Middle-class families to get Budget tax breaks
Workers will take more pay home in plan to change income band levels
MIDDLE-CLASS families will be able to take home a greater proportion of their salaries under radical proposals to revamp income tax bands.
Proposals drawn up at senior level in the Department of Finance suggest allowing workers to earn more money before they must pay the top 52pc rate of tax, which will put more cash in people's pockets.
The paper shows that serious consideration is being given to increasing the level at which the top 52pc tax rate kicks in, as negotiations get under way ahead of the October Budget.
Several Fine Gael ministers have already expressed a wish to ease the income tax burden on families where possible.
But fiscal economist Brendan O'Connor, who drew up the paper, also says there's scope for increasing "consumption taxes" on fuel, emissions and VAT.
His analysis even looks at increasing property tax, but this is unlikely to happen soon as it would be too politically damaging.
However, the report points out that raising the entry point for workers to the top rate of tax would have positive "substitution effects".
This means that consumers would have the ability to buy more expensive goods and services with their take-home pay boosted.
This in turn would stimulate the economy, instead of a situation where a large portion of a person's salary disappears into the tax net.
Currently, the highest rate of 52pc tax kicks in at €32,800 for a single PAYE worker and €41,800 for a single-income family. This rate is calculated using a combination of the Universal Social Charge, PRSI, as well as the higher 41pc income tax rate.
The rate is even higher for a self-employed person, at 55pc.
The proposed changes would reverse the current situation where workers on average incomes are having more than half of every euro they earn above the threshold taken by the Government. And it would provide an additional incentive to people on social welfare to find jobs.
The financial impact will vary depending on a person's circumstances, but currently a single worker is hit by the top rate of tax at a threshold of €32,800.
If this was raised to €34,800 instead, that would mean that €2,000 worth of income would be taxed at a lower rate of around 30pc instead of 52pc.
This would translate into an effective tax cut worth approximately €400 a year.
The mooted changes follow comments by Finance Minister Michael Noonan, who has publicly criticised the fact that these high tax rates occur at relatively low levels by international standards.
"This means that for a working person on average income in Ireland, out of every extra euro they earn the Government takes more than half," he said.
Minister Richard Bruton has also highlighted the problem, saying that tax rates of more than 50pc on average incomes did damage to inward investment and entrepreneurship.
He argued that a high income tax rate made too many people question whether they would be better off not working.
According to the Central Statistics Office, the average income here is €36,000 – and workers on this rate are getting hit by the top rate of tax for a significant proportion of their income.
The top rate of tax kicks in here earlier than in most other European countries.
In Germany, the top rate of tax is only paid when a person earns over €253,000 and in the US, it is only paid by those earning over €310,000.
The Department of Finance has insisted that Mr O'Connor's presentation was prepared solely by him and should not be interpreted as reflecting the views of Minister Noonan or the department.
It has said that other factors would have to be considered before making any tax changes – such as the how fair they are considered to be.
But it has acknowledged that the research would "feed into" the budgetary process.
The income tax issue is already causing tensions in the Coalition, with Labour insisting that other issues – such as spending on infrastructure, education and health – have to be considered before implementing any tax cuts.