Wednesday 21 August 2019

Tax cuts back on the cards but pensioners to lose out

  • Pensioners likely to be disappointed but cuckoo funds are warned they could face policy change

  • Donohoe’s officials urge radical changes in Budget plan – including higher levies on polluting cars

Pensioners likely to be disappointed but cuckoo funds are warned they could face policy change
Photo: Stock
Pensioners likely to be disappointed but cuckoo funds are warned they could face policy change Photo: Stock

Kevin Doyle, Donal O’Donovan and David Chance

Tax cuts for middle-income families are back on the table ahead of Budget 2020.

Finance Minister Paschal Donohoe was advised he has to counteract rising wages – but his senior advisers see little scope for increases to the old age pension or social welfare payments next year.

The high-level recommendations come just as the Government had begun talking down the prospect of tax cuts due to Brexit.

The Budget 2020 Tax Strategy Group Papers also propose:

Paschal Donohoe: Finance Minister is preparing Budget 2020. Photo: Gareth Chaney, Collins
Paschal Donohoe: Finance Minister is preparing Budget 2020. Photo: Gareth Chaney, Collins
  • Social welfare increases should be targeted as specific poverty relief schemes;
  • A review of the Home Carers’ Grant because 10pc of payments go to households with incomes of more than €100,000;
  • Extra taxes on high emission cars.

One of the 20 documents released by the Department of Finance also warned the Exchequer could suffer a hit of €350m based on duty free sales of cigarettes and alcohol if the UK crashes out of the EU on October 31.

The Department of Finance papers suggest it will be impossible for Mr Donohoe to appease all sectors of society in his final budget before a general election.

Setting out the policy options in relation to taxation, the papers say that wage growth "is projected to be relatively stable out to 2023".

Incomes are likely to grow by 3.2pc annually with the result that thousands more workers are sucked into paying the 40pc income tax rate.

The numbers paying the higher rate has already more than doubled from 277,086 in 2010 to 576,500 today.

"Consideration could therefore be given to further increases to the standard rate income tax band having regard to such projected growth as otherwise increased numbers of taxpayers will end up subject to income tax at the higher rate," it says.

Since 2015 the higher rate income tax band has been increased by €2,500 from €32,800 to €35,300 and the higher rate was reduced to 40pc.

The report notes there has been "a lot of commentary around the competitiveness of the Irish income tax regime".

Last year Taoiseach Leo Varadkar made a public commitment to increasing the entry point for the higher rate to €50,000 over five years.

It is estimated that if a Brexit deal is secured the Government will have €700m available for a tax and welfare package.

A €3,000 increase to all standard rate bands would cost €524m in the first year, and €610m in a full year.

Mr Varadkar appeared to walk back from that promise in the Dáil recently though, saying it may "not necessarily" start in the forthcoming budget as a consequence of Brexit.

The Department of Finance has now put the issue of tax cuts firmly back into play.

However, Budget 2020 looks set to disappoint the bulk of the 1.3 million people in the State in receipt of some weekly social welfare payment, including the biggest group, pensioners.

Social welfare commitments in the Programme for Government - including to raise pensions and allowances for carers, families and those with a disability - have all been met, the Tax Strategy Papers note.

Across the board increases in the weekly rates of payment are very expensive (costing around €70m for a €1 increase). Across the board increases like last year's €5 a week hike are now unlikely to be repeated with one approach suggested being to target any extra spend at vulnerable groups - including to encourage parents in households where no-one works back into the labour force.

Meanwhile, the Department of Finance has shied away from mandatory increases in carbon taxes starting next year, saying it did not want to commit to fixed annual increases in a blow to the green agenda.

"In terms of meeting the commitment to increase the carbon tax to at least €80 by 2030, a possible trajectory is to raise the rate by €10 per tonne in 2020 and by €5 per tonne every year thereafter," it said.

It argued that shocks to the economy ranging from Brexit to a surge in oil prices meant that a pre-set path of increases was inadvisable.

"This suggests that if there is to be a long-term trajectory in place it should be flexible enough to allow for both a 'step-off' from the carbon tax escalator or, in the alternative, an ability to increase the speed towards €80 per tonne," it said.

Meanwhile, the controversially low taxes paid by so-called cuckoo funds are set to be looked at ahead of the Budget, with officials firing a warning shot that funds that own thousands of apartments may be hit by a policy change.

An interesting side-effect of Brexit is also highlighted in the papers. By default, duty free sales would emerge between the UK and EU, meaning passengers flying into Ireland could buy tax-free cigarettes and alcohol.

Around 7.6 million passengers arrived in Ireland from the UK in 2017 and the reports warn the tax-free goods will promote "fiscally motivated travel".

If 50pc of the total passengers arriving into Ireland from the UK availed of tax-free allowances within the fixed limits for cigarettes and spirits, this would involve the importation of 760 million cigarettes and 3.8 million litres of spirits.

While this would be a boon for some shoppers, the impact on the Irish retail sector has not been quantified.

Irish Independent

Also in Business