The tax and benefit measures announced in October’s budget will reduce household income by an average of 0.7 per cent, according to a study by the Economic and Social Research Institute (ESRI).
It is also expected to net the exchequer an additional €600 million in tax revenue next year.
While Budget 2019 introduced cuts in Universal Social Charge (USC) and a widening of income tax bands, these gains will be eroded by the Government's decision to freeze personal and employee tax credits, the ESRI said.
Failing to keep these credits in line with inflation (indexation) means that the tax take on incomes automatically increases if wages rise – a kind of inflationary stealth tax.
So an employee with earnings of €30,000 per year who could have expected to pay €2,600 in income tax next year had tax credits increased in line with forecast wage growth. However, because of the decision to freeze these credits in cash terms, they will instead pay €2,700.
The ESRI said the Government’s decision to hold both personal and employee tax credits fixed while wages and prices are rising “amounted to an effective tax increase for many workers”.
Wage growth
The ESRI’s study indicated that lower-income households will on average see slightly larger proportional losses – 0.8 per cent – because the welfare increases earmarked for next year will be less than wage growth. Higher-income households, by contrast, will on average see smaller proportional losses – 0.5 per cent – because of cuts to the Universal Social Charge and a rise in the income tax higher-rate threshold, which partially offset overall tax increases.
"Freezing personal and employee tax credits when prices and wages are rising amounts to a real terms tax rise, which take proportionally most from lower-to-middle income households," the ESRI's Barra Roantree said.
“Tax cuts in this budget were focused on the 25 per cent of households that contain a higher-rate income taxpayer.”
In its assessment of Budget 2019, the ESRI also warned about the exchequer’s increasing reliance on receipts from corporation tax, which it said “were highly volatile and concentrated among a small number of firms”.
“This leaves revenues highly vulnerable to the relocation of even one large company, changes in the international tax environment, or a large macroeconomic shock [such as a no-deal Brexit],” the ESRI said.
Tax receipts
Corporation tax receipts have nearly doubled since 2012 to €8.2 billion and are on course this year to top €10 billion for the first time. This comes amid a major transfer of multinational assets here in the wake of a clampdown on global tax avoidance and increased corporate profitability generally.
About 40 per cent of corporate tax receipts in the Republic are generated from a handful of companies, understood to include tech giants Apple, Microsoft, Dell, Google and Oracle.
The Government has been repeatedly warned not to use the current boom to fund permanent day-to-day spending measures.
In addition to direct tax reforms, the ESRI’s study highlighted that the budget also included a number of indirect tax changes, the main one being the return of a 13.5 per cent VAT rate for the hospitality sector, which includes the supply of food and drink in catering, hotel lettings, theatrical performances and hairdressing services.
