The Commission on Taxation has recommended the introduction of a third rate of income tax on the grounds of “equity, greater progressivity and flexibility”.
It says a three-rate income tax structure has merit, but should “have regard to the need to keep taxation on labour low and marginal rates competitive”.
In its report published today, the Commission said it considered whether having an effective rate of tax of 20 per cent “has the potential to create a target rate for high-earning individuals”.
But it also had regard to “the role the tax system can play in making wealth prodcutive”
“We consider that a balance has to be struck between the provision of tax incentives to encourage investment in particular areas of the economy and a provision in the tax system which restricts the use of those same incentives”.
It says that given the necessity to return to stronger economic growth in the short and medium term, it does not recommend any change to the existing effective rate of 20 per cent. It does, however, suggest, that this rate be reviewed when economic growth returns to a “more stable trend”.
It says that in its view, all individuals who earn over €250,000 in a year should pay an effective tax rate of “at least 20 per cent” and tha there should be no graduated provision for those earning between €250,000 and €500,000.
“This would provide for a more equitable incidence of taxation for people with earnings in excess of €250,000 and who have the ability to use tax reliefs and exemptions to reduce their effective rate of tax to less than 20 per cent”.
But the Commission said it accepted there was a need for a “graduated application of the rules” in order to avoid a “step effect” at €250,000. It considered that the graduation should apply to income in the €200,000 to €250,000 band.
The Commission says that if its recommendations on tax expenditures will, if adopted, “result in a more efficient suite of incentives which will support economic activity for Ireland in the future”.
It notes there are now four parallel systems which collect tax on income – the income tax system, PRSI, the health contribution levy and the income levy.
“Our strong view is that there should be a single system which collects tax on income,” the report says. It examined the option of bringing together the income tax system and the two levies into such a single system.
“We also looked at the option of integrating the health contribution levy on its own into the income tax system.”
It concludes that in current circumstances, where the key imperative is to restore fiscal balance, there are likely to be significant consequences from such a move in terms of potentially increasing marginal rates of tax and imposing taxation or a greater amount of tax on those on low incomes while significantly increasing the tax liability of those on higher incomes.”
The Comission says integrating the four systems into a single system for taxing income would “inevitably give rise to an increase in the standard rate of income tax if the main personal credits remain at their 2009 levels”.
“This would give rise to a reduction in the relative value of the personal credits, thus bringing low earners into the tax net or causing them to pay more tax," it said.
Having assessed the various possibilities with regard to reform of the tax system, including the reversal of the process of individualisation, the Commission said it took the view that the present arrangements with regard to band structure and credits which apply to married one-earner and married two-earner couples should remain in place.
“They represent a balance between, on the one hand, acknowledging the choices between, on the one hand, acknowledging the choices families make in caring for children, and, on the other, taking account of the need to encourage labour force participation.”
On co-habiting couples, the Commission says a key issue in looking at the issue was the special position of marriage under the Constitution. It said it did not seem “advisable” to address the issue through tax policychanges alone”.
It took the view that in relation to the treatment of opposite-sex couples and same-sex cohabiting couples under the tax code, that tax law should “follow the general law” in this area.