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Cantillon: Get set to be underwhelmed by budget tax plan

PAYE credit move will add new layer of complexity into our complicated tax system

Minister for Finance Michael Noonan: it looks likely that the main 5.5 per cent USC rate will be cut again in this budget. Photograph: Gareth Chaney Collins
Minister for Finance Michael Noonan: it looks likely that the main 5.5 per cent USC rate will be cut again in this budget. Photograph: Gareth Chaney Collins
Thu Jul 21 2016 - 05:00

The political message from the Institute of Tax’s latest report – and the reaction to it – is clear. Framing the tax package in the 2017 Budget, due for delivery in October, is going to be no easy task. And there is a serious risk of causing more annoyance and complication than gratitude for what is on offer.

The report looks at one specific issue, which is the proposal that the PAYE tax credit be abolished for those earning above a certain, as yet unspecified, income. This credit is worth €1,650 to taxpayers, so it is no small matter.

The Government maintains that everyone will be better off, but that it has to act to make sure that changes to the USC do not disproportionately benefit the better off.

Now you could observe here that it is Fine Gael which has led the charge to abolish the USC, and that the very need to offset USC cuts by other measures suggests that there might have been better places to start in delivering tax reform. But Minister for Finance Michael Noonan and the rest of the Government seem determined to press ahead.

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It looks likely that the main 5.5 per cent USC rate will be cut again in this budget. To offset the gains for the better off, the PAYE credit move appears to be on the cards. There has also been mention of a “solidarity levy”on higher earners. The problem is that either of these will introduce a new layer of complexity into our already complicated tax system.

The PAYE credit move, as the institute pointed out, will involve a sharp increase in the marginal income tax rate at whatever level it is introduced. If this level is, say, €120,000, this might be seen as no big deal. If it is €70,000, then some 270,000 taxpayers will be involved.

Maybe they won’t care too much if they end up with more cash at the end of the month. But this is the crux of it. There will not be a lot to spread around, given the limited room for manoeuvre in the budget and the commitment to allocate most of the extra cash to higher spending.

Our “new politics” may ensure that the options are debated endlessly before the budget is presented, but whatever happens taxpayers may feel underwhelmed by the result.