Big tax cut plan would only give €1 a day back to families
The Government's favoured plan for tax cuts in the Budget would deliver a benefit of less than a euro a day.
This works out at far less than a reduction in the unpopular universal social charge (USC).
Two separate analyses carried out for the Irish Independent have laid out the various options available to Finance Minister Michael Noonan, showing how families could benefit and the cost to the Exchequer.
The studies show that income tax cuts costing €225m will only deliver €315 a year savings to a family. This works out at less than a euro a day.
But reducing USC by 1pc will give a bigger break to families, the research shows.
There are close to two million earners in the country, with the Government dangling the prospect of some income tax cuts in the next Budget.
This is likely to be the first of what is expected to be a serious of changes to lessen the tax burden on families hit by almost seven years of austerity.
The two tax studies show that:
* Higher earners would be the big winners from a lowering of the top rate of income tax from 41pc to 40pc.
* Allowing people to earn another €1,500 before they hit the higher 41pc rate would give back no more than €315 to income taxpayers.
* But cutting the USC by 1pc could deliver a saving of €580 a year to a two-income family on €60,000.
Numerous Government ministers have proposed allowing people to earn more money before they start paying the top rate of income tax. However, most workers will be surprised to learn just how little that change to the tax regime would be worth to their own bank balance.
For many lower and middle-income earners cutting the top rate of tax would be of no financial benefit at all.
"A 1pc reduction in the top rate of income tax will only benefit mid and higher earners," said John Heffernan and Catriona Coady in a study for Ernst & Young (E&Y). And they said that if the Government decided to change the lower rate of income tax from 20pc to 19pc it would "deliver the same increase in net take home pay regardless of income level".
But the global accountancy giant found a one-income family on €60,000 would get a €440 a year boost if Michael Noonan decided to reduce the USC rate of 7pc to 6pc.
Lowering the top rate of income tax to 40pc would only give €272 back to the family.
The same reduction in the USC would give a married, two-income couple on €60,000 a year a €580 boost.
"The most equitable approach would appear to be a reduction in the rate of USC," said the study. The EY study showed that lowering the USC gives the biggest benefit to the largest number of taxpayers.
"Unlike income tax, the USC is applied to gross income with very limited deductions, so a reduction in the higher rate of USC by 1pc to 6pc will deliver a more substantial increase in net take-home pay than a reduction in the top rate of income tax," the study says.
Almost all taxpayers would benefit from lower USC rates.
On the other hand reducing the top rate of income tax from 41pc to 40pc would give a family on one income of €45,000 a break of just €32 a year - nine times less than the boost from cutting USC.
Mr Heffernan and Ms Coady said: "Virtually all taxpayers would benefit more from a 1pc reduction in the USC compared to a 1pc reduction in the top income tax rate."
This is because the controversial USC is paid on gross income with very limited deductions.
Reducing the USC by 1pc would see a single earner on €30,000 gaining €140 a year. But this person would get nothing from reducing the top 41pc tax rate to 40pc, EY found.
However, high earners would also be big winners from either a USC cut or a reduction in the top income tax rate, the calculations show. This leaves the option of keeping the current 7pc USC rate for high earners, and reducing it for middle and lower-income earners.
Brian Keegan, of Chartered Accountants Ireland, has outlined various tax-cutting options for the Government, showing how households could benefit from up to €250m in income tax reductions.
Currently, a single person who earns any more than €32,800 starts paying tax at 41pc instead of 20pc.
Combined with the USC of 7pc, and pay-related social insurance of 4pc, this means the total tax rate is 52pc.
Mr Keegan calculated that allowing people to earn another €1,500 before they start paying the top 41pc rate of income tax would cost €225m.
This would mean that a single worker could earn up to €34,300 before hitting the top rate. In a year that would result in an extra €315 in their take-home pay.
The €315 boost would be the same for all taxpayers, as long as there income was above €34,300.
Changing the USC would be expensive, as it applied to almost all types of income.