Enda Kenny’s pledge to cut marginal tax rate to 50% in budget assumes economic growth

The promise by Taoiseach Enda Kenny to reduce the marginal tax rate on many incomes to 50 per cent in the next budget is a firming up of indications given on budget day earlier this month.

In the budget, the marginal rate was cut from 52 per cent to 51 per cent, but only on earnings of less than €70,000. For earnings above this level, an increase in the universal social charge (USC) rate clawed back the benefits.

The speech on Thursday to the US Chamber of Commerce clearly indicated that a similar formula will be used next October, in the 2016 budget. So the marginal tax rate on earnings up to €70,000 will be cut to 50 per cent. Higher earnings are likely again to face a clawback.

This year, the cut in the marginal rate – the rate which applies to additional income earned – was achieved by reducing the top income tax rate from 41 per cent to 40 per cent.

At the moment, the top tax rate kicks in for a single employee at €33,800 – so the one point cut reduced the income tax on all income above this level.

Highest earners

However just doing this would have led to very significant benefits for the highest earners. So the USC rate on earnings above €70,000 was increased from 7 to 8 per cent. Higher earners still benefited as they paid less on a portion of their income, but their overall gains were cut sharply.

The Taoiseach’s speech suggests that a similar formula will be used next year. So the 40 per cent rate could be cut to 39 per cent and the USC rate on earnings above €70,000 could be hiked to 9 per cent.

The marginal take on incomes is composed of three elements – income tax, PRSI and the USC. There would be other ways to achieve similar results in the next budget by tinkering, say, with USC rates alone. The precise means to be used will only be determined next year in the light of what resources are available, but the working plan will probably be to use a similar approach to the 2015 budget.

Politically, this allows the Government to target middle-earners without being seen to deliver too significant gains to those on the highest incomes.

Political campaign

Coming out and selling it now is clearly an effort to move beyond the water charge controversy and refocus on the gains to taxpayers on budget day.

Kenny said his approach was that there should be more to come – and further cuts in income tax and in the marginal rate in particular – after the next election.

This will clearly be a key part of Fine Gael’s election platform.

There was debate before the budget about whether to deliver tax cuts via reducing the rate or increasing the standard rate band, which determines the income level at which people start paying the higher rate. In the event, a bit of both was done and – when other changes are counted in – pretty much all income earners got some benefit.

Growth forecasts

To be able to deliver the promised tax reductions in next October’s budget – the last one possible before the next general election – the Government’s economic growth forecasts will need to be met. A string of advisory bodies – most recently the Irish Fiscal Advisory Council and the OECD – have warned that this cannot be taken for granted.

However, for the moment, the Government finances are on course to come in on target or better for 2014. And if growth does stay on target, plans for the 2016 budget next October will stay on course.