Up to 1 million middle-income earners and couples could save up to €1,000 a year should the Government introduce a new 30% tax rate in the budget.
The Government’s tax strategy papers, which will set out a range of options for next month's budget, have been published this afternoon.
The papers make clear that the people most likely to benefit from such a tax break would be middle and higher income earners, while lower income earners would see little or no benefit from it.
The papers show that if the 30% 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 Department of Finance estimates that to introduce such a measure would cost €820m in the first year and €945m every year after that.
It is reckoned that 35% of the taxpaying population would benefit from such a tax break.
A second more limited option is set out in the papers which would see a 30% rate apply to incomes between €36,800 and €41,800.
This would see an individual or a married couple better off by €500 a year. The cost of this option would be €460m in year one and €525m every year thereafter.
Currently, any single person earning up to €36,800 a year pays income tax at the basic 20% rate, while any yearly income above that level for single people is taxed at a rate of 40%.
The entry point for the higher rate of income tax in Ireland, at €36,800 for single individuals and €45,800 for married one-earners, is low by international standards. The policy rationale for introducing an intermediate rate of tax is to increase the entry point before taxpayers are subject to the 40% rate of income tax, which would result in an increase in net pay for those taxpayers.
The papers stated that the introduction of an intermediate rate of income tax between the current standard rate of income tax (20%) and the higher rate of income tax (40%) would benefit middle and high-income earners and such taxpayers would see a direct increase in their net income due to the intermediate rate of tax.
“Low and modest income earners would not directly benefit from this proposal, if it was introduced in isolation and without additional compensating measures. From an equity perspective, it may be desirable to introduce other tax measures in tandem that would benefit low earners,” the papers state.
The Tax Strategy Group concluded that the intermediate rate of income tax is an easily understood proposal, which would assist in increasing the entry point for the higher rate of tax and positively contribute toward the competiveness of Ireland’s personal tax system.
At the same time, the introduction of an intermediate rate of income tax would represent a very significant change to the current structure of the income tax system, as the current two-rate structure of income tax has been in place since the early 1990s, the group states.
“It would necessitate big alterations to Revenue’s systems as well as changes for payroll providers to ensure the feasibility and operability of the new structure,” the group concludes.
It warns that there may be “consequential impacts” for people’s current tax credits.
Some tax reliefs are granted at a taxpayer’s marginal rate of tax (for example, tax relief for employee pension contributions and health expenses relief for nursing home charges).
“With a decrease in the marginal rate of tax for some taxpayers who would benefit from the intermediate rate, this could give rise to a reduction in the amount of tax relief they receive,” they warn.
Speaking in Balbriggan in North Dublin today, Tánaiste Leo Varadkar said that the 30% tax rate is under consideration. He said that it is one of many options open to the Government.
“The possibility of 30% tax rate or middle tax rate for middle-income people is under consideration. And the papers today set out how about a million workers will benefit from that and what the potential costs would be.
"But 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 workers, but a particular emphasis on middle-income workers.”
Mr Varadkar said that the Government has not yet decided how this tax cut would be decided — whether it will be indexing tax credits to wage inflation or the introduction of the 30% band — but said that the Government has agreed the principle of tax cuts.
The concentration of large amounts of corporation tax (CT) among a small number of multinational companies is a concern, the Tax Strategy Group said.
In its paper on corporation tax, the group said the multinational sector accounted for 89% of net corporation tax receipts in 2021, with the ten largest payers accounting for €8.2bn or 53% of the take.
“This proportion has increased significantly during the pandemic over recent trends – over the period 2013 to 2019, the top ten CT payers accounted for between 36% and 45% of net CT receipts,” the papers say.
It adds that prior to the pandemic there had been increases in the numbers of companies of all sizes paying tax and that the growth in receipts from SME companies often outpaced that of large companies. While this had slowed down during the pandemic, the ongoing receipts from large companies helped the Government pay for Covid supports.
“While the pandemic caused a reversal of this trend in 2020, it must also be acknowledged that the sustained CT and income tax receipts from the foreign-owned [multinational corporation] sector contributed significantly to the Government’s ability to support the worst-affected domestic sectors through the course of the pandemic.
“As this increased concentration is connected with the sectoral impacts of the pandemic and the particular sectoral specialisations in Ireland, it could be expected that the concentration should moderate in 2022 as public health restrictions are lifted. As noted above, CT payments data for 2021 provides early indications of a strong return to profitability in 2021 for SME businesses, in addition to growth for larger firms. The increased concentration is nonetheless a matter of concern in considering longer-term sustainability and will require ongoing careful monitoring.”
The papers discuss the options open for other schemes, such as the Knowledge Development Box and Regional Film Uplift. On the former, which allows companies pay an effective 6.25% rate of corporation tax on income arising from assets such as computer programs and inventions protected by a qualifying patent, the Government is told that uptake has been low due to “restrictive requirements”. The scheme can be extended, the tax rate pushed to 9% or ended, the papers say.
A tax credit for digital games announced last year has yet to commence due to discussions with the European Commission, the papers say.
Motorists will pay an additional €1.28 on a 60-litre fill of unleaded petrol and €1.48 on a tank of diesel in carbon tax hikes from Budget night.
Under the Government’s legally binding commitments on carbon taxes, an additional charge of €7.50 per tonne will apply on motor fuels from budget night and on all other fuels from May 1, 2023, to allow for the winter heating season.
There is no further scope to increase or extend the diesel rebate scheme for motorists, the Tax Strategy Group has said.
While the fuel industry have made calls for the scheme to be made more generous, particularly in the current environment of increased fuel costs, the officials argue in practical terms there is currently no potential for enhancing the scheme.
The existing maximum repayment amount under the DRS of 7.5c per litre when combined with the March excise reductions brings diesel excise levels to the EU minimum.
“In summary, the minimum excise rate allowable on auto diesel is 33c per litre. Currently the MOT on autodiesel is 40.53 cents. When the maximum DRS repayment is taken into account, the effective excise rate is 33.03. Therefore there is no scope for further improvements,” the group concluded.
Increasing electricity tax could be done to “offset” the drop in exchequer funding as the country transitions away from fossil fuels.
“If the shortfall in Exchequer revenue arising from the transition to carbon neutrality is to be met in some way through electricity tax revenue, a change to the current reliefs and rates may be needed,” the papers said.
Another option being examined is the indexation of taxation to offset the impact of inflation.
It is currently tentatively estimated that full indexation of 1% would cost around €180m in the first year and around €210m in a full year.
Using the most recent Revenue Ready Reckoner (post-Budget 2022) the cost of indexing the income tax system at 3% would be in the order of €550m.
A €50 increase in the Home Carer Tax Credit would cost €3m in the first year and €4m for a full year.
The Tax Strategy Group said a surcharge of 3% applies in respect of individuals whose non-PAYE income exceeds €100,000 in a year.
A rate of 11% applies to the non-PAYE income that exceeds €100,000. Based on the latest available Revenue data, from 2019, it is estimated that approximately 14,360 taxpayer units were subject to the 3% USC surcharge with an estimated yield of €71m.
“Abolishing or reducing the USC surcharge on non-PAYE income would represent a further step in levelling the playing field between PAYE and self-employed income earners. In addition, it would also reduce the top marginal tax rate on self-employed income, which is currently 55% and may be considered high by international standards,” it said.
The papers also reveal that in 2022, it is estimated that the top 1% of income earners, those earning in excess of €250,000 will pay 22% of the total income tax and USC collected. While those earning less than €56,000, which represents the bottom 75% of income earners, will contribute only 18% of total income tax and USC receipts.
The Government has been advised not to introduce a vacant site tax to urban areas as they are deemed to be “inappropriate” in an Irish setting.
The Department of Finance Tax Strategy Group have said they do not consider the application of vacant property taxes to specific urban areas or regions, as seen in other jurisdictions, appropriate in the domestic context.
They say overall vacancy levels are low in Ireland and in line with a functioning housing market.
The categories and duration of vacancy suggesting that vacancy is predominately short-term, with the most common reason being refurbishment, they said.
“In jurisdictions in which vacancy is taxed, there tends to be a broad range of exemptions available,” the group said.
They argued that vacancy and dereliction are frequently conflated in the public discourse on vacancy, but should be distinguished both for conceptual and policy reasons. “It is possible that a vacant habitable property could be occupied quickly whereas uninhabitable or derelict properties require various levels of investment to make them habitable,” the group said.
They argued that the objective of any tax imposition would be to increase the supply of housing for rent or purchase to complement the Government’s strategy to maximise use of existing housing stock, rather than to raise Revenue. “In any case, if a tax on vacant residential property was introduced with appropriate exemptions in place, it is estimated that the yield would be modest, applying to a narrow base of taxpayers,” the group said.
The highest rates of vacancy were returned in Donegal (6.7%), Kerry (6.4%), Leitrim (6.3%) and Mayo (6%).
In these areas, the most common reason for vacancy was the incidence of holiday homes making up 40.6% of the vacancy in Donegal and 39.9% of the vacancy in Kerry.
Of the 57,206 properties reported as vacant by their owners, 3,450 are owned by Local Authorities and Approved Housing Bodies (AHBs). Of the 53,756 vacant properties not owned by Local Authorities and AHBs, 2,959 vacant properties have claimed exemptions from LPT (as may be expected, the biggest category, 1,627 properties, is the exemption related to properties unoccupied due to illness of owner) and 3,453 have an owner indicated as non-resident. 42,522 of the vacant properties were indicated as Non Principal Primary Residences (NPPRs) by their owner. 90.
Overall, 61% of vacant properties were reported as being vacant for less than 12 months. However, in all but one of the Local Authority areas, at least 50 %of vacant properties were reported as having been vacant for less than 12 months.
The Department highlighted that the cost of its Help to Buy scheme was, at the time, over four times greater than the original €40 million per annum estimate.
This, alongside issues regarding the inequitable and regressive characteristics of the scheme, raised questions about its viability.
The Programme for Government retained and expanded the Help to Buy scheme for new properties and self-build properties.
The papers also who that 95% of people liable for the Local Property Tax have paid it following the review of the system in 2021.
The number of properties exempted from LPT has fallen from 49,000 to 18,300.
The number of people deferring LPT payments has also fallen from 40,700 to 11,800 with the majority of people claiming to be below the income threshold.
Whilst completions in 2021 still lag significantly below the estimated required 33,000 units’ per annum, in the year to end-March 2022, completions of new dwellings amounted to just over 22,000 units.
This is the highest rolling 12-month total since the Central Statistics Office (CSO) series began in 2011. With activity beginning to feed through to commencements, it is likely that the Housing for All target of 23,600 units for this year will be surpassed. The key challenge will be to sustain this momentum in the years to come and bridging the imbalance between demand and supply that has persisted for a number of years to date.