FINANCE Minister Paschal Donohoe’s Budget day speech will be a pitch to middle Ireland to stick with a Government that is determined to reward work.
Ahead of Budget 2018 next week our experts assess the fault lines. Today, Kevin Doyle looks at personal taxation.
The minister and Taoiseach Leo Varadkar are blue in the face telling reporters they want to give workers a break – but the hype could come back to bite on October 10 when people realise there is only room to tweak personal taxation rates.
Put in simple terms: The ‘give-back’ to be announced by Mr Donohoe on Budget day won’t be enough to pay for an extra pint of plain a week. Fine Gael and Fianna Fáil drew swords over the issue of tax cuts in recent weeks, but both sides privately admit the ‘Budget war’ is akin to two bald men fighting over a comb.
Mr Donohoe is working on changes to the income tax bands, arguing that workers shouldn’t be hit with a 40pc rate on all earnings over €33,800. Part of the Government’s message in the coming fortnight will be that people shouldn’t be discouraged from taking on overtime by a taxman who takes 50c from every extra €1.
On the flip-side, Fianna Fáil is quite clear that the ‘confidence and supply’ arrangement that underpins the Government commits to a reduction in the Universal Social Charge. It is correct. The deal states: “Introduce reductions in the Universal Social Charge (USC) on a fair basis with an emphasis on low and middle-income earners.”
But an analysis of the two approaches reveals little difference in terms of how it’ll affect your pocket. If the Government was to raise the entry point for the higher rate of income tax by €1,000, it would eat up €200m of the €300m available for tax cuts and extra spending in 2018.
However, when the benefits are split between 1.2 million taxpayers, the Irish Tax Institute believes the ‘payback’ would be just €4 a week.
Fianna Fáil’s alternative proposal is to reduce the 5pc USC rate, paid on income between €18,773 and €70,044, to 4.5pc. This would average out at just €2 per week, although it would benefit a larger number of low-income earners.
The Government’s obsession with tax cuts is understandable, but it will find it difficult to deliver, which is why Mr Donohoe is expected to announce a three-year plan rather than a one-off cut.
This year tax on labour will bring in €29.8bn, followed by €13.3bn for VAT and €7.7bn for corporation tax.
Together these three taxes make up two-thirds of the Government’s income.
When USC was first introduced in 2011, it was seen as a way of broadening the tax base with a €4,004 entry point. Just a year later this was hiked to €10,036 and since then it has gradually risen to €13,000.
In the run up to the last General Election, Fine Gael promised to abolish the USC – but the minister is working on a method of merging it with Pay Related Social Insurance (PRSI) in a bid to create a European-style social insurance system.
In line with Mr Varadkar’s ‘making work pay’ motto, the idea is that everybody who puts something in will eventually get something back.
Experts say the process will be mind-boggling and the Taoiseach even admits it will be a “complex and challenging task that will take many budgets”.
For starters look at the entry points. Workers start paying USC at €13,000, but PRSI doesn’t kick in until €18,304. For the selfemployed PRSI starts at €5,000, while employers also have to contribute to PRSI.
USC has five different bands. PRSI has 11 different classes. USC operates on a cumulative annual tax, whereas PRSI is done on a week-by-week basis. A range of exemptions also applies to both.
So for those who take an interest in the detail of personal taxation, Mr Donohoe will have some explaining to do on Budget day. For those who just want to know about the bottom line, there won’t be much to see.