Paschal Donohoe (Dublin Central, Fine Gael)

Before I respond to the substance of the Deputy's amendment I acknowledge the important point he has made, which is on my mind and needs discussion, regarding if and when we go back to personal tax changes based on indexation. The reality I have grappled with is that even when you do that it means there are workers in our economy who will not see much of a change in their after-tax income. That is a really important point we have to consider. The Deputy will be aware, and indeed he said there, that this is a consequence of the fact we have a progressive tax code in the first place. That means the lower income you have, the lower tax amount you pay. The Deputy may not have said it but I will say he was acknowledging it in his contribution. If we move back to indexation it means those who do not pay much income tax and USC in the first place will not see a big change in their after-tax income and then if you were to try to adjust that it would lead to a narrowing of the number of people who pay income tax or USC in the first place, which is something we should try to avoid doing over time. That simply means discussions that are had in other committees and on budget day regarding the role of targeted spending measures will continue to be really important in supporting those who are on low incomes within our society and who are paying a relatively low level of USC or income tax, even though in their eyes it is still a large share of the income they earn.

On the measure the Deputy has brought forward to try to address that, the issue of refundable tax credits was recently examined as part of the tax strategy group, TSG, process in advance of budget 2024 and the analysis and findings of the review were published in the income tax TSG paper, which is available on the Department of Finance’s website. The review explored the concept of refundable tax credits, provided an overview of previous relevant studies and an overview of refundable tax credits in other countries and provided an economic analysis of refundable tax credits. The review identified a number of issues concerning their operation. It noted they would represent a fundamental change to the personal tax system. On the one hand refundable tax credits would help tackle in-work poverty, as the Deputy said, and would increase a measure of equity.

However, there are already a wide range of existing policies tackling poverty and direct supports are a simpler and more effective means of providing assistance to low income households. That is the point I made a moment ago. Additionally, the introduction of refundable tax credits could potentially prove to be very costly and provide relatively little benefit to the majority of individuals, including those working full time and earning at least the national minimum wage, because such workers generally utilise their tax credits in the first place. Take, for example, a single individual. The entry point to income tax will be €20,000 per annum in 2026. However, a single full-time worker earning the national minimum wage will have income of €28,700 in 2026. They will actually utilise all of their personal tax credits and therefore a tax credit that is refundable will not be of benefit to them. This is somebody who is on the minimum wage.

In addition, such credits could have behavioural impacts on labour supply and could reduce the incentive to take on additional work, though I should say that is a judgment and my experience continues to be that the vast majority – nearly everybody I meet – wants to work and find some kind of work, whether that is part-time or full-time work. God knows we have ample evidence of that in the number of people at work in our economy. The overall estimate provided by Revenue at the time of the review suggested a cost in the region of €1 billion for making tax credits refundable. This would be a really big operational change to implement. We have just done a detailed review of this, which has been published. It is for that reason I do not believe a further analysis is needed at the moment and that is why I am not accepting the Deputy’s amendment. As I said a moment ago, we did a review of this quite recently.

The overall policy issue I have with the measure that is being proposed by the Deputy is the number of people who are on low incomes within our society who are still in a position to avail of the tax credits that are available. Therefore, I am not sure making them refundable would deliver the benefit I understand the Deputy wants to deliver. I am strongly of the view that the only way we are going to make progress on the issue he is identifying is targeted measures that are spending in nature rather than taxation.