Wednesday 13 December 2017

McCreevy was right: when it comes to income tax, workers only look at rates

Former finance minister Charlie McCreevy

Do you know how much your tax credits are worth to you?

Highly unlikely.

Do you know the income tax rates?

Probably.

The lower and higher rates of income tax are part and parcel of the general understanding of the tax system. On Budget day, changes to tax rates are one of the things the ordinary punter traditionally looks out for, along with how much is gone on to the price of a pint, a packet of fags and the litre of petrol.

And therefore a cut in the tax rates will have a triple impact. Not only will it give a worker a reduction in the amount of tax they pay, but it delivers the psychological benefit of a taxpayer feeling their burden has been lightened, providing them with an incentive to work more and seeing a genuine return. The tax rate also serves as a benchmark for the taxation system in a country, when it is being examined by workers abroad - either emigrants considering a return home or migrants moving to the country.

The problem with adjusting income tax rates is it's not the most efficient way of targeting a specific cohort of income earners as the benefits of a lower rate are spread across everyone paying income tax. A method of clawing back the benefit from higher earners needs to be found elsewhere, within the income tax or wider tax system.

Taoiseach Enda Kenny has clearly pinned his colours to the mast of reducing the income tax rates. He employed strong language this week to describe the "damaging" effect of the high tax rate for business, workers, families and Ireland's attractiveness for foreign investment.

Notably, Mr Kenny was not confining his comments to removing middle income earners from the marginal tax rate, made up of income tax, PRSI and USC, when they earn more than €32,800, which has been the focus of the Government's commentary so far.

Mr Kenny was raising the prospect of a cut to one of those three components.

But his counterpart, Tanaiste Joan Burton, appears to have a different view. The Labour Party leader wants to see the point at which the worker hits the marginal rate raised.

But she is also zoning in on tax credits. A tax credit is effectively a discount off your tax bill. Increasing a tax credit will deliver the result of increasing take home pay.

But it won't reduce the numbers caught in the 52pc net. The marginal rate will remain intact and an opportunity will be lost.

The Government risks missing the knock-on position effects of its tax relief package if it doesn't keep it simple.

Former Finance Minister Charlie McCreevy understood that taxpayers only really look at the rate. To restore confidence, the Coalition would be well advised to take a look out of Mr McCreevy's book.

Irish Independent

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