Fairness and Changing Income Taxes: A context for Budget 2027

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Fair taxation

Despite low overall levels of taxation, and historically low effective income taxation rates, reductions in income taxation levels continue to be highlighted as a potential policy reform in pre-budget commentary.  Social Justice Ireland’s latest budget policy briefing provides an assessment of the fairness of eight possible income taxation options.  The analysis highlights the distributive impact taxation policy choices can have and the potential for policy to pursue both fair and unfair outcomes.

Fairness and Changing Income Taxes: A context for Budget 2027 includes two examinations:

  1. An assessment of the fairness of eight possible income taxation options, each with a full year cost of between €482m to €635m; equivalent to between 1.2 per cent and 1.6 per cent of the annual income taxation yield.
  2. An assessment of the fairness of the Programme for Government proposal to index income taxes and a comparison of this with an income tax credits focused package using the same funds (around €935m-€940m in a full year).

Key findings:

The briefing provides an assessment of the fairness of eight possible income taxation options, each with a full year cost of between €482m to €635m; equivalent to between 1.2 per cent and 1.6 per cent of the annual income taxation yield.

Overall, three of the changes examined would produce fairer outcomes:

  • increasing the personal tax credit;
  • abolishing the 0.5 per cent USC rate and reducing the 2 per cent rate; and
  • reducing the 2 per cent USC rate.

Five of the changes examined would produce unfair outcomes:

  • reducing the top tax rate to 39 per cent;
  • reducing the standard tax rate to 19.5 per cent;
  • increasing the standard rate band; and
  • reducing the 3 per cent USC rate.

With Budget 2027 in mind, in particular discussions regarding potential options for a ‘tax package’, the briefing’s analysis of an increase in the standard rate band (20 per cent tax band) of €2,000 (changing the entry point to the top tax rate) finds that such a change provides gains which are skewed towards higher incomes. A single earner on €25,000 gains nothing from this reform, and gains are only experienced by single individuals with incomes over €44,000, one-earner couples above €53,000 and couples with two earners with a gross income above €88,000. 

The analysis of a potential increase to the personal tax credit found that such a change would provide a relatively fair distributive outcome. The gain is the same for all taxpayers earning sufficient income to pay more than €180 in income taxes. However, below €20,000 for single earners / €30,000 for couples with one earner / €40,000 for couples with two earners, there are no gains as up to these points tax credits absorb all income tax liabilities. 

Reforms

Social Justice Ireland believes that the best reform to the income taxation system would be to make tax credits refundable. Such a reform would mean that the full value of tax credits goes to everybody who has an earned income. The main beneficiaries would be low-paid employees (full-time and part-time). This option would improve the net income of workers whose incomes are lowest.  Broader reforms to income taxes are not a central priority for Social Justice Ireland either in the forthcoming Budget or in any future plans for taxation policy reform.