Government pledge to 'prioritise band widening over rate reductions' on tax

Low and middle-income earners are set to receive a de facto tax cut in the next budget through a raising of the threshold deciding when they pay higher rates to the State.

Finance Minister Paschal Donohoe confirmed the move yesterday during a speech in which he also confirmed plans to merge the universal social charge with PRSI — putting his party on a potential collision course with Fianna Fáil.

In a speech at the Kennedy summer school in New Ross, Co Wexford, he said he would not return to the “shock and awe” boom-era promises which saw the popular plans of today resulting in the damaging cuts of tomorrow.

However, in a notable move before 2018 budget, he said the widening of tax bands, the raising of the higher tax threshold and the merging of USC and PRSI will be among the policies on his agenda when the financial plan is revealed on October 10.

“Our system, due to choices that have been made, has delivered a tax code that is hugely progressive,” said Mr Donohoe. “Our tax and welfare systems delivers one of the greatest redistribution of income in any country in the OECD.

“The top 10% of income earners pay 24% of total income tax and USC, the top 6% pay 49% of total income tax and USC, and the top 26% pay 83% of all income tax and USC collected in our country.

“It is absolutely right that those who earn more pay more and those who earn less pay less.

“But a taxation system that takes more than 50% of the income of someone just above the average industrial wage is not fair, it is not efficient and it is not sustainable.

“I want to gradually increase the standard rate cut-off point for income tax. We will prioritise band widening over rate reductions.”

Mr Donohoe also used his speech to confirm widely expected Government plans to merge USC with PRSI in the upcoming budget instead of the previous plans to remove it, and stressed he did not want to return to “shock and awe” economic politics as there is “nothing brave” in promising the public “nirvana”.

However, his comments were questioned last night by Fianna Fáil finance spokesman Michael McGrath, who said his party wants to scrap USC, not merge it, and that the tax changes plan poses serious financial risks if not managed properly.

“In the agreement we entered into with Fine Gael, the focus on income tax is to reduce the universal social charge and we expect more progress on that from this year,” said Mr McGrath. “We haven’t heard from Government that they intend to depart from the confidence and supply agreement which provides for USC reductions.

“I accept and agree that there is a need over time to increase the entry point to the higher rate of tax but I think the minister has to be straight with people as well.

“Increasing the entry point by €1,000 will cost over €200m in a full year. So I think the minister is talking about a longer-term plan.

“We have an agreement that provides for reductions in the universal social charge now. We saw some of that last year. We expect more of it this year.”

The Fianna Fáil position is likely to lead to fresh friction for the Government, as the confidence and supply deal means Micheál Martin’s party has a role to play in any budget plans.