Income tax bands should not be changed in the next Budget – benefit would only go to the better off

Social Justice Ireland challenges the Minister for Finance’s proposal that the tax band ceiling of €32,800 should be raised.  Changing the tax bands in the next Budget would only benefit those who are better off, not those earning low incomes.

Increasing tax credits and making them refundable would be a much fairer approach that would benefit everyone with a job, not just those earning more than €32,800, and would go some way towards addressing the working poor issue.  Lifting the income threshold for the 20% tax band would be of no benefit to anyone with an income at or below the top of that band.  All the benefit from such a change would go to those earning above €32,800 per annum which is the current cut off point.

• Under no circumstances should the 20% income tax band be widened in the next Budget.
•  In terms of fairness, making tax credits refundable is the most appropriate option as their full value would go to everybody who has an earned income.
• The poorest 10% of society lost most since the onset of the crisis. A widening of tax bands as proposed by the Minister for Finance would not improve their situation but would increase inequality and widen the rich/poor gap.
• 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.

Refundable Tax Credits

Making tax credits refundable is the fairest and best option for changing the income tax system. By making tax credits refundable the full value goes to everybody who has an earned income.  The main beneficiaries would be low-paid employees (full-time and part-time).  The system would improve the net income of workers whose incomes are lowest, at a modest cost.

It would also be a positive policy response to the ‘working poor’ issue. Such a move would make Ireland’s tax system fairer, address part of the working poor problem and improve the living standards of a substantial number of people in Ireland.  It would ensure that Ireland’s income tax system treated everybody equitably and fairly. 

Increasing tax credits

 Increasing the tax credit would be a less favourable way of changing the income tax systems, but preferable to widening the bands.  The most appropriate way to make changes to the income tax system is to make tax credits refundable before any further changes to tax credits are made.  By making tax credits refundable any increase is distributed fairly across incomes.  If tax credits are not made refundable and tax credits are increased the benefit is not distributed as equitably.

Impact of making tax credits refundable and making changes to tax credits

Chart 1 below outlines the impact of making tax credits refundable.

Chart 2 shows the impact of making tax credits refundable and increasing tax credits by €100 per person.

Chart 3 shows the impact of increasing tax credits by €100 per person without making tax credits refundable.

Chart 1: How much better off would people be if tax credits were made refundable?

* Except where unemployed as there is no earner

Chart 2: The impact of a €100 increase in tax credits per person and if this was refundable

* Except where unemployed as there is no earner

Chart 3: The impact of a €100 increase in tax credits per person (credits not refundable)

* Except where unemployed as there is no earner

• Social Justice Ireland has published a detailed study on the subject of refundable tax credits entitledBuilding a Fairer Tax System: The Working Poor and the Cost of Refundable Tax Credits.  
• Source for charts – ‘What Would Real Recovery Look Like: Socio-Economic Review 2013’ published by Social Justice Ireland.

Building a Fairer Tax System: The Working Poor and the Cost of Refundable Tax Credits can be accessed here