New ‘middle’ income tax rate of 30% is under consideration

A new middle rate of income tax of 30 per cent is being considered by the Government in order to ease the pressure on middle-income earners amid the cost-of-living crisis, Tánaiste Leo Varadkar has said.

The Fine Gael leader said on Wednesday that he had asked Minister for Finance Paschal Donohoe to examine the possibility.

Currently any single person earning up to €36,800 a year pays income tax at the basic 20 per cent rate, while any yearly income above that level for single people is taxed at a rate of 40 per cent.

“One thing we should take a look at, and I have asked Minister Donohoe to look at the pros and cons of it, is whether we should have a middle rate of 30 per cent because you do suddenly go from 20 per cent to 40 per cent. There might be a case for having a middle rate of 30 per cent for people on middle incomes so that you wouldn’t maybe get to that highest rate of 40 per cent until you earn a little bit more,” Mr Varadkar said.

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“We are a low tax economy in the round, but we are not low tax when it comes to income tax, particularly for people on middle incomes, those who earn more than €38,000, couples who earn more than €60,000 or €70,000.”

He said the Government intended to increase the bands at which different tax rates kick in as part of the next budget. The mooted measures come amid concerns over the current cost-of-living crisis fuelled by rising inflation.

Welfare increases

The inflation crisis could last for two years and increases in pensions, welfare and childcare subsidies will be needed to help people deal with it, the Tánaiste also said on Wednesday.

In a speech to the Institute of International and European Affairs (IIEA), Mr Varadkar also called on central banks to “do their bit” and “reign in” quantitative easing at an appropriate pace rather than increasing interest rates.

Speaking about the cost-of-living crisis, Mr Varadkar said that pay rises would be needed.

“We have not seen this [inflation] phenomenon since the early 1980s. While I might not agree with the exact numbers, I agree with the ESRI’s assessment that the spike in inflation is not temporary. It could go on for two years or more.

“It requires a long-term response as well as temporary measures. As every doctor knows, it’s important to treat the symptoms and you must also treat the underlying disease,” he said.

In an indication of possible measures in the next budget, he said that “pay rises and increases in pensions and social welfare will be needed to compensate people at least in part for the higher cost of living.

“However, this is not a solution to inflation. Many businesses will simply fund pay rises by increasing what they charge customers for goods and services, thus wiping out the gains.”

The Tánaiste added: “So, I believe we need a comprehensive anti-inflation strategy to reduce the cost of living. Central banks must do their bit, and I believe it would be better if they reigned in quantitative easing at an appropriate pace, rather [than] increasing interest rates at this time.”

Childcare

He also signalled an aim to reduce the cost of services such as childcare next year. "Childcare is already subsidised in Ireland. The focus of additional subsidies this year has been on paying staff better and improving quality.

“Next year, increased subsidies should be used to reduce costs considerably for parents. This will increase disposable family incomes and make it more attractive for parents to return to the labour market, thus helping to fill vacant positions and moderate wage inflation.

“The same applies to charges for healthcare. While we have made real progress in recent years in reducing the cost of medicines and extending free GP care, Ireland remains an outlier. It’s simply the case that other Europeans do not have to pay so much to see their doctor, attend a hospital or buy medicines. The same is true of the cost of a higher education.”

He said that for the first time in many years, “real living standards could fall this year if prices rise faster than disposable incomes.

“It’s certainly true for very many households already.”