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Some Budget income tax proposals would favour rich at expense of lower income workers

Some income tax proposals currently being considered by Government should be rejected because they would give far greater benefit to people earning higher incomes while giving nothing to lower income employees according to a new study conducted by Social Justice Ireland.

This study, entitled 'Fairness in Changing Income Tax: 6 options compared'  shows that three of six options to reduce income tax currently being considered would be profoundly unfair because they would favour only those with higher incomes.

A copy of the study may be accessed here.  The following key points should be noted:

  • This study compares six changes to the income tax system suggested by various members of Government and many others.
  • The options examined are for the 2014 income taxation system and are:
  • a decrease in the top tax rate from 41% to 40% (full year cost €195m)
  • an increase in the personal tax credit of €105 with commensurate increases in couple, widowed parents and the single person child carer credit (full year cost €194.25m)
  • an increase in the standard rate band (20% tax band) of €1,300 (full year cost €195m)
  • Reducing the 2% USC rate to 1% – this applies to income below €10,036 (full year cost €190m)
  • Reducing the 4% USC rate to 2% – this applies to income between €10,036 and €16,016 (full year cost €210m)
  • Decreasing the 7% USC rate to 6.5% – this applies to income above €16,016 (full year cost €225m)
  • To compare these options the study allocates about €200m to each option (based on the Department of Finance’s costings) and presents the outcomes.
  • Although all the income tax options cost roughly the same, they have very different impacts on the income distribution.  Table 1 in the study sets out the various impacts.
  • Three of the changes would produce a fair outcome i.e. increasing the personal tax credit; reducing the lowest USC rate by 1 percentage point; or reducing the middle USC rate by 2 percentage points.
  • Three of the changes would produce an unfair outcome i.e. reducing the top tax rate to 40%; increasing the standard rate band; and reducing the 7% USC rate.
  • Each of the three fair options would provide beneficiaries with an improvement in their annual income ranging from €99-120.
  • Each of the three unfair options would skew benefits towards those with higher incomes. 

The impact of each option would be as follows:

  • Decreasing the 2% USC rate by one percentage point would provide the same gain (€100.36) to all individuals with earnings in excess if €10,036 (option 4 above; chart 4 in the study). 
  • Decreasing the 4% USC rate by two percentage points would benefits all those with incomes of more than €10,036. However those earning above €16,016 would gain a little more those below that threshold (option 5 above; chart 5 in the study).
  • Increasing the personal tax credit also provides a fair distributive outcome across the income distribution.  The gain is the same for all taxpayers earning sufficient to pay more than €105 in income taxes (option 2 above; chart 2 in the study).
  • The most unfair option would be to decrease the 41% tax rate (option 1 above; chart 1 in the study). This would benefit only those paying tax at that rate. Therefore, the single earner on €25,000 would gain nothing from this change while those on €50,000 would gain €172 per annum and those on €125,000 gain €922 a year. The higher the income, the greater the gain. 
  • Increasing the standard rate band (Option 3 above; chart 3 in the study) also would provide gains skewed towards those with higher incomes.  Again, the person on €25,000 would gain nothing but a person on €50,000 would gain €273 a year.
  • Finally, reducing the top rate of USC by 0.5% (option 6 above; chart 6 in the study) would also produce an unfair outcome with earners above €16,016 gaining 0.5% of their income as a tax cut, while people in low-paid jobs would gain nothing.

Under no circumstances should the 20% income tax band be widened or the top tax rate reduced in the next Budget.  The poorest 10% of society lost most since the onset of the crisis. Reducing the lower USC rates or increasing tax credits are the fairest options and Government should opt for these rather than choosing any of the three unfair options.

It should be noted that

  • Reducing taxes is not Social Justice Ireland's priority for Budget 2015. Any available money should be used to improve Ireland's social services and infrastructure, reduce poverty and social exclusion and increase the number of jobs.
  • If money is available for tax reductions then making tax credits refundable would be the fairest and best option to take.  By making tax credits refundable the full value of the tax credit 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.