In a previous post I pointed out how growing reliance on cyclically-sensitive taxes had left Ireland’s tax revenue exceptionally vulnerable to a downturn. In effect we were running a sizable structural deficit without noticing.
So clearly we now have to ramp up the more reliable and less cyclically sensitive taxes again.
Rates and bases of lots of taxes need to be changed. The most complicated one is income tax. In 1996, before Charlie McCreevy’s first budget, standard and higher rate income taxes were 27 and 48 per cent. Yet we were happy, growing rapidly and in effect “Europe’s Shining Light”. Such an income tax schedule did not destroy the economy.
Now the tax rates are 20 and 41, plus the new income levies of between 1 and 3 per cent. (I’m going to ignore the health levy, the public sector pension levy and PRSI in this). Even more important, the standard rate band has been about doubled in real terms and the exemption limit increased by an even larger margin.
I thought readers might be interested to compare the average income tax rates (including the 1,2,3% levy) paid under the current tax schedule with what would be implied by the 1996 tax schedule adjusted for CPI inflation since 1996. This is shown in the following charts.
Wow, what a sizable reduction there has been. Average income tax rates in 1996 were 6-15 per cent higher than today. And interesting to see that the changes have not been uniform. That means it would be quite politically contentious to go back to 1996.
But we do have to go some way if sufficient tax revenue is to be generated. And it may take a few years to get there.
Here’s a first shot at a tax schedule that, starting from the current situation, gives a roughly proportionate increase in average tax rates from where they are at present. It’s just a first shot and illustrative of the sorts of decision that need to be taken.
The parameters are: 22% basic rate and 48% top rate (to include the 1,2,3% levies); Tax credit lifted from €1.8K to €2.5K; standard rate band reduced from €36.4K to €25K. This is a lower schedule than in 1996, especially for the lower paid, but still a sizable increase from the present. My guess is that this should yield upwards of €2.5 billion in additional income tax revenue–though depending on savings response there would be a negative impact on expenditure tax receipts.
I know this can be improved upon, with only a modicum of additional work.
I presume/hope these kinds of calculations are being worked on in a much more precise way by the Commission on Taxation and/or in the Department of Finance and discussed with key politicians.
Update: There were some flaws in the original version which I have fixed now. Exemption in 2009 is now achieved only through the tax credit and thus is not tightened in the sample schedule (affects the comments by Colm and Aedin below)