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Income Taxation and Budget 2015

Posted on October 17, 2014 by Micheál Collins

Budget 2015 (Public investment in social housing)

Judged from an income taxation perspective, Budget 2015 was reminiscent of Budgets of ten years ago, or more - maybe a worrying starting point! Cuts to income taxes dominated the announcements, and policy implementation within the Budget. This was at the cost of other priorities, including securing a more stable basis for growth and recovery in the years to come.

While it was clear from very early in the year, as the exchequers figures improved and the 3% 2015 deficit target became more than achievable, that income tax cuts were on the cards, the size of the package delivered in the Budget was a surprise. Overall, in full-year terms, the Budget provided €688m in income tax cuts. Spread evenly, this would have delivered about €415 to every family; but the distributive impacts were not so smooth.

Next year, a single worker on the Living Wage (€11.45 per hour / €23,247) will have €174 more in their pocket to spend while a similar worker on average earnings (€35,830) will gain €405. A working couple on an average income (€51,886) will be €348 better off while a single person on an income of €80,000 gains €747 and a couple at the very top of the income distribution, with a combined income of €125,000, gain €1,342. These regressive outcomes are further enhanced if account is taken of the net cost of new measures, such as water charges, in 2015.

In fairness, the design of the income tax package in the Budget did limit the scale of this regressivity. The new higher rate of USC, for individual earners over €70,044, capped the tax cut benefits for higher earners. It should also be acknowledged that, while there is merit in moving to a position where employees on less than twice average earnings do not face a marginal tax rate in excess of 50%, the process of moving there inevitably brings with it such regressive income tax outcomes. As the Government has planned, and already announced, a similar approach next year, the outlook is for further regressivity in income taxation terms.

Hidden in the Budget documentation was a welcome income taxation development regarding the assessment and recurring review of Ireland’s system of income tax breaks – formally tax expenditures. The Department of Finance have set out a new set of guidelines and approached to these measures which if adopted and consistently implemented will ensure a more rigorous and recurring consideration of these measures. Invariably, they benefit higher earners more than lower earners, and as the 2009 Commission on Taxation pointed out, they represent a flow of potential taxation revenue away from the exchequer; money that could be used elsewhere in the provision of various direct expenditures.

Overall, this was clearly an income taxation Budget. In being so dominated by income tax cuts, it is of concern that alternative choices and opportunities were missed. As the NERI have pointed out, there remains a need to invest in Ireland’s recovery, rebuild depleted public services and address many of the income and living standards divides in our society. Unfortunately, after Budget 2015, much of these needs remain.

My presentation to the UCD Economics Society on Budget 2015 is here

The NERI will host a post Budget Seminar on October 22nd. Details availabe here.

Posted in: IncomeLiving wageMacroeconomicsTaxationWages

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