Many, many budgets ago, the Tax Strategy Group papers emerged like scrolls uncovered from a mysterious ark. The arcane cipher of tax policy-speak would point to shifts in the taxation of the nation.
Today, their publication is another of the extremely interesting but not always particularly enlightening series of documents that form part of the formal march towards Budget Day in October.
They are written by various officials across several Government departments. They contain a lot of information on various taxes and toss out a few opinions on the cost, effectiveness and desirability - or not - of various mooted changes.
There are no heavy hints dropped but there's a feast of context and they do give a general sense of the direction of travel, at least as far as officials are concerned.
This year, there was a bit of commentary around the fact that there was no mention of a possible third tax rate which would benefit middle income earners. It’s a policy idea that has been favourably mentioned by Taoiseach Leo Varadkar on several occasions.
There was a mention in last year’s papers. That analysis concluded a third middle rate had the benefit of being easily understood but would "necessitate big alterations to Revenue’s systems as well as changes for payroll providers to ensure the feasibility and operability of the new structure".
In other words: "Too much hassle".
Hassle is not a good enough reason not to bring in a tax change. Other factors included the possible reduction some taxpayers may see in tax benefits from pension contributions when their marginal rate of tax changes.
But the biggest negative factor was that just 35% of taxpayers would benefit, and those would be on middle to higher incomes. This raised questions about what changes would be needed for those on lower incomes, on the grounds of equity.
Earlier this year, a group of Fine Gael TDs called for a €1,000 tax break for middle income earners in Budget 2024. The idea of the third tax rate and the €1,000 has been conflated but the reality is that a tax break that gets very close to that goal already looks close to being achieved without any of the complications associated with a third rate.
Last year’s Budget had a tax package worth €1.13 billion. This year’s Summer Economic Statement has pencilled in a tax package of €1.1 billion with the key statement that it will be deployed "to avoid workers paying additional tax simply because they move through higher tax brackets due to wage growth".
That means raising the standard rate band, allowing workers to earn more under the lower tax rate of 20%. In last year’s Budget, the standard rate band was raised from €36,800 to €40,000. There were changes too to tax credits.
This meant full-time single workers on salaries of €40,000-€55,000 saw an increase of €831 a year in their take-home pay, an increase of over 2%.
If the tax package in Budget 2024 is of a similar scale, and if there are alterations to Universal Social Charge rates and/or tax credits, you could easily see how middle-income earners might see a tax break not far off the €1,000 figure at the centre of the bunfight over a possible 'third rate’.
This year’s Tax Strategy Group paper on income tax included a discussion of a tax policy that has been championed by organisations like Social Justice Ireland: refundable tax credits.
This is where workers who don’t earn enough to use up all their available tax credits would receive what’s left over in cash payments. It’s seen as a way to boost the income of lower paid workers.
The paper estimates it would cost between €1.3 and €2 billion and comes down heavily in favour of the view that the tax system should collect money and the social welfare system should do the work of boosting incomes and providing supports.
The Department of Finance is working on a review of our personal tax system. Its terms of reference include examining the idea of a third rate of income tax. No doubt, refundable tax credits will crop up too. It’s sure to have been mentioned by several organisations during the period of public consultation earlier this year.
Our tax system can seem fiendishly complicated, with its credits, rates, USC and Pay-Related Social Insurance which many roll up in their minds as ‘tax.’ And many people would prefer to see more of their earned income arriving back in their pay packet.
But the system does work, and not just from the perspective of raising huge sums for the Exchequer.
It’s often heard that Ireland has a very ‘progressive’ tax system. This means that those who earn the most pay the most in tax. It’s worth mentioning the numbers behind that.
According to this year’s TSG paper, the top 20% of earners pay 79% of all income tax and USC. The top 1% pay 23%. The bottom 80% of earners pay 21%.
37% of income earners are exempt from paying any income tax at all.
Tinkering with an already complicated system that delivers that much redistribution of income (not without some grumbles) may not only be too much hassle but may end up being worse for society.
