Paschal Donohoe (Dublin Central, Fine Gael) | Oireachtas source

The Senator’s recommendations refer to reports on first, the tapering out of income tax credits at certain incomes and, second, the introduction of a high income levy. First, regarding tapering of income tax credits, there is already a substantial amount of research published on this subject. The income tax reform plan published by my Department in July 2016 examined this issue due to the fact that the Programme for a Partnership Government contained a commitment to consider the removal of the PAYE credit for high earners as part of a medium-term income tax reform plan. It pointed out that there are a number of technical issues and policy issues which would need to be addressed in order to achieve a tapered withdrawal of income tax credits, particularly for PAYE employees. The issue was also discussed in the 2018 tax strategy group papers on income tax. It is estimated that the tapering out of the personal income tax credit, PAYE credit and earned income tax credits in the manner outlined by the Senator could raise in the region of €855 million per annum.A significant issue arising with this amendment is that it would have a negative impact on the marginal rate of tax. The tapering out of a tax credit would result in a higher marginal tax rate within the taper zone than would apply at higher income levels. By way of example, were the personal tax credit of €1,650 to be tapered out at a rate of 5% per €1,000, the marginal rate within the taper zone would be just over 60%. Once the taper period has expired, at income over €120,000, the marginal rate would revert to 52%.

Another issue that has been pointed out in previous research is that tax credits and rate bands operate on a cumulative basis as Revenue issues a revenue payroll notification to the individual’s employer, which then uses the information contained in the notification to calculate the tax to be deducted each time a payment is made. If it is known from the beginning of the year that an employee's income will exceed the chosen threshold, then the application of the taper of the credits could be applied from the outset, thereby spreading the tax burden equally over the year. However, where it appears during the course of the year that the employee’s income may exceed the chosen threshold, Revenue will need to update the Revenue payroll notification to withdraw the relevant credits and this will result in the collection of arrears from the next payment of salary by the employer, resulting in an uneven distribution of its liabilities over the year and an uneven distribution of the yield for the Exchequer.

Tapering the tax credits could also affect the relative position of different categories of taxpayer. For example, consideration would need to be given to how the taper would work in the case of jointly assessed individuals, such as whether the value of a single personal tax credit or that of a married personal tax credit would be subject to the taper, and what income threshold would apply to a single-income couple. In addition, the effect of a deduction such as a loss available in respect of one spouse would need to be considered where the couple are jointly assessed for tax.

Regarding the amendment for a report on introducing a high-income levy on incomes in excess of €140,000, there are a number of issues with the proposal the Senator has suggested, as it would increase the complexity of the income tax system and could negatively impact on marginal rates of tax as well as the competitiveness of our tax code. While the Senator has not specified a specific percentage for the levy, for illustrative purposes, if a 5% levy was introduced on the basis of the current structure of the income tax charge, it is estimated it could yield €505 million per annum. However, this would see the current two-rate income tax system expand to become a three-rate system. If introduced on the basis of the current structure of USC, it is estimated that such a 5% charge could yield an additional €520 million per annum but would see the current five rate USC system increase to six rates. This would be in addition to the PRSI system, which has further distinct features and would introduce complexity and an unnecessary additional administrative burden for taxpayers, employers and Revenue. The introduction of a higher rate such as this would increase the marginal rate of tax on earnings over €140,000 to 57% for employees and 60% for the self-employed if it was introduced as an income tax rate.

I believe those kinds of marginal tax rates would be a deterrent to the continued retention of workers in our economy, including individuals who earn a lot of money, whose presence here is important to the retention of jobs in Ireland. A practical example of this is hospital consultants. The difficulties we have in attracting consultants who were trained in Ireland but are working abroad to come back to work in our hospital system are well known. Rates such as those I have outlined would be a deterrent to encouraging those highly trained consultants to come back to work in our public services. There is a public service argument for why I would not accept this amendment, and a broader issue with the competitiveness of our economy and the need for personal tax rates to be competitive.