MIddle-income groups will be squeezed and marginalised in the next three Budgets. I'm not talking about the middle class who have savings and something left after they pay the bills. I mean the people who worked hard for what they have only to see it taken away by a misguided Government. There are 2.5 million registered income tax payers in this country
The figure is closer to two million if we treat two-income married couples as one, as the Revenue do.
Nearly half of these taxpayers are exempt from income tax altogether.
Of those who do pay, nearly 28 per cent pay 70 per cent of all the tax.
Those earning between €40,000 and €100,000, paid 45 per cent of all income tax in 2010. The top one per cent of taxpayers paid about 22 per cent. But they control 10 per cent of the income and maybe more. Every euro taken in income tax, PRSI and the USC cuts spending and that means we lose other tax such as VAT, VRT, excise duty and stamp duty. The top one per cent may pay a lot, but middle-income groups pay the most.
The €100 household charge, for which as much as a third hasn't been collected, seems small. But it comes out of after-tax income.
For those who pay tax at the highest rate, it absorbs €222 of their gross. If you have not paid yet, you already owe €132. By January the figure will be €143. In terms of gross income that's worth more than €300, and interest will be added until everything is paid.
Indications are that the new property tax will be 0.2 per cent of the value of the property. The average charge will be €315, based on a typical property value of €158,000. For every €100,000 your property is worth, you will be charged €200. So if the value of your home is €500,000 you will pay €1,000. If you pay tax at the highest rate, this will absorb €2,222 of your gross income. The rest will go in income tax, PRSI and the USC.
Those who cannot pay may be allowed to defer payment. That just shows how stupid and badly thought out this tax is. What is the point if people cannot afford to pay it? Any fool can see that this is another desperate measure to win gold stars from our paymasters in the EU.
If property tax in Ireland is not dumb at this time, it is certainly premature.
Eighty-seven per cent of taxpayers don't pay income tax at the higher rate. The incentive for tax avoidance is huge once you earn enough to hit 41 per cent. When you take account of PRSI and the USC, even a 20 per cent taxpayer can expect to lose 30 per cent to the taxman.
When this jumps to over 50 per cent, it is too much for most. You can cut your tax bill if you pay into a pension fund. But that is being restricted in the private sector.
Thirteen per cent of those registered for income tax pay 70 per cent of the tax based on Revenue's 2010 statistics.
The USC propped up revenue when the tax yield collapsed. But it has taken it out of circulation and we lose spending taxes as a result. This is dead money, used to pay back foreign banks. It has destroyed the economy and it will be worse after the Budget.
The Government made a commitment that it would not increase income tax. It should eat humble pie and renege on this promise, because it was foolhardy. Now it finds itself having to introduce a myriad of other badly thought out taxes to get around its foolhardy promises. It would be easier to tax those who still have some income than to concoct new taxes that many cannot afford to pay. If €315 is collected from 1.6 million homes it will yield over €500m in a full year. But the Government only intends to collect half next year. So it will only get €250m.
If it encounters the same resistance as it did with the household tax it will be lucky to collect €160m next year. Given that tax revenues are already up a little for 2012, it might be satisfied with less. The troika wants 2.5 times what the Government is seeking from property tax. That would average nearly €800 per household. It won't happen next year, but we can expect even higher property tax and soon.
The Government agreed to raise €1.5bn more tax next year. Property tax is likely to yield no more than €250m. That leaves another €1.25bn to raise from other taxes.
Tax relief for private sector pensions are under pressure, but it should be left alone. Half the population still need to be encouraged to provide for their retirement. It will drive a bigger wedge between private and public sector workers if such discrimination is allowed to continue.
There are about two million taxpayers who pay the USC. A one per cent increase across the board would raise a billion. While nearly half the workforce pay little or no income tax, nearly everyone pays the USC. It will be used to plug the holes. Excise duty is one of the most sustainable taxes and it can be increased without much risk of a falloff in spending that generates it. It will be used to raise revenue from drink and cigarettes next year. Motor tax will be targeted.
They need something else too. That might involve taxing child allowance to claw something back from those who don't need it. If we keep our fingers crossed, they might see sense and not increase tax at all.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning.