Budget tax proposals would favour rich at expense of lower income workers

Some tax proposals currently being considered by Government should be rejected because they would give far greater benefit to people earning higher incomes while giving nothing to lower income employees according to a study conducted by Social Justice Ireland. The study shows that four of seven options to reduce income tax currently being considered would be profoundly unfair because they would favour only those with higher incomes.

The complete study may be accessed here.  Below is an executive summary.

This study compares seven changes to the income tax system suggested by various members of Government and many others. 
The options examined are for the 2015 income taxation system and are:

• a decrease in the top tax rate from 40% to 39% (full year cost €246m)
• a decrease in the standard rate of tax from 20% to 19.5% (full year cost €272m)
• an increase in the personal tax credit of €100 with commensurate increases in couple, widowed parents and the single person child carer credit (full year cost €220m)
• an increase in the standard rate band (20% tax band) of €1,500 (full year cost €257m)
• a 1% point decrease in the 1.5% USC rate – that applied to income below €12,012 (full year cost €243m)
• a 2% point decrease in the 3.5% USC rate (so that it merges with the 1.5% rate) – that applied to income between €12,012 and €17,576 (full year cost €264m)
• a 0.5% point decrease in the 7% USC rate – that applied to income above €17,576 (full year cost €182m)

The full-year cost of the options range from €182m to €272m, equivalent to between 1% and 1.5% of the expected income taxation yield in 2015.

Overall, three of the changes would produce a fair outcome:

• increasing the personal tax credit;
• reducing the 1.5% USC rate by 1 percentage point; and
• reducing the 3.5% USC rate by 2 percentage points.

Four of the changes would produce an unfair outcome:

• reducing the top tax rate to 39%;
• reducing the standard tax rate to 19%;
• increasing the standard rate band; and
• reducing the 7% USC rate.

Each of the three fair options would provide beneficiaries with an improvement in their annual income of around €100-120. Each of the four unfair options would skew benefits towards those with higher incomes.

Under no circumstances should the 20% income tax band be widened or the top tax rate reduced in the next Budget. The poorest 10% of society lost most since the onset of the crisis. Reducing the lower USC rates or increasing tax credits are the fairest options and Government should opt for these rather than choosing any of the three unfair options.

This study also looked at the impact of a package of measures being suggested by many of those currently commenting on the Budget. The package of measures examined includes:

• an increase in the standard rate band (20% tax band) of €1,000 (full year cost €173.4m) – after this change a single person begins to pay at the 40% income tax rate when their income exceeds €34,800, for couples with one income the threshold becomes €43,800 and for couples with two incomes it becomes €69,600
• a 0.5% point decrease in the 1.5% USC rate – that applied to income below €12,012 (full year cost €121.5m)
• a 0.5% point decrease in the 3.5% USC rate– that applied to income between €12,012 and €17,576 (full year cost €66m)
• a 1% point decrease in the 7% USC rate – that applied to income above €17,576 (full year cost €364m)
• Total full-year cost of this income taxation package = €724.9m

In cash terms such a set of choices are clearly regressive – benefitting those on the highest incomes much more than those on lower incomes.

It should be noted that

Reducing taxes is not Social Justice Ireland's priority for Budget 2016. Any available money should be used to improve Ireland's social services and infrastructure, reduce poverty and social exclusion and increase the number of jobs.
If money is available for tax reductions then making tax credits refundable would be the fairest and best option to take.  By making tax credits refundable the full value of the tax credit goes to everybody who has an earned income.  The main beneficiaries would be low-paid employees (full-time and part-time).  This option would improve the net income of workers whose incomes are lowest.