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How will income tax pledges impact you, be financed?

Parties promise wide-ranging cuts if they're elected

Both major parties have pledged income tax relief if elected to government. Kurt Sansone looks at what they are proposing and tries to understand the benefits, the pitfalls and who will gain.

Income tax relief is a key plank voters will be looking at when evaluating who to vote for in the general election.

It is always nice to hear that your income will be taxed less but will the country’s future finance minister be left scratching his head as to how these cuts will be financed?

Before answering this question, it is best to see what is being proposed, who will benefit and who will not.

Moreover, what are the difficulties that arise from these proposals by the parties?

The exercise covers only the key pledges linked to tax relief for employees and the self-employed.

Given that both parties want to reduce the tax on part-time work to 10 per cent, this has also been excluded.­

What are they proposing?

PL

▪ Income tax refunds will be given to all those earning under €60,000

▪ The lowest refund will be €200 and the highest €340 per year

▪ Low earners will get a higher refund than high earners

▪ Earners who currently pay no tax will also receive a refund of €340

▪ Refunds will be introduced gradually

PN

▪ Those earning up to €20,000 will pay a maximum 10 per cent tax

▪ Based on the single rates, someone earning €20,000 will save €1,185 per year

▪ All self-employed and small businesses will pay 10 per cent tax on the first €50,000 of profits

▪ The self-employed tax cut will be introduced in the first Budget

What will it cost?

PL

▪ Refunds will cost €46.5 million per year

PN

▪ Tax cut for workers will cost €44 million per year

▪ Tax relief for self-employed will cost €85 million annually

Who will benefit?

PL

▪ All workers and self-employed earning less than €60,000

▪ Those who do not pay tax, such as minimum wage earners

▪ Refunds would benefit 190,000 wage earners

PN

▪ All taxpayers earning up to €20,000

▪ All taxpaying self-employed

▪ Cuts will benefit 121,000 employed taxpayers and 7,000 self-employed

Who will not benefit?

PL

▪ Anybody earning more than €60,000

PN

▪ Those who do not pay tax today, including minimum wage earners

▪ Employees earning more than €20,000

What is good about the proposals?

PL

▪ The refunds do not discriminate between workers and the self-employed, providing tax relief for the widest cohort possible.

▪ The way the refund is structured means that those earning the least will benefit the most, doing away with the problem that arises whenever the tax bands are adjusted to benefit low-income earners. Given the progressive nature of the income tax system, the better off always end up benefitting more when the lower tax bands are adjusted. The refund system does away with this anomaly.

PN

▪ The tax cut provides substantial relief for workers who earn up to €20,000. With the average wage standing at just under €18,000, this measure will benefit most workers.

▪ The self-employed tax cut will practically introduce a simpler flat tax system for small businesses and the self-employed. It could encourage those working in the shadow economy to declare their income and, thus, curb tax evasion.

What is problematic about the proposals?

PL

▪ The tax refunds will be sent out even to those who pay no tax, which makes the proposal more like a bonus system. In fact, the system is not linked to tax paid but earnings. The use of the words ‘tax refund’ could be misleading.

▪ Given that the refunds are a flat amount and not a percentage, they risk being eaten away over time as inflation goes up.

PN

▪ If the employee tax cut applies on the first €20,000 earned, it will have a ripple effect on all tax brackets and the cost to public finances may be substantially higher than the €44 million projected by the PN.

▪ If, on the other hand, the tax cut applies only to those earning up to €20,000 (and so will not have a ripple effect on higher tax brackets), it would lessen the progressive nature of the tax system. This would create a large difference in tax paid (almost €1,200) between someone who earns €20,000 and someone who oversteps the limit by a single euro. It would also leave a large cohort of middleclass taxpayers, who are not self-employed and who earn more than €20,000, without any tax relief.

▪ The tax cut for the self-employed had been calculated by the PN to cost €85 million based on a worst-case scenario involving 7,000 self-employed. However, with the PN saying this tax cut will apply to retailers and all categories of self-employed, including doctors, lawyers and tile layers, the 7,000 figure is likely to be much higher, leading to a substantially higher cost.

▪ This tax pledge could also discriminate between taxpayers in the same job. For example, an employed accountant earning €30,000 would end up paying more tax than a self-employed accountant who declares a profit of €30,000.

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