Broadening the base: Should lower-paid workers pay more tax?

Earlier this year, a consultation was launched to get views on personal taxes as part of the Government’s avowed intention to review the system of how people pay taxes in Ireland.

The consultation closed last April and the Department of Finance has now published the submissions received — almost 30 of them — from a variety of tax experts, business associations and members of the general public.

There was a wide variety of views expressed, with many looking for lower tax rates and an increase in tax reliefs.

But one overriding theme emerged: too few people are paying too much tax, and this needs to change. The solution? Increasing the tax burden on the lower paid.

On the Money: the personal finance newsletter from The Irish Times

---

How does a 6 cent increase in the price of a pint by Guinness become a 30 cent increase by publicans?

---

Should we buy a city apartment for now or a house in a commuter town for the future?

---

Expectations matter for tech investors

---

Many of the submissions called for a broadening of the tax base to reduce pressure on middle-income and higher earners, who, they say, are bearing the burden of contributing income tax for the State’s coffers.

As noted by the Consultative Committee of Accountancy Bodies — Ireland (CCAB-I) in its annual taxation report, the Department of Finance confirmed that “the distribution of tax liabilities is markedly skewed towards higher wage earners”. The top quarter of earners (those earning €50,000 or more) contribute about 80 per cent of total income tax revenues, with another quarter of taxpayers “paying little or no income tax”.

Based on recent Revenue figures, some 1.26 million taxpayer “units” — individuals or jointly assessed couples — will pay neither income tax nor Universal Social Charge (USC) in 2024.

“Base-broadening reforms should be considered as a matter of priority”, it suggests, adding that Government should also look at broadening who pays consumption taxes (particularly VAT), capital taxes and property taxes. “Alleviating some of the burden on high-income earners is vital in the global economy within which Ireland operates,” it argues.

The Irish Tax Institute says that “with one-third of income earners paying neither income tax nor USC in 2023, the Irish personal tax base is narrow”.

Given this structure, PwC suggests there might be a basis for extending USC to all taxpayers (about 29 per cent are currently exempt), “such that all income earners make a contribution to the national exchequer”, adding that this could be balanced somewhat by a lowering of the standard rate tax band or through carefully implemented transfers to those on low incomes.

The Department of Enterprise also suggests “base-broadening measures” to reduce “the over-reliance on a small proportion of high earners”, while the British-Irish Chamber of Commerce wants to see lower taxes applied on a broader base. “This is a preferable option to applying higher taxes on a narrow base,” it says.

KPMG says the “overreliance” on a relatively small share of the population, could pose a potential fiscal vulnerability.

Cuts and reforms

Ireland’s relatively high marginal rate of taxation (52 per cent for PAYE workers, 55 per cent for the self-employed) is regularly criticised. And it again comes to the fore in these submissions, with Ibec noting that, at 49 per cent for median earners, it is the second-highest marginal effective tax rate in western Europe.

Ibec says the best path for future reform of income tax would be to make changes which gradually move the top (marginal) rate of income tax to around 45 per cent of income, and index the entry point to the top rate over and above the average full-time wage in the economy.

Deloitte says the top marginal rate “should not cross 50 per cent”, and suggests introducing an “intermediate” rate of tax.

Introduced in 2011 with the aim of broadening the tax base in the wake of the financial crisis, the Universal Social Charge has since become a bugbear for many, not least as it has now achieved a near-permanent state.

As noted by the Irish Tax Institute in its submission, when it was first introduced, some 12 per cent of taxpayers were exempt from the charge — now that stands at 35 per cent.

“In our view, it is now time to revisit the original purpose of the charge which was to broaden the base of personal taxes,” the institute says, adding that PRSI and USC should be amalgamated as part of this.

PwC agrees that the effect of USC “has been reduced”, adding that there may be merit in integrating it into income tax.

“Whilst this would significantly simplify overall tax administration, care would need to be taken to ensure that progressivity, broadening of the tax base and preservation of the income tax yield continue to be maintained,” it advises.

As it stands, self-employed workers who earn in excess of €100,000 have to pay a three percentage point USC surcharge, which brings their marginal tax rate up to 55 per cent.

KPMG has called for this additional 3 per cent to be removed, arguing that it should be abolished to “equalise treatment of employed and self-employed individuals”. The Irish Tax Institute agrees, “as it does not comply with the principle of horizontal equity”.

Indexation

While personal tax bands have been increased in recent budgets, there is no statutory obligation on Government to adjust these. Typically, adjusting tax bands is done to ensure that workers don’t end up victims of stealth taxation, whereby they move into a higher tax bracket as a result of rising incomes due to inflation, but see no improvement in their spending power due to paying more tax on that income.

The Labour Party, however, queries whether or not such indexation would disproportionately benefit higher earners.

“Where issues of equity of this nature arise, Government should consider increases to USC on higher-earners, for example, as a means by which any disproportionate benefit for those higher up the income distribution can be clawed back,” it says.

There were no big changes to pensions announced in the recent budget/Finance Bill, but some would like to see the tax reliefs on offer enhanced.

As noted by KPMG, the maximum contribution an individual can earn tax relief on in one year is €115,000 — but this has stayed static since 2011. Moreover, the standard fund threshold, which is set at €2 million, has also been at this level since 2014.

“Given the increases in wage levels and the standards of living in Ireland, it is necessary that these limits be indexed to maintain the real value of the reliefs and thresholds,” KPMG says. It would also like to see tax relief on contributions made by someone to their spouse’s pension fund.

On the other hand, others feel that existing tax relief is too generous. One private citizen, for example, wants tax relief to be reduced to 33 per cent, given that this is what will be available under the auto-enrolment (AE) mandatory workplace pension scheme which is due to be introduced in 2024.

Otherwise, “the pension relief that remains in place for those outside of this proposed AE scheme will reflect an inequality in treatment of income earners, favouring those higher income earners over others”, they wrote.

Panel: Other recommendations

• Accommodation costs for the first 24 months of an international assignment to Ireland should be tax-free (Deloitte)
• Non-marital couples should qualify for the Home Carer tax credit (Citizens Information Board)
• Tax relief on routine dental treatment (Citizens Information Board)
• Tax relief for childcare (KPMG)
• Tax relief for certain personal wellness costs such as gym membership (KPMG)
• Introduce/increase tax relief on medical expenses, education and creche fees to 30 per cent to coincide with a 30 per cent tax rate (Private citizen)
• Reform the TaxSaver Commuter Ticket Scheme for hybrid workers (CCAB-I/Deloitte)
• Replace current tax relief on remote working with a new €800 annual credit (Ibec)
• Abolish the Special Assignee Relief Programme (Sarp) (Labour Party)
• Enhance Sarp relief by making it easier to access (Deloitte)
• Introduce a cap on PRSI Contributions (Family Business Network)
• Remove PRSI exemption on over 66s (Irish Tax Institute/Neri)
• Bring back mortgage interest relief in full (the Taxpayers’ Alliance)