Brian Cowen's four-year ruse: the less you earn, the more you lose
The Government's latest big plan could burn a €15,000 hole in your pocket over the next four years, writes Louise McBride
AS if the shame of an €85bn bailout isn't enough, we now have to swallow at least four years of tax hikes, swingeing welfare cuts and lower pay.
The Government's four-year plan, published last Wednesday, includes a €1 cut in the minimum wage, the introduction of a property tax and water charges, a higher carbon tax and a 33 per cent increase in university registration fees.
By 2014, the plan will reduce the amount of money people must earn before they start to pay tax from €18,300 to €15,300. As a result, more lower paid will be pushed into the tax net and middle-income families will have tougher tax bills to cope with.
We will also pay more for alcohol, petrol, cosmetics, CDs and toys, thanks to the Vat rate increase from 21 to 23 per cent by 2014.
Although the precise detail of the €2.8bn of social welfare cuts in the plan won't be revealed until Budget Day on December 7, the cuts are expected to be in the region of 5 per cent -- with child benefit and the dole on the chopping board. The State pension was left alone but the plan seeks to increase the age at which people qualify for it -- to 66 in 2014, 67 in 2021 and 68 in 2028. There also will be a dramatic decrease in the amount of tax relief available to those paying into a pension.
So while we are all taking some hit, how much worse off are you under the four-year plan?
At least €3,270 worse off
Let's take a young married couple. Only one of them is working, the other spouse stays at home to look after their six-month old baby and one-year-old toddler. The working spouse earns €70,000 a year. The couple own a three-bedroom home in Dublin.
Child benefit: €720 poorer
The couple is currently entitled to €300 a month in child benefit for their two children -- but December's Budget is likely to cut that to €285 a month, meaning the couple will lose out on €180 in child benefit in 2011 -- or at least €720 over the next four years (assuming child benefit isn't cut again).
Higher taxes: €1,500+ poorer
Under the four-year plan, by 2014, income tax will kick in on earnings of €15,300 instead of the previous limit of €18,300.
So this spouse will pay about €1,500 more in tax on annual earnings of €70,000.
This could be the least of this family's tax worries. The Taoiseach said last week that the four-year plan would bring our tax system back to 2006, suggesting other tax hikes are on the cards (see panel). Furthermore, the carbon tax rise will see this family pay more for petrol. They will also be burned by a Vat increase and (assuming the spouse has a pension) by the reduction in pension tax breaks.
Property tax: €450 poorer
This family will soon have to dish out a property tax of €200 a year. This tax will be first introduced in 2012 as a "site value charge" of €100 per residence.
By 2014, this tax will have increased to €200. Let's assume that the property tax for 2013, therefore, is €150. This would mean the family will pay €450 in property tax over the next four years.
Water charges: Between €500 and €600 poorer
As the Government must wait for water meters to be installed before it can introduce water charges, it could be two or three years by the time water charges come in.
The four-year plan did not specify how high water charges will be but they could easily cost the average household between €250 and €300 a year. In Britain, the average household pays about €350 a year in water charges. So, assuming that water charges are introduced in 2013 this couple could have paid €600 in water charges by the end of the four-year plan.
MIDDLE-CLASS WEALTHY FAMILY
€9,402 worse off
LET'S take a wealthy middle-class family with five children aged 3, 5, 7, 10 and 18. Both parents are working -- and they earn €110,000 between them. The family own their own home and a holiday home in Cork. Their 18-year-old child is due to start college in September 2011.
Child benefit: €4,992 poorer
The family are currently entitled to €674 a month in child benefit for four of their children -- which works out at a higher rate of child benefit per child (€168.50) than for families claiming child benefit for up to two children (€150 per child).
Under the four-year plan, the same rate of child benefit will be paid regardless of the size of the family. This would reduce the child benefit for four children from €674 to €600 a month. If, as expected, a flat 5 per cent cut is also chopped off child benefit in next month's Budget, their monthly entitlement will fall to €570.
This means the family is losing out on €104 in child benefit a month -- or €1,248 a year. So after four years, child benefit cuts will have cost this family €4,992.
Property tax: €450 poorer
This family, who are already paying an annual €200 charge on their holiday home, will have to pay a second property tax in 2012 when the "site value charge" of €100 is introduced. As this charge will increase to €200 by 2014, and will likely be €150 in 2013, this family could pay €450 for the property tax on their main home by the end of the four-year plan.
Water charges: Up to €1,200 poorer
If the family has to pay water charges on their holiday home as well as their main residence, they could have to cough up for water charges on two properties from 2013 (as long as water meters are installed by then).
If based on usage, the water charges for the holiday home are unlikely to be too high. But if the water charges for both homes are €300 a year, by the time the four-year plan comes to an end in late 2014, the family will have paid €1,200 in water charges.
Higher taxes: €2,260+ poorer
The plan's move to start tax on earnings of €15,300 instead of €18,300 by 2014 will cost this family €2,260 in extra taxes on their combined annual earnings of €110,000. Further changes to the tax system will cost them more.
College fees: €500 poorer
The four-year plan aims to increase college registration fees from €1,500 to €2,000. As there is an 18-year-old in this family about to start college, this family now has to cough up an extra €500.
€15,294 worse off
Low-paid workers have at least three bitter pills to swallow: the €1 cut in the minimum wage; the move to tax someone once they earn €15,300; and the prospect of a universal social charge.
"The replacement of PRSI and the various levies with a universal social charge has not materialised in the four-year plan," said Jim Ryan, partner with Ernst & Young. "However this is expected to appear in the Budget announcement in December."
Minimum wage: €11,568 poorer
Let's take an office cleaner who is on the minimum wage of €8.65 an hour. She has opted to work 55-and-a-half hours a week so she can afford her massive rent and support her only child.
At this rate, she works more than 2,890 hours a year and earns about €25,000. The reduction in the minimum wage from €8.65 to €7.65 an hour will hit this worker hard. In fact, it will put her about €2,892 a year out of pocket -- that's a whopping €11,568 over four years.
Under the new minimum wage of €7.65, she will have to work an extra seven-and-a-half hours a week (about 63 hours in total weekly) to earn €25,000 a year.
Higher taxes: At least €366 poorer
The move to tax earnings from €15,300 instead of €18,300 by 2014 will cost this worker about €366 more in tax on annual income of €25,000.
Rent relief: €800 poorer
This worker will lose rent relief as under the plan, this will start to be phased out from 2013 (at the same time as mortgage interest relief). This relief is worth about €400 a year to single people under the age of 55. So by the end of the four-year plan, the loss in rent relief will cost this worker €800.
Universal social charge: €2,560 poorer
A universal social charge, which will replace PRSI and the income and health levies, is expected in next month's Budget.
Such a charge will hit the low paid hardest (especially those earning €25,000 or less) as many of these do not currently pay PRSI or the health levy, according to Brian Purcell of taxation firm Purcell McQuillan.
The Economic and Social Research Institute recently recommended that a 7.5 per cent universal social charge be introduced. Whether or not the charge will be as high as this remains to be seen. But if a 7.5 per cent charge were introduced, a worker earning €25,000 will pay €640 a year more in tax -- or €2,560 over four years, according to Purcell.