The election debate has focused more on spending and on the key areas of health and housing. But significant commitments are also being made on tax which would have an impact on people’s pockets – in some cases quite a significant one. So how do the parties measure up in terms of these promises – and what would their promises mean for your bottom line?
1. Income tax
The days of election commitments of big reductions in taxes on income are over. There is no more talk of abolishing the USC or slashing income tax rates. But there are promises from many of the parties to adjust income tax bands and credits and the USC. Like promises on spending , these are – of course – reliant on growth continuing to pay the bills.
On income tax, there is one key point to note, now that wages are increasing again. To adjust for this, the tax band and credits need to be adjusted for wage inflation if the real burden is not to increase on employees. So there is an element of having to run to stand still which needs to be taken into account in what the parties are offering.
With this in mind, let’s look first at what the two bigger parties are offering. Fine Gael’s plan, aimed mainly at middle earners, centres on increasing the entry point to the higher income tax rate from €35,300 now to €50,000 over the term of the next government. This would be ahead of inflation – in other words it would more than account for the impact of expected wage inflation on pushing people into the higher tax band.
It is, of course, reasonable to point to the very limited tax moves in recent budgets and ask whether spending pressures would again wipe out the scope for tax cuts. But in terms of middle earners, Fine Gael is clearly making a pitch. The gains from this move would accrue to those already liable at the higher rate and to those who fully benefit, it would add €2,940 to annual earnings. Some of this would effectively be compensating for the inflation impact.
Fianna Fáil also plans to increase the standard rate cut-off point, though it is allocating less cash to this, aiming to increase it to €38,300. This would offer cash gains of up to €600. Again, however, likely wage increases will kick in and the increase planned by Fianna Fáil would be short of what would be necessary to fully index the system, if wages increased by around 3 per cent annually. The Fianna Fáil plans would, however, still lead to a bigger extension in the band than happened under outgoing government.
There has been debate about the number of people who would benefit from extending the standard rate band. Revenue’s tables show some 600,000 taxpayers – individuals and couples jointly assessed –pay at the higher rate, about one in five of the total. However Revenue makes clear that this excludes those whose tax credits offset their liabilities at the 40 per cent rate – these people would still benefit from a widening of the standard rate band, at least to some extent.
Separate Revenue data shows some not far off one million people earn more than €35,000, enough to give them some liability at the higher rate, at least if they are single. However jointly assessed married couples would have a higher cut off point.There are no firm figures here but it does seem as if significant numbers would benefit from widening the standard band.
Fianna Fáil’s other big measures is a promise to cut the 4.5 per cent USC rate which applies on incomes between around €20,000 and €70,000 to 3.5 per cent. This would benefit everybody earning over €20,000 with the the biggest cash benefits to those earning close to or above the upper €70,000 limit. The maximum gain from this would be around €500 a year while someone earning €50,000 would gain around €300.
Fine Gael is promising an increase in the USC exemption threshold from €13,000 now to €20,500, giving a modest income boost to those below the revised threshold.
Special tax credits can be significant for some earners. Both Fine Gael and Fianna Fáil are promising some increases in the self-employed and carer tax credits. Fianna Fáil is promising a new tax credit for renters – worth €600 – and a €2,000 credit for average income households who rely on non-relative registered childminders. It also promises to increase the home carer tax credit to €2,000 a year from €1,600 currently.
Sinn Féin’s tax promises head in a different direction. In terms of tax on income, it proposes to abolish USC on the first €30,000 earned, which would benefit anybody earning more than €13,000 a year, which is the current limit to become liable. This would benefit all earners currently paying USC – those earning €30,000 or more would gain €672 a year – but give the biggest proportional gains to lower and average earners.The party is also promising a special renter’s tax credit and, like the big parties, a rise in the self-employed credit to align it with that available to PAYE employees.
Sinn Féin also proposes some big additional taxes on higher earners. These include a straight 5 per cent levy on incomes over €140,000 and a gradual withdrawal of tax credits on earnings over €100,000, a proposal included in the outgoing government’s programme but never enacted. Together these would add very significantly to the tax burden on the highest earners. For example, the withdrawal of the standard tax credits would add €3,300 to tax bills for a single person at whatever income level it fully kicks in– which the party suggests would be around €140,000. The new 5 per cent levy would then apply on earnings above this level.
Other parties have generally stepped away from tax plans, generally making a pitch that spending should be the priority. Labour says it would index tax bands and credits and also proposes to withdraw the benefit of tax credits from higher earners. Likewise the Social Democrats emphasise spending and criticise Fine Gael in particular on its tax-cutting agenda.
The Green Party also does not focus on income tax promises. People before Profit is calling for the abolition of USC on earnings up to €90,000 and higher charges on income levels above this.
2. Local Property Tax
Not surprisingly the big parties are kicking to touch a bit on this one. The current valuations are due to be updated before next year and while everybody says they don’t want bills to increase – at least by much – avoiding increases for some is technically very difficult. Fine Gael has just assumed the same revenue from the tax from existing households and added a small amount for new houses bought since 2013 who will come into the net for the first time. Fianna Fáil promises that reform under it would mean householders do not face significant increases, by using localised rates for each area to try to compensate for house price changes in recent years. Sinn Féin maintains its calls for the abolition of the tax, as do People before Profit – despite residential property being the biggest source of personal wealth.
3. Wealth tax
The idea of a tax on wealth – assets held by people as opposed to income – has raised its head a few times over the years. Interestingly, it is mentioned in a couple of manifestos. Sinn Féin calls for a 1 per cent tax on wealth of over €1 million, while the Green Party calls for a wealth tax on assets over €10 million. Designing such a tax, and deciding how to deal with the family home, or farms, as part of it, would not be straightforward, though various studies have suggested it would be possible.
4. Capital taxes
Inheritance tax is, of course , one way of taxing wealth, but the tax bill paid by families when a parent dies remains controversial. Fine Gael proposes to maintain the existing tax-free limit of €335,000 for capital acquisitions tax (CAT) in the case of inheritance by a son or daughter but cut the rate on the next €250,000 from 33 per cent now to 20 per cent. Anything above €585,000 would continue to be taxed at the 33 per cent rate. In contrast, Sinn Féin is calling for a hike in the CAT rate to 36 per cent. Fianna Fáil, meanwhile, has proposed a cut in the capital gains tax rate, which applies in the sale of assets, from 33 per cent to 25 per cent, which it says will incentivise investment. Fine Gael has criticised this, saying it will mean asset sales are put on hold.
5. Pensions
While the pension age has been a controversial aspect of the campaign, a number of parties also propose changes to the tax treatment of pensions.
Sinn Féin proposes to raise almost €500 million by reducing “subsidies to gold-plated pensions” by reducing the earnings limit and cutting the standard fund threshold from €2 million to €1.2 million. The standard fund threshold (STF) is the maximum pension an individual is allowed at retirement for tax purposes. The large revenue that would be raised from this move and the cut in the STF suggests that significant numbers would face a higher tax bill. The Green Party proposes to reduce tax relief on pensions which yield an annual income of €48,000 or more.
6. Policy issues
The election promises raise some policy issues. The first is the obvious one – can the cuts be afforded, or will proposed hikes get the expected additional revenues? The second is possible knock-on impacts. Sinn Féin’s plan, for example, proposes big increases on higher earners and a hike in employers’ PRSI. What would this mean for foreign direct investment?
The third is what they mean for the tax base. Proposals to remove significant numbers from the USC net would continue the trend since the crisis of narrowing the income tax base to become ever more reliant on higher earners. International evidence shows that income taxes are relatively low here on lower incomes and relatively high on the highest earners. We don’t have to follow what others do, of course. Making policy is all about choices.
