INCOME TAX REFORM:LOW-PAID WORKERS will be brought into the tax net under measures that the Government admitted would "negatively affect the living standards of citizens in the short term".
Tax exemptions, reliefs and credits will also be axed or curtailed under the four-year plan, which the Government claimed would lead to “fundamental reform” of the income tax system.
Almost €1.9 billion – more than a third – of the €5 billion to be gleaned from taxation measures over the period will come from direct income tax, while 65 per cent, or €1.245 billion, of this will be raised from 2011, the Government said, signalling a severe budget on December 7th for most people still in employment.
Much of the detail of these measures has yet to be announced, however, the Government did signal that the earnings entry point at which people start paying tax will be lowered from €18,300 to €15,300 by 2014.
“We must increase the numbers paying tax,” the Government report said. “Those who can pay most will pay most but no group can be sheltered.”
There will be no change to the top marginal rates of tax charged to the highest earners in the State over the period of the plan. These will remain at 52 per cent for PAYE workers and 55 per cent for the self-employed.
However, over the course of the four years, the value of tax credits and tax bands to the average worker will be reduced by 16.5 per cent. This will serve to increase the proportion of workers who pay tax at the higher 41 per cent rate.
The plan gives two examples of how net pay will fall as a result of lower tax credits and bands. The net pay of a single person earning €55,000 will fall by €1,860 a year, or around €36 a week, which is a drop of 4.8 per cent.
The net pay of a married single-income family earning €55,000 will be reduced by €2,310 a year, or €44 a week – a fall of 5.4 per cent.
As a result of changes to pension reliefs, the net income of a person earning €55,000 who contributes to a private sector pension would fall by a further 2.5 per cent.
The higher percentage fall for single-income married couples signals that the tax system will move closer to full individualisation, or the process whereby the standard rate tax band for a single-income married couple is gradually lowered to the same level as that of a single worker.
The document notes that it would be “possible to deliver the same outcome” through changing the tax rates or restructuring PRSI and the income levy into a single charge, which has not been ruled out. “These options will feature in the Government’s consideration of specific changes in advance of each budget,” it said.
Lowering tax credits and the standard rate band instead of increasing the rates at which tax is charged means that the same money will be taken from the pay packets of middle-income earners as it will from the salaries of high-income earners.
By 2014, a single person on average earnings would see 33.7 per cent of their gross pay deducted in tax, compared to 28.6 per cent in 2009.
The widening of the tax net is in part a reversal of measures introduced in the middle of the last decade. The Government also noted that the standard rate tax band, which is the income on which earners pay the lower 20 per cent income tax rate, had widened 105 per cent for single people and dual-income married couples over the last decade, partly as a result of individualisation.
Meanwhile, the proportion of workers paying the higher rate of tax has shrunk from 23 per cent to 13 per cent since 2004.
The report said it was “unsustainable” that an estimated 45 per cent of workers would pay no income tax in 2010, compared to an exemption rate of 34 per cent in 2004.
“The overall burden and incidence of income taxation has increasingly fallen on a relatively small number of taxpayers,” the four-year plan states.
Overall, the direct income tax increases make up about 12 per cent of the total budgetary savings target of €15 billion.
