Economy has ‘limited tax ability’

The economy has very limited ability to generate the additional taxes needed to achieve the €3.5 billion in fiscal consolidation agreed with the troika for December’s budget, says the Irish Tax Institute in its pre-budget submission.

“Imposing new and additional taxes on taxpayers cannot be done without consequences,” says institute president Martin Phelan.

“Those contributing to the tax system have less disposable income than in 2008 and will have less again following any further tax increases. Such increases will really be an element of replacing one tax with another.”

In 2008 there were 2.1m workers in the country contributing €13.5bn in income taxes and the universal social charge whereas now there is 1.8m workers generating €15.3bn in income taxes and the universal social charge even though there has also been a reduction in salary levels. Moreover, in 2007 only 29% of the overall tax take came from income tax and the universal social charge . Last year 42% of the tax mix came from income tax and the charge .

The institute argued against further increases in the charge because this levy is based on gross salary which means it has a bigger impact on take home pay than a hike in income tax because the latter is cushioned by a series of reliefs.

Ireland has now the 10th highest marginal rate on wages out of 34 OECD countries. If the charge was increased by 3% in the budget then that would bring the Irish marginal rate into the top five among OECD countries.

“Ireland has the most progressive tax system in the EU. Any further increase would start to seriously impact on our competitiveness and our ability to attract jobs in a fiercely competitive market,” says Mr Phelan.

Furthermore, the top tax rate kicks in at €32k in Ireland compared with €258k in Germany and €304k in the US.

The Government proposes to bring in a property tax in June of 2013. It is expected that it will be based on a 0.25% annual charge of the total value of the property. Mr Phelan says the tax is going to be extremely hard to collect.

“Look how hard it was to collect a household charge of €100?” Mr Phelan also questioned the fairness of applying a property tax to people who paid 9% stamp duty in the years just prior to the property bust.

The institute calculated that a couple with a house worth €350k and a buy to let apartment worth €150k are looking at a property tax bill of €1,450.

Institute board member Jim Ryan warned against a reduction in the tax relief on pension from 41% to 20% on the basis that those who retire will be paying a marginal rate of 52% in pensions above €32k. Moreover, he called on the Government to end the 0.6% pension levy in 2014 as scheduled.

The institute also called on the Government to keep the corporate tax regime as competitive as possible.

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