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What's the view from Dublin? Irish income tax system is strange and complicated

By Brendan Keenan

Published 09/08/2016

Brendan Keenan
Brendan Keenan

I see they're still working on Charlie McCreevy's 'individualisations' of tax allowances, 15 years on. When he brought it in, as a response to a Supreme Court ruling, I was among the small minority who thought it was fairer that one person should pay more tax than two people earning the same amount of money between them.

When it comes to tax, fairness is very much in the eye of the beholder.

This particular plan proved too complicated to be applied completely, with the tax band still only partially transferable between spouses.

To compensate, the Home Carer Credit (HCC) was introduced where one spouse works primarily in the home in order to care for dependants, adding another layer to the system.

Now comes a new bit of plastering, with government plans to abolish the PAYE tax credit for higher earners.

Those earning more than €70,000 (£60,000) a year could have their tax bills increased by a maximum of €1,650 (£1,450). The logic seems strange, but it turns out that logic has little to do with it, and everything to do with the abolition of the hated Universal Service Charge (USC).

With commendable honesty, Finance Minister Michael Noonan explained that, because higher earners would benefit more from the end of USC, they would have to give some of it back.

He seemed unimpressed by any suggestion that, because higher earners were hit harder by USC, they ought to enjoy a bigger gain from its disappearance.

Of course, the disappearance must be paid for. There is also honesty in the Programme for Government when it says the phasing out of USC will be covered, not just by removing the PAYE tax credit for high earners, but by not indexing personal tax credits and bands against inflation.

There is less honesty in the conclusion that these measures will ensure the tax system remains "fair and progressive".

They are also at variance with the stated objective to lower "marginal tax rates" - the highest rate an individual pays. Non-indexation increases the marginal rate for more people, while the tax credit proposal could see deductions of over 60% on part of the income of those higher earners.

In the face of such complaints, politicians spring to the defence of middle-income earners; known in media jargon as the "squeezed middle". But there is little evidence that this supposedly oppressed group will get much out of the plans.

To have a middle, there must be a top and a bottom.

Less than 20% of Irish taxpayers earn more than €70,000 (£60,000) (although they contribute around half of income taxes), so they are definitely part of the top, but not all of it.

Defining the bottom is not simple either. Presumably, it is the near 40% of earners who pay no income tax. Before USC, most of them had no liability at all. That leaves almost half the workforce in the supposed middle, which is a strange definition of middle.

The Irish income tax system is indeed strange, as well as extraordinarily complicated for something with just two rates.

As the Institute of Taxation noted, there are also five USC rates, one employee PRSI rate and two employer rates, plus different entry points, bands and credits for income tax, PRSI and USC.

Belfast Telegraph

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