A major overhaul of the current tax system in the forthcoming Budget is under consideration. The Department of Finance is examining the introduction of a new system of tax credits, to replace the existing income tax allowances.
The move is being examined in the context of a Budget package offering significant gains to lower earners. The current system of tax allowances favours higher earners, as by reducing their taxable income they can reduce the amount of tax they pay at the higher 46 per cent rate. Tax credits give the same cash benefit to all taxpayers.
The introduction of a credits system is understood to be strongly supported by the Tanaiste, Ms Harney. The Minister for Finance, Mr McCreevy, is due to meet other Ministers in the weeks ahead to decide on spending plans for 1999. Following this, the final shape of the tax package will be sorted out.
Ms Harney indicated this week that she favoured another significant package of tax reductions, despite warnings from the Central Bank that this could risk overheating the economy. However, the Department of Finance is expected to give some support to the Central Bank's position, while the Government is also under pressure from the European Central Bank to introduce a tight Budget package.