industrial wage, will see their tax and PRSI deductions fall from 37.1 per cent of total income in 1997/98 to 27.1 per cent in 2002, a reduction of 10 percentage points.
The most significant improvement for this couple came since individualisation was introduced in Budget 2000. Individualisation was possibly Mr McCreevy's most controversial move. He has not managed to complete the planned three-year changeover and political pressure to appease aggrieved single-income couples means that the tax system have been made more complicated than before.
Lower- and middle-income earners have benefited most in proportionate terms from the last five budgets, but middle-income married couples, where each earns enough income to get full benefit of wider standard rate band changes, have benefited disproportionately from individualisation. Middle-income families with one earner have done relatively less well.
About 310,000 taxpayers have come out of the tax net altogether over the term of the current Government but Mr McCreevy has not managed to achieve his target of removing all workers earning below the minimum wage from the tax net. The move from allowances to tax credits has made the tax system fairer by ensuring the cash value of personal allowances is the same for all taxpayers regardless of their income levels.
Tax relief at source for mortgage interest and medical insurance premiums will benefit everyone, even people who fall outside the tax net altogether.
Costing budget changes is an inexact science. When Capital Gains Tax was cut from 40 per cent to 20 per cent in Budget 1998 - the Department of Finance factored in a full year cost, or loss of revenue, of about £19 million (€24 million). The outcome was very different.
In the first year of the new 20 per cent rate, Exchequer CGT receipts were almost twice the previous years figure as the lower rate encouraged investors to realise pent-up profits.
For business, which benefited from the personal tax changes to incentivise work, the plan was a phased reduction in the standard Corporation Tax rate to 12.5 per cent from 36 per cent.
The initial signal was that this new low rate would be achieved by 2006. In Budget 1998 Mr McCreevy cut the standard rate from 36 per cent to 32 per cent - the new rate came into effect from January 1998. In Budget 1999 (December 1998) he announced a schedule of reductions to take the rate to 12.5 per cent with effect from January 2003.
However, a twist in the 2002 Budget - the change in the Corporation Tax payment date - has arguably now pushed out the application date of the 12.5 per cent rate to about 2007. This date change will eventually mean that companies will have to pay their tax bills some seven months earlier.
When it is fully in place, corporation tax will be due one month before their year end. In cash terms, the change means an effective tax rate of about 15 per cent will apply from 2004 to 2006.
After five years of giveaway budgets, weaker first quarter 2002 returns indicate less room for manoeuvre for the next government.
Mary Canniffe is Investment Editor of The Irish Times