Up to a million taxpayers could benefit to the tune of up to €1,000 a year from a new 30% tax band — but the Government has been warned such a move would not be equitable.
The pros and cons of a new middle bracket are included in the Tax Strategy Group papers and are being considered by the Government, Tánaiste Leo Varadkar confirmed.
Mr Varadkar said: "I think the most important thing to emphasise in relation to the budget, which is now only just over a month away, is that it will contain a substantial income tax package that will reduce income tax for low-income workers, for middle-income workers and higher-income income workers, but a particular emphasis on middle-income workers.”
However, the authors of the report have warned the Government that the introduction of an intermediate rate of income tax between the current standard rate of 20% and the higher rate of 40% would benefit those on lower incomes disproportionately less.
Middle- and higher-income earners would gain more, they say, and, as it is not equitable, other taxation measures are more desirable.
“Low- and modest-income earners would not directly benefit from this proposal, if it was introduced in isolation and without additional compensating measures,” the papers state.
"From an equity perspective, it may be desirable to introduce other tax measures in tandem that would benefit low earners."
They also state that middle- and high-income taxpayers would see a direct increase in their net income due to the intermediate rate.
Mr Varadkar said the Coalition has not yet decided how a tax cut would be implemented — whether it will be indexing tax credits to wage inflation or the introduction of the 30% band — but said that the Government has agreed to the principle of tax cuts.
The Tánaiste said the programme for government commits to indexation, but how wage inflation is calculated remains to be decided.
He said the average worker pays €800 less in tax now than eight years ago, but the Government is looking to implement a “substantial tax package” to allow “more people to keep more of their hard-earned cash”.
“What we're aiming for is a substantial decrease in the amount of income tax and USC that workers — almost all workers — pay," he said.
"Why do you want to do that? Because we want to make work pay better. We want people to be able to keep more of their hard-earned cash.
"And by reducing the amount of income tax people have to pay, that means more money in their pockets, and that's one of the ways that we can help with the cost of living.”
Finance Minister Paschal Donohoe explained that any moves to introduce a new 30% tax band would be with the aim of helping people to keep as much as possible of any wage increases.
The Government knew that the money in a person’s wallet was not purchasing as much as it used to so indexation was important as wages go up so people did not end up paying more tax.
“We want them to keep as much as they’re earning,” he told RTÉ radio’s Morning Ireland. The objective for the Government was to change personal taxation in a way that was affordable.
The papers also lay out the option of a €15 increase to core social welfare, three times last year's increase. Such a move would cost €1.1bn, they state.
A 6.1% increase in the State pension, which would increase the rate of the pension by €15.50, would cost nearly €400m more.
An 8.3% rise to be closer to inflation would see an increase of €21.10 in the maximum personal rate of all pension age schemes. With proportionate increases for qualified dependent adults, this would cost €777.7m.
Grant Thornton Ireland tax partner Peter Vale said the papers "raise a number of issues as to how far the Government is willing to go to alleviate the impact of the current inflationary environment on all households".
Mr Vale said that realigning tax bands is the "usual and perhaps most straightforward option for Government".
However, he said that such an increase "may not go far enough", as mortgage rate increases could wipe out any gains in income.
"It appears that, for many taxpayers, even suggested adjustments to credits and bands are likely to be dwarfed by higher household expenses," he said.
"Even the most optimistic of the proposed income tax adjustments suggested will not make up for higher mortgage payments, with inflationary pressure likely to see other household expenditure also increase next year."