While better than expected exchequer returns may offer a little more room for manoeuvre, all the indications are that Finance Minister Paschal Donohoe will have not much more than €233 million to work with when it comes to tax adjustments in the forthcoming budget. If past behaviour is any indication of future actions, we can expect the minister to make fairly minor or even negligible tweaks to personal taxes in order to spread the largesse around.
However, this may not be the best approach to take in the context of Brexit and other disruptions to the global economy. “The minister kept doing the same thing again and again over the last four budgets,” says PwC partner Pat Mahon. “He trimmed the USC slightly and made adjustments to the middle band. They were all small things, but he has spent about €2 billion in total on these slight changes over the years.”
He believes the money could be better spent by making a cut to the headline 40 per cent rate of income tax. “This would send out a very positive message to potential FDI investors and people who we want to attract to come and work here post Brexit,” he contends. “Drip feeding tiny amounts doesn’t really help.”
Such a move would also go some way to addressing the unhealthily high proportion of tax paid by higher earners, he argues. “We almost run the risk of going back where we were in 2009,” he says. “There is a huge concentration in the amount of tax paid by higher earners. Fifty-one per cent of all income tax is paid by just 7 per cent of taxpayers. That’s those earning over €100,000. In all, 84 per cent is being paid by those earning €50,000 or more. That means the great majority of income tax is being paid by just 27 per cent of income earners.”
The corollary being that 73 per cent of income earners pay just 16 per cent of all income tax and USC collected. “The predictions at the moment are that there will be 2.7 million income earners in the country at the end of the year and we are looking at situation where 2 million of them are paying just 16 per cent of the income tax collected.”
A strategic move
It is in this context that he calls for the minister to make a strategic move with the funds available to him. “The USC was introduced in 2009 in an effort to broaden the tax base and bring in more revenue,” Mahon notes. “Back in 2010, 914,000 people were exempt from it. In 2019, 941,000 are exempt from USC. The number of people in employment is higher so we are not comparing like for like exactly but the direction of travel is clear. At present, 35 per cent of income earners are exempt from income tax and 28 per cent are exempt from the USC. There is a huge chunk of people exempt from the USC while a further 20 per cent are only paying at the 2 per cent rate and a significant number of those don’t pay income tax.”
He fears this makes the public finances very vulnerable to any slowdown in the economy. “You have to ask where the revenue is going to come from in future,” he says. “If you think it’s all going fine and there will be no fall in employment and wage and salary rises will continue to generate increased revenue, that’s great. But if the number of people earning €50,000 or more falls back to where we were in 2009 there will be serious problems and the minister would have to look at broadening the tax base again.
Even across the OECD Ireland has among the lowest tax takes from people on average earnings. The concentration of the tax take on not very high earners is not healthy
The optics are important as well. “If we are trying to attract people from the UK and other countries to come and work here following Brexit the 52 per cent rate of income tax keeps coming up time and again,” says Mahon. “It stands out particularly in relation to the UK where they don’t get to their top rate of 47 per cent until they reach £160,000. There is a big disparity there. Even across the OECD Ireland has among the lowest tax takes from people on average earnings. The concentration of the tax take on not very high earners is not healthy.”
A one per cent cut on the headline rate of 40 per cent would cost €362 million while 1 per cent off the 8 per cent USC rate would cost €186 million, he points out. “If he were to cut the 20 per cent rate, everyone who pays tax would benefit but a 1 per cent cut would cost €693 million and doesn’t send out the same message as it wouldn’t affect the headline rate.”
Focusing on positive measures
A cause for concern is the planned increases in employers’ PRSI. “It rose to 10.85 per cent last year, is scheduled to rise to 10.95 per cent this year and a further rise to 11.05 per cent in 2020 is already on the statute books,” he says. “This is a tax on employment and any increases could have a negative impact on hiring decisions and the government needs to be very careful about that. We certainly wouldn’t like to see it increased any further and we believe it would be a positive move if the Minister halted the scheduled increases.”
Minister Donohoe has been drip-feeding small cuts for four consecutive budgets and all the indications are that he is considering doing it again this year
This is especially the case given the anticipated fallout from a hard Brexit. “The government has said it could result in up to 50,000 job losses,” he says. “That would certainly impact the tax take and any employment tax increases must be looked at in that light.”
The minister should instead focus on measures which can have a positive impact on employment, he argues. “Minister Donohoe has been drip-feeding small cuts for four consecutive budgets and all the indications are that he is considering doing it again this year. This would be meaningless to most people. But there is an opportunity to send out a very positive and confident message in advance of Brexit. Stopping the increase in employment tax would be a positive move as well. These actions would leave us less exposed to a future bump in the road and would send out a very clear statement of confidence.”