Budget hope of 30% tax bracket fades

Budget hope of 30% tax bracket fades

Michael McGrath said the scale of the Government's one-off cost of living package, which will be made alongside the Budget, has yet to be decided. Picture: Damien Storan.

Public Expenditure Minister Michael McGrath has played down chances of a new 30% tax bracket being in place by next month's budget.

Mr McGrath also said the Government will not use bumper corporation tax receipts to commit to permanent expenditure in a giveaway budget on September 27.

The middle tax bracket, an idea first mooted by Tánaiste Leo Varadkar, was discussed in last week's Tax Strategy Group papers.

If the new band was introduced to cover income from €36,800 to €46,800, it would lead to a tax saving of €1,000 per year for the individual. 

However, the authors of the papers also warned such a move would not be equitable. 

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, the papers said.

There had been some suggestion that Mr Varadkar was struggling to sell the idea to Cabinet colleagues, but senior Fine Gael sources said this is not the case. 

One said the notion that the Tánaiste is "campaigning" for the idea is "made up".

If the new band was introduced to cover income from €36,800 to €46,800, it would lead to a tax saving of €1,000 per year for the individual. 
If the new band was introduced to cover income from €36,800 to €46,800, it would lead to a tax saving of €1,000 per year for the individual. 

 

The source said Mr Varadkar is "flexible" about whether it is a new tax band, an increase in tax band ceilings or indexation of tax credits, but that it was "important to have an adequate income tax package for middle-earners that properly reflects the increase in prices and wages".

Fine Gael sources said the budget package "has to be more than last year's tax cuts when inflation and wage increases were much lower than now".

Speaking to the Irish Examiner, Mr McGrath said Fianna Fáil is open to the idea of a 30% rate, but said there are a number of questions which needed to be answered about how it would be implemented, making it "extremely challenging" to have done so by the end of September. 

Mr McGrath said there could be knock-on effects of such a fundamental change to the tax system, including whether those earning tax relief on pensions at marginal rates would lose it if their tax bracket dropped.

"The idea has merit but requires more time to work out and tease out fully. The Tax Strategy Group showed you'd need to assist people on lower incomes, through indexing of credits, and there are questions about those earning pension tax reliefs at marginal rate, would those people be affected? 

All of these issues can be worked out but I have my doubts it could be done in the coming weeks. Fianna Fáil is happy to engage on it but we need to be mindful of the impacts."

However, Junior Finance Minister Sean Fleming has played down the Tánaiste's suggested third rate of tax claiming it would be extremely complicated to introduce.

He said an indexation of the current tax bands would be "the most obvious thing to do" and would be easier to understand and implement.

Mr Fleming said introducing a 30% tax rate would be "very complicated" and would have a knock-on impact on pensions in the longer term.

"We want to encourage people always to contribute to their own pensions. At the moment you get tax relief at your higher rate, you get it at 20% if you pay income tax of 20%.

"If you pay tax at the 40% rate, at the moment you get 40% relief. So, if we introduce a 30% rate, we would be reducing the tax relief and pension contribution for a large number of workers," he said.

He said Fianna Fáil wants to help low-income families on the 20% tax rate. A 30% tax rate would help some people, but it would leave out more people, Mr Fleming said.

“We have to have something for lower income families," he said adding that indexing would stop lower income earners from entering the higher rate of tax.

"You can have a middle rate, but maybe another way of looking at it is to try and keep people out of the tax bands, the top tax rate of 40%," he told RTÉ radio.

However, the Fianna Fáil TD added that nothing has been ruled out at this stage. He said USC is not an issue that has come up in pre-Budget discussions at this point.

Meanwhile, Mr McGrath said the scale of the Government's one-off cost of living package, which will be made alongside the Budget, has yet to be decided. 

Sources have put the figure at €1 billion, though it could be slighly higher if measures such as a one-off windfall tax on energy company profits is factored in.

Government sources say that this intervention will include:

  • a double payment of child benefit
  • a repeat of the €200 energy credit 
  • and a continuation of cuts to excise duties on fuel. 

The final size of the amount committed to this package will not be known until the second week of September, after the August Exchequer Returns, it is understood.

"It will be a combination of measures," Mr McGrath said, saying there will be some broad measures for those who are above earnings thresholds.

"We will have to target those who need it the most and look after those carrying the largest burden because of this inflationary cycle."

However, despite recent historic highs in tax receipts, Mr McGrath warned the Government will not use this income to commit to a "giveaway budget" and that Finance Minister Paschal Donohoe has asked his officials to examine whether a rainy-day fund will be established.

"We've had historic and unprecedented Exchequer Returns, but we're seeing a slowdown in the global economy and it would be naive to think we won't be impacted by that."

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