Modelling the Withdrawal of Personal Tax Credits from High Income Earners
Since 2008, the Irish Government has implemented a total of €27.8 billion in fiscal adjustments in an attempt to close the gap between government expenditure and revenue. The adjustment to date is equivalent to almost 18% of GDP. While the composition and effectiveness of these adjustments has been much discussed, the terms of Ireland's Memorandum of Understanding with the Troika (EC, ECB and IMF) alongside the remaining exchequer deficit, require the programme to continue into 2014 and 2015.
This paper contributes to considerations regarding the composition of the fiscal adjustment planned in Budget 2014 (October 2013). The paper focuses on the potential to reform the current structure of tax credits so that the personal tax credit is gradually withdrawn, or recaptured, from high income earners and entirely eliminated for those with incomes above €100,000. It builds on a proposal from Collins and Walsh (2010, 2011) in their reviews of the Irish tax expenditure system. The paper shows that the policy offers a simple pathway to increase effective tax rates, protect headline marginal tax rates, avoid labour market disincentive effects and raise an additional €115-€130 million in tax revenue from the top 100,000 earners.
Keywords: Ireland, Taxation, Tax Credits, Marginal Tax Rates, Effective Tax Rates