Michael Noonan’s best option lies in targeted tax reliefs

The Apple controversy pushed much of the usual flurry of commentary and analysis of the forthcoming Budget to the background.

But irrespective of whether we should or shouldn’t appeal the Commission’s decision, whether we can or cannot collect the €13bn or, even if we do collect the €13bn, whether we can spend it on social housing, hospitals or schools, Budget 2017 will still go ahead in the middle of October.

For the record, we should appeal the decision, can’t collect the €13bn and really don’t know whether we could spend it in those areas even if we got the money.

Already the message in relation to the Budget is one of caution from both the Taoiseach and the Minister for Finance.

This year a minority coalition government will have to try and make good some of their election promises and implement what was agreed with the disparate parties to the Programme for Government.

Recent disagreements with the Independent Alliance have only confirmed that this is no easy task.

Alongside calls for reform of personal and business taxes in order to minimise the economic impact of Brexit came warnings from the Irish Fiscal Advisory Council.

The Government’s planned budgetary adjustment this year will end up being nearer to €2.4bn rather than the €1bn already flagged, so the pressure on Budget 2017 is very high.

With all the competing claims for the Finance Minister to consider, one of the more difficult balances to strike will be between rewarding workers and easing the burden on the “squeezed middle” while at the same time encouraging enterprise and long-term growth.

Promises to abolish USC are proving to be very costly and could have the additional effect of narrowing the tax base, a factor that is now universally agreed to have compounded the catastrophic fall off in taxes during the recession.

Rather than attempting to scatter scarce largesse too thinly, a targeted approach to easing the burden on income taxpayers should be taken.

Changes to the USC rates or to the income tax bands are relatively blunt instruments. Because a single change can affect all personal taxpayers they would be very costly to implement.

A change to the key 5.5% USC band would absorb almost all the €330m earmarked in the government’s Summer Statement for tax relief.

As an alternative, targeted tax reliefs for the expenses that affect most income taxpayers, for example, medical insurance and mortgage interest, would relieve the burden on the individual taxpayer but should also help move the pressures away from the public health service and public housing.

Recognising, through targeted tax relief, the contribution of non-working parents in the care of the young, disabled and the elderly in their homes has been lacking in previous budgets.

The targeted tax relief approach can also be used to reduce inequities in the system. A single self-employed person on €60,000 taxable income a year pays 33.4% tax, USC and PRSI compared with 31.5% for a PAYE worker on the same amount.

This equates to a higher tax bill of €1,100 per annum for the self-employed. Taxpayers should be taxed on what they earn, not how they earn it. Last year the government began the process of closing this gap and this process should continue.

Despite the return to growth, at least on paper, Ireland will still have to borrow a significant amount of money — possibly as much as €100m per month to continue to fund public services and provide for worthwhile tax reliefs in 2017.

Any tax relief granted will have to deliver value for money, and that might well be calculated in political terms.

The noise over Apple will in time die down; the disappointment that the economic recovery isn’t impacting in any significant way on many people’s daily lives will be a lot slower fading away.

Brian Keegan is director of Taxation with Chartered Accountants Ireland


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