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Money Times - October 4, 2016

Posted by Jill Kerby on October 04 2016 @ 09:00

 

INCOME TAX FAIRNESS FOR ALL SHOULD BE BUDGET GOAL

 

Tax policy in this country just gets more bizarre by the day.

With the Budget approaching, every private and public agency, charity, opposition party and, it would seem junior minister, has been busy preparing and submitting their budget claims to whatever surplus amount – about €1 billion is the latest reckoning – that the Minister for Finance has to dish out for 2016-17.

So long as their group of constituents, beneficiaries or clients come away with something these interest groups will declare victory. The long picture…is Michael Noonan’s problem.

That said, the most bizarre tax ‘reform’ proposal, from the Minister’s own colleagues, Richard Bruton (back in October 2015) and Mary Mitchell O’Connor (last week) is for a separate 30% flat income tax rate that will also include PRSI and USC, aimed at highly skilled Irish workers earning more than €75,000, who have been away for at least five years.  It would last five years.

The 2015 proposal, with a salary floor of €60,000 was described prior to the 2016 Budget, “as likely to infuriate Irish workers”. It never saw the light of day.

But junior minister Mitchell O’Connor clearly saw some merit in it, and while it looks pretty dead in the water this week, was lauded by employers in the high tech sector in particular who claim they are involved in an ‘international war of talent’ which has been hindered by Ireland’s highly progressive and punitive personal tax rate that claims 51% of tax, PRSI and USC on every euro earned over €33,800.  (52& on earning over €70,045.)

If native Irish talent is reluctant to come back to Ireland after five years of emigration, the income tax situation is certainly one reason. But let’s not overlook all the other less overt taxes that contribute to their trepidation, as well as the acute shortage of affordable housing (especially in the capital) and huge child-care costs.

In addition to a 41% top rate income tax, 4% PRSI (on all income), c6% USC (and an additional 3% on all income over €100,000) Ireland has amongst the highest VAT (23%) in the world, high rates of excise and VRT on cars, alcohol, tobacco; a compulsory annual €399 levy (€135 for children) on health insurance plans; annual 5% levies on general insurance policy premiums and 1% on all life insurance, investment and pension policies. We also pay separate property tax, car tax, bin charges and a suspended water charge. CGT rates are comparatively high at 33% given how low the individual annual CGT free allowance of just €1,270. (It is over £11,000 in the UK.)

Would a two tier flat tax rate of 30% foster a tax revolt by the PAYE workers paying that higher rate of 51%? It could, if the home-based worker earning that €75,000 discovers that the returnee next door – doing exactly the same job as he/she - now pays several thousand euro less tax than they do.

The Irish Taxation Institute reckons that a single, Irish PAYE earner on €75,000 will pay €26,482 in tax here, compared to €18,482 in the United States and €21,920 in the UK. The disparity between countries exists, but in those places, everyone on the same tax level pays the same tax. One group of workers on the same pay is not favoured over another.

High taxes encourage the creation of loopholes and tax avoidance opportunities to those who can afford professional advice.So perhaps a better way, tax-wise, to attract home wary émigrés, is to improve the tax situation for everyone, starting  by setting a higher income entry point (from the existing €33,800) on the tax bands.  Even in France, one of the highest taxed economies in Europe, you only pay their marginal rate of 55% when you earn €152,000. In Portugal it is €80,000.

Shifting tax from labour to capital assets (like property) would also take some pressure off the high income tax burden in this country. But this is highly unlikely as it also requires the phasing out of tax reliefs, special capital allowances and other tax avoidance measures.

Not all tax reliefs are a bad thing in the absence of a fairer tax system.

One that bears watching, pre-Budget, is the proposal that first time buyers receive tax relief worth €10,000 to assist in the purchase of new homes. The only way this can be considered ‘fair’ is if hard-pressed renters in private accommodation see the re-introduction of rent tax relief.

A long standing personal tax break, with the over 55 married couple tenant tax credit worth as much as €1,600 a year (€800 aged under 55) and as much as €400 for a single person aged under 55 it has been phased out since 2011 for and will disappear entirely by 2017. It can only be claimed by those renting privately since December 7, 2010.

This year – and you have until the October 31 Pay & File deadline to claim up to four years of the backdated relief - tax credit is only worth €80 this year for a single person under age 55; €80 for over single over 55s; €160 for a married person under age 55 (or a widow/er) and €320 for partners (widow/ers) aged over 55.

Solve the housing crisis (and child-care) in Budget 2017 and the income tax burden might just get a great deal lighter by itself.

 

 

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