A REFORM of the income tax system so that people are no longer enticed to pay more taxes every time they get a raise could benefit many people.
The so-called indexation of tax margins and income credits would increase the net income of around 2 million taxpayers, Treasury Department officials have worked out.
This equates to anyone paying income tax, as many are exempt from paying tax and USC on their earnings.
In the so-called “Tax Strategy Group” papers, one of the options explored is indexation of tax spreads and credits ahead of next month’s budget.
Indexing tax margins means adjusting the different tax margins to ensure people are not better off or worse off because of inflation.
Right now, a couple with one income can earn $48,800 before they start paying taxes at the higher rate of 40 percent, or the tax band.
Indexation could mean that this €48,800 amount is increased each year, leaving less income taxed at the higher 40 percent tax rate.
It would also include an increase in tax credits, an amount you can earn before you have to start paying income tax.
Each year, the Treasury Department prepares briefing notes for the Treasury Secretary on the possible options for tax changes in the budget.
The budget is earlier this year, so the different parts of the budgetary process are happening earlier.
Indexing the tax margins and credits would mean that the gains would be small as it would affect a large number of income taxpayers.
The papers examine the pros and cons of various proposals, as well as potential costs to Treasury, but make no explicit recommendations either way.
Bigger gains, but for fewer people, would come from introducing a third rate income tax rate of 30 percent, the income tax strategy paper said.
This would serve to ease the pressure on the squashed middle and avoid the dramatic jump from 20 percent to 40 percent income tax rates.
The Tax Strategy Group paper on income tax shows that a formal indexation policy would mean that indexation would be applied automatically.
The 73-page paper estimates the cost of indexing the income tax system to 3 percent would be €550 million in the first year and €630 million for a full year.
A single person earns 416 euros a year or 8 euros a week.
A married, single-earner couple with no children would earn €466 a year, or €9 a week.
For a single-earner couple with children, the gain is 516 euros per year or 10 euros per week.
About 2 million or 72 percent taxpayer units would benefit.
When indexation is set at 4 percent, it costs €730 million in the first year and €845 million over a full year.
A single person benefits from €560 per year or €11 per week.
For married earners with no children, the benefit is €630 per year or €12 per week.
Married earners with children would get €695 annually or €13 per week.
Department officials estimate that 2 million taxpayer units (72 percent of taxpayer units) would benefit.
This equates to anyone paying income tax or USC.
Another option being considered to ease the pressure on income taxpayers is a similar approach to last year’s budget, increasing tax margins and slightly increasing tax credits.
The paper considers an increase of €1,500 in the standard rate range of the uniform income tax. This would mean that taxpayers could earn another €1,500 before hitting the 40 percent tax rate.
An increase in the income tax credit, employee tax credit and income tax credit of €50 is also included.
In this scenario, a single earner would earn EUR 400 a year, and a married person would earn EUR 450.
Around 1.9 million taxpayers would be better off.
A third rate income tax rate of 30 percent would benefit around one million income taxpayers.
If the new tax rate were applied to income between €36,800 and €41,800, it would cost €525 million in a full year.
Single earners and single earner married couples would gain €500 per year.
If the new rate were applied to earnings between €36,800 and €46,800, the profit for single earners and single-earner married couples would be €1,000 per year, the Tax Strategy Group papers say.
Tánaiste Leo Varadkar has repeatedly put forward the proposal to create a new tax rate for middle earners.
The introduction of a new 30 percent rate is likely to take a while, however, as revenue and employer payroll and tax systems would all need a major overhaul.
Soaring energy prices and other runaway price hikes have made it an urgent priority to ensure households benefit from the September budget to offset the inflation hits.
The Tax Strategy Group paper on income tax shows that nearly €4 out of every €10 of all tax revenue comes from income tax.
Income tax receipts, which include USC, are expected to rise 10.6 percent this year to 29.5 billion euros.
Of this, €4.8 billion is attributable to the Universal Social Charge.
https://www.independent.ie/business/personal-finance/tax/adjusting-income-tax-bands-and-credits-would-boost-earnings-of-2-million-taxpayers-41902796.html Adjusting income tax bands and credits would increase the income of 2 million taxpayers