Tuesday 22 May 2018

Keith Connaughton: Tax bands leave us a long way from 'Republic of Opportunity' despite income tax cuts

Keith Connaughton is a tax director with PwC
Keith Connaughton is a tax director with PwC

Keith Connaughton

The clear message in the run-up to Budget 2018 was that the Exchequer's books would be balanced for the first year in many, which meant limited 'fiscal space' and no surprises on the day. €300m was earmarked for additional spending and there would be a concerted focus on certain areas, particularly workers on middle incomes.

Taoiseach Leo Varadkar was unequivocal on the intention to "reward work and enterprise" and reduce the burden on those "who pay the highest rates of tax on far too modest incomes". However, there would be no visit from the ghosts of giveaway Budgets past.

And yet, when the fateful hour arrived, Finance Minister Paschal Donohoe pulled a rabbit out of the hat and €300m became €1.2bn. A large proportion of the extra cash was allocated to badly-needed housing supply initiatives and Brexit support measures for affected businesses, to which there can be little objection. This still left more than €350m for income tax and USC reduction measures, an amount greater than the initial overall projected spend for the Budget.

How does this translate to helping the Taoiseach's 'squeezed middle'? In real terms, a single person on €45,000 a year is set to benefit to the tune of €22 a week. For the same person on €66,000 a year, it's €27 a week and there's no further benefit for anyone earning above this. So far so good - the changes proportionately benefit middle-income workers more than high earners. Clearly then, the USC rate cuts and the widening of the standard rate tax band are a step in the right direction for middle-income earners.

However, it's still hard to get away from the fact that workers in Ireland continue to enter the higher tax bands at relatively low levels of income. Comparisons with our European neighbours, all the more relevant in the context of a post-Brexit Europe, bear this out.

Even with this week's tax cuts taken into account, a single worker in Ireland continues to pay 44.5pc tax on income over €34,550. Move over to the Netherlands and that worker will pay less than 41pc tax on similar income. In Germany, a single person can earn over €57,000 before paying a tax rate of 44.3pc.

Further examples abound but what's clear is that we still have a long way to go if we're to create the Taoiseach's 'Republic of Opportunity'. Likewise, if we're to seriously compete with our fellow Europeans for business, talent and resources in the wake of Brexit, we'll need to see more progress on the entry points to our higher tax rates.

Talk of merging USC and PRSI into one social insurance payment may hold the key to addressing this but that's a matter for next year.

Keith Connaughton is a tax director with PwC

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