Rising tax bills will erode USC cut, according to ESRI analysis

The real gains to taxpayers from Government budget policy will be limited, as the universal social charge cuts will be partly offset by the higher tax bills resulting from rising wage levels, according to an ESRI analysis.

Overall the analysis, published in today's Irish Times, shows that all income groups, except for the least well-off, will be net gainers from budget policy, but the benefit on average will be a rise of less than 1 per cent in net incomes.

The ESRI analysis, based on an economic model of the population, assumes that employees will benefit from wage rises of about 2.5 per cent next year. The tax system needs to adjust if wage rises are not to mean a hike in the tax burden for many.

For this reason, the ESRI calculates that the boost to real income will be between 0.5 and 0.8 per cent for most groups in society. Employees will, on average, gain more from the USC cut, but these gains will be partly eaten away as they pay higher tax on increased earnings.

Previous ESRI analysis has shown that it would cost some €700 million a year to adjust the tax system if wages were rising at above 2.5 per cent and if the tax burden is not to rise.

Poorer people

The ESRI also says the budget will do nothing to help the poorest section of society, which made no real income gain as a result of its measures.

This group is generally not earning enough to benefit from tax or USC cuts, and there was no general increase in welfare rates, although there was a hike in the Christmas bonus.

The ESRI researchers also say the decision to freeze the valuation threshold for the residential property tax is a “serious concern” and could undermine the credibility of the tax.

It says that if the goal is not to increase the tax level, it would be better to adjust the actual tax rate charged at a local level, rather than hold to outdated property valuations for a prolonged period.

The ESRI points out that the failure to adjust valuations was one of the key issues which discredited the old system of domestic rates, which were abolished in the late 1970s.