Indexing tax system would boost pay of 2m workers but cost up to €1.1bn a year

Indexing tax bands and credits would boost the take-home pay of up to 2 million taxpayers in the Republic while costing the Government between €630 million and €1.1 billion a year to implement, the Government’s high-level tax strategy group has estimated.

In its annual batch of papers aimed at informing budgetary policy, the group also indicated that even partially shielding poorer households from the current cost-of-living squeeze through the welfare system would be costly, up to €1.1 billion in the case of a €15 hike in all weekly welfare payments.

In the paper dealing with income tax, the Tax Strategy Group (TSG) assessed the possibility of inflation-proofing the tax system by indexing income bands and credits.

The fact that taxpayers here get dragged into paying significantly more tax when in receipt of a pay rise has long been a source of complaint.

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The paper calculated that indexing the income tax system to the tune of 3 per cent a year would - in full-year terms - cost the exchequer €630 million while indexing at a rate of 4 per cent would cost €845 million a year. While the move would benefit 2 million or 72 per cent of “taxpayer units”, the indexation rates are well below the current level of inflation.

Alternatively the group assessed the partial indexation of bands via a €1,500, €2,000 and €3,000 hike to the single income tax standard rate band, which it said would cost between €585 million and €1.14 billion a year, a move which could benefit two thirds or 66 per cent of taxpayers.

“Income tax indexation is primarily the adjustment of tax credits and income tax rate bands in response to inflation and or wage growth,” it said, noting the policy intention is to avoid bracket creep.

“Bracket creep can occur when inflation and or wage growth drives incomes into the tax net or into higher rates of income tax,” it said.

The group also estimated the impact of new 30 per cent income tax rate to alleviate the tax burden on middle-income earners, an idea pushed by Tánaiste Leo Varadkar.

By international standards workers here end up paying the higher 40 per cent rate at relatively low rates of income – on anything above €36,800 for a single person.

The tax group estimated that a new 30 per cent rate on income between €36,800 and €41,800 would cost the exchequer approximately €525 million a year while a 30 per cent rate on incomes between €36,800 and €46,800 would cost up to €945 million per year. However, it said a new 35 per cent would benefit up to 1 million taxpayers in the Republic.

Government sources suggest Coalition ministers favour widening tax bands over a new 30 per cent on the grounds that a new rate would add another layer of complexity to an already complex tax system.

In a separate paper on social protection, the group also costed a €15 hike in all weekly social welfare payments, as some Opposition parties have been calling for to address the current cost-of-living squeeze, at €1.1 billion.

A €15 increase would represent a significant change in rates, three times that of Budget 2022 increases, it said.

Alternatively, the Government could opt for a €10 increase in weekly welfare rates combined with a targeted increase in the Fuel Allowance directed at 370,000 low-income households at a similar cost.

Another paper reiterated the Government’s plan to discontinue the 9 per cent VAT rate for tourism/hospitality next February, a move that will be strongly resisted by industry.