Sunday 18 March 2018

Tax credit system must be re-examined to help the 'squeezed middle'

'A more targeted approach using tax credits and allowances could better assist the squeezed middle' Stock Photo
'A more targeted approach using tax credits and allowances could better assist the squeezed middle' Stock Photo

Brian Keegan

In the run-up to the October budget, all the talk is about USC abolition. But for many people, the sharpest tax increases during the recession came not from the USC but from the reduction or the abolition of other tax credits and reliefs. Remember, the USC replaced two separate levies which already existed - an income levy and a health contribution. So while the USC affected all of us, in many cases it just replaced a charge that was already there.

Losing tax credits is different. When a tax credit is reduced or dropped, it's a direct cost to the taxpayer. Every euro less of a credit means a euro more tax is paid. Nor is there any prospect of these credits being increased or reintroduced. The Programme for Government actually states that any future USC reductions will be funded in part by not increasing tax credits and other tax allowances.

Most of us are entitled to the personal tax credit, and those of us in employment are entitled to the PAYE tax credit. Before 2011, the tax credit for a single person was €1,830. Now it's €1,650. That's an extra €180 a year that everyone has to pay in tax, before any talk of changes to USC or income tax rates or allowances. The same goes for the PAYE tax credit, which also used to stand at €1,830. It too is now locked in at €1,650.

But at least these credits are still available. Some others were abolished entirely. There used to be a credit for bin charges. That's gone, as is relief for items like trade union subscriptions. Other long-standing reliefs have progressively been whittled away over the years.

Mortgage interest relief used to be one of the most valuable reliefs available to taxpayers, and of real assistance in getting on the property ladder. Over the years, the eligible amounts of interest have been pared back, then the relief was only granted at the standard rate of tax rather than at the marginal rate of tax, and it is now to all intents and purposes abolished. Tax relief for medical insurance was also whittled away.

The maximum relief any taxpayer can now get for their medical insurance premiums is €200 against the cost of the premium for an adult, and €100 against the cost of the premium for a dependent child. The benefit in helping people fund their own homes at a time of great difficulty in the housing sector, and the benefit of helping people privately fund their own healthcare at a time of great pressure on the public health service, would surely suggest that these reliefs are worthy of re-examination.

Another consequence of eliminating targeted tax credits and allowances is that it restricts the Government's ability to direct tax relief to where it is most needed. Changes to the 20pc income tax band, or adjustments to the USC rates and bands, are relatively blunt instruments. Even a small adjustment to the general rates and bands which apply affects a very large number of taxpayers, and so becomes very costly to implement. A more targeted approach using tax credits and allowances could better assist the squeezed middle.

Yet rather than adopt a more flexible approach to the use of tax credits, the signals are that the opposite will be the case. The Programme for Government talks about actually reducing the tax credits available to those taxpayers earning over a certain income threshold, possibly €100,000. A recent Income Tax Reform Plan from the Department of Finance outlined all the options available.

There is no doubt that the old income tax model that prevailed up to a few years ago had too many allowances and deductions for taxpayers. We don't want to go back to a UK-style model, where there are over 1,000 separate forms of tax relief available in the system. But neither is the New Zealand model, which promotes a mere handful of reliefs, appropriate to us. Nevertheless, the tax credit system deserves to be re-examined if Government is serious about tax relief for the squeezed middle.

Brian Keegan is director of taxation with Chartered Accountants Ireland

Irish Independent

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