Cowen faces income tax challenge

FINANCE Minister Brian Cowen will have to bring income tax relief of €750 million a year to eliminate the 15% in stealth income taxes imposed by his predecessor, Charlie McCreevy, Ulster Bank economist Pat McArdle calculates.

The unchanged tax bands over the last two years will effectively increase the income tax take by 15% in 2005, if Minister Cowen maintains the status quo.

The tax bands should have been indexed to wages annually to ensure a consistent percentage tax take.

If Minister Cowen does the unthinkable and leaves the bands unchanged then for the first time in the history of the State there will be more taxpayers paying tax at the highest possible level than at the lowest level.

Unchanged tax bands would result in 685,000 income tax payers at the higher level of 42% and 620,000 at the 20% rate in 2005. In 2002 when the bands were last increased there were 487,000 income earners at the higher rate and 728,000 at the lower rate.

Mr McArdle has looked at what would be needed to index the 2002 figures to allow for wage developments in the meantime.

“Single and married bands would need to increase by €4,500 and €9,000, respectively, while the amount transferrable between spouses would rise correspondingly.

“Credits would also have to be increased by between €230 and €460. The main anomaly would be the PAYE tax credit which would decrease by €278.

“This reflects the fact that, in a situation of constrained finances, the minister made large increases to this credit in an effort to help those at work at a time when all other credits were frozen.

“The cost of this package is €530 million in 2005 and €750 million in a full year, somewhat below the IBEC figure but a measure of what is needed if the stealth taxes of recent years are to be unwound,” he said.

Mr McArdle believes that the fiscal gods have been kind to Mr Cowen in his first Budget.

“He has an opportunity to rectify many of the worst omissions of recent years while significantly increasing bands and allowances. He should take it.

“The most disappointing aspect of Budget 2005 will be the failure, once again, to hit the self-imposed target of spending 5% of GNP in the capital area. While traffic congestion is being alleviated by some high-profile recent project completions, it is steadily mounting in other areas,” he argued.

Goodbody economist Dermot O’Leary, whose predecessor, Colin Hunt, is now adviser to Transport Minister Martin Cullen, has analysed the Government’s pre-budget White Paper and believes the Government has more that enough room to deliver the €750 million required to return income tax to its 2002 status.

“The White Paper details the fact that Minister for Finance Brian Cowen will have an opening balance of €318 million on Budget Day.

“This leaves the minister with the prospect of using an extra €1.5 billion to €2.0 billion to spend on social welfare increases, changes in tax bands and tax credits and increased infrastructure spend.

“We suspect that there will be a combination of these announced on Wednesday.

“The Budget should provide a pre-Christmas boost to the Irish taxpayer and bodes well for consumption growth in Ireland next year,” he predicted.