independent

Wednesday 23 April 2014

PAYE tax cuts on the way to boost economy

Bailout exit: squeezed middle to finally benefit

Taoiseach Enda Kenny feels the heat while visiting the Glen Dimplex plant at Dunleer, Co. Louth. Photo: Paul Connor
Taoiseach Enda Kenny feels the heat while visiting the Glen Dimplex plant at Dunleer, Co. Louth. Photo: Paul Connor

SQUEEZED middle-income workers, earning between €30,000 and €60,000, will get a boost from income tax cuts before the next general election.

Following the exit from the bailout, the Government plans to put more money back in the pockets of hard-pressed workers who bore the brunt of the downturn.

The focus is on cutting the higher rate of income tax, currently 42pc.

"Rate cuts are what we want," a senior government source said.

But despite promising tax cuts as he marked the end of the troika programme, Finance Minister Michael Noonan warned: "We can't go mad again."

Reducing the tax burden is viewed as an economic stimulus, as it encourages growth and additional spending.

But part of the cost of income tax reductions may have to come from tax hikes elsewhere.

To balance the measures, higher earners may be hit with reductions in tax reliefs.

Middle-income earners enter the higher rate of tax once they hit €32,800.

When the USC and PRSI are added in, it brings what is known as the marginal rate of tax for a PAYE worker up to a punitive 52pc.

This means a worker only gets 48c into their back pocket out of every €1 earned above €32,800.

The Coalition is looking at a range of options to help middle-income earners:

* Reducing the higher income tax rate of 42pc.

* Raising the band where workers enter the higher rate.

* Moving around the bands for the USC.

* Increasing tax credits is being ruled out as workers don't tend to associate this with extra take-home money.

More complicated solutions are also under consideration, but are less likely:

* A third band between the lower rate and higher rate.

* A child tax credit.

Fine Gael and the Labour Party both want to see tax relief in the coming budgets. But the first option is to reduce the 42pc rate.

"People don't change their habits otherwise. It's the rate that matters for them. The income tax wedge has become a barrier to economic growth. Every option has qualities and anomalies. The Department of Finance has been pressing for the reform," a Government source said.

Taoiseach Enda Kenny signalled income tax cuts for "hard-pressed" families could feature in next year's Budget, if economic growth be sufficiently strong.

"Clearly, the figures will become available to Government from June, July, August -- the Budget will be next October -- and the Government will monitor the situation from January," he said.

RELIEF

"But we will decide then on the basis of what the growth figures are, what the income figures are, how best to give relief where it can be given."

But Mr Kenny added that any suggestion of tax cuts will not happen at the expense of the country's recovery.

"Mr Noonan was pointing out that 2015 and 2016 will be important years. We have to get this right. We are not going to blow away the momentum we have achieved, just because the troika have returned home," he said.

Tanaiste Eamon Gilmore insisted both coalition parties were in favour of reducing the income tax burden on people.

"I think what we have to do is ensure that the people of this country, whose sacrifice and hard work made exit from the bailout possible, that as our economy recovers, that as jobs are created and as the finances of the state improves, that we do what we can to lift the taxation burden on hard-pressed families. That is a view that is shared across Government," he said.

Mr Gilmore had previously flagged up the prospect of tax cuts in the run-up to the recent Labour annual conference in Killarney.

The Tanaiste told the Irish Independent he wanted to see tax relief for hard-pressed middle-income earners.

Mr Noonan rejected suggestions the Government was ignoring the advice of its independent economic watchdog, the Fiscal Advisory Council, by promoting tax cuts.

"I don't think there's a contradiction. Even when we had very little, we were prepared to cut certain taxes for economic objections," he said.

Public Spending Minister Brendan Howlin said the Government did have regard to what the economic advisory group says.

"We make decisions that go beyond simply the economic, we have a social responsibility, and a political responsibility because there's no point making decisions that can't bring a majority of the people to be supportive of those decisions.

"We have always been prudent in the decisions we have made," he said.

Fionnan Sheahan, Michael Brennan and Daniel McConnell

Irish Independent

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