The income tax rate cuts will boost GDP next year by 0.35 per cent, but after that they will settle at around 0.3 per cent, according to calculations made by the Central Bank of Malta.

The government had announced in November 2012 that it would cut income tax rates for those earning more than €60,000 a year, from 35 per cent in phases down to 25 per cent this year.

In 2013, 42,500 taxpayers benefitted from the reduction, which along with those getting minimum wage exemptions (MWE) represent 16.8 per cent of all taxpayers. This number is expected to be 43,500 in 2014 (with a further 7,300 for the MWE) and 44,400 in 2015 (MWE 7,500).

Nearly 48 per cent of the €3.9 billion income earned is not taxed as it falls before the minimum tax threshold.

The study, conducted by the CBM’s Aaron Grech, looked at how people’s extra disposable income would affect the economy by encouraging higher spending but this would in turn drive up prices, having a negative impact on exports. The impact on consumption will peak in 2016, while the impact on investment continues to go up until 2017.

Between 2010 and 2013, income from personal income rose from 5.9 per cent of GDP to seven per cent of GDP. As a share of the total tax collected by government, it rose from 18.9 per cent to 21 per cent.

The government collected €16 million less in tax in 2013, considerably more than the €10 million estimated when the cuts were announced in November 2012. The figures for 2014 and 2015 are estimated to be €19.6 million and €28.2 million respectively, giving a total of €57.8 million.