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The government says they'll cut our taxes in the Budget, but how are they going to do it?

We don’t know anything definitive yet, but plenty of hints have been dropped about easing the tax burden on Middle Ireland.

Michael Noonan has plenty to ponder in the coming days
Michael Noonan has plenty to ponder in the coming days
Image: Sam Boal/Photocall Ireland

THE GOVERNMENT HAS issued a firm commitment to announce a tax cut in next week’s Budget, but the debate about how exactly that is done and how much taxpayers’ stand to benefit is ongoing.

The famous Budget leaks have not flowed as freely as they have in previous years as the coalition keeps a firm lid what will be announced. We’ve had a few hints but nothing specific.

Last month, Health Minister Leo Varadkar’s suggestion that the tax cuts could amount to an “extra fiver or tenner” in your weekly pay packet prompted the Taoiseach Enda Kenny to deliver a ‘slapping down’ of his outspoken minister.

But given Varadkar’s comments many will now be expecting to benefit to tune of between €5 and €10 when Michael Noonan makes his Budget 2015 announcement in the Dáil next week.

The government’s intention has become clear in recent days. It wants to cut the 52 per cent top marginal rate of tax.  This rate is made up of three components – 41 per cent income tax, 7 per cent Universal Social Charge (USC) and 4 per cent PRSI.

Cabinet Meetings Source: sam boal

The three elements

The Taoiseach outlined the issue facing ministers in their deliberations at a press conference earlier this week, saying: “The question is how best do you give relief to whom you want to give it by looking at either one element of it or all three elements?

“It is in there that the Minister for Finance is going to have to make his proposals to government for consideration. It is not as simple as it might seem to reduce the 52 per cent tax burden. But if you want help for middle-income earners, you have to do it in a particular way.”

That ‘particular way’ is likely to involve looking at all three elements of the 52 per cent rate and making changes to them. Not all of these changes will be made immediately.

The government is expected to lay out its tax plans for the next three years and the focus in this Budget 2015 announcement will be on changes to income tax and USC.

Jobs Expos Source: Sam Boal

Cutting USC

There is a drive in both in Fine Gael and Labour to cut the unpopular USC. Tánaiste Joan Burton mentioned the levy, first introduced in 2011, a number of times in an interview with Today FM earlier this week as she talked about easing the tax burden and one Labour cabinet source was adamant yesterday: “We’ll have to do something on USC.

But given the tax raises €4 billion in a full year, officials in the Department of Finance are understandably reluctant to reduce the rates and thus the income from one of their biggest revenue raisers.

The table below, courtesy of Revenue, shows that if the 7 per cent top rate of USC was cut to 6 per cent it would cost €358 million next year and over €500 million in the full year.

By contrast, cutting the top income tax rate of 41 per cent to 40 per cent would cost €164 million in 2015 and €234 million in the full year. But the drawback is that it would not be as beneficial to as many taxpayers as changing the top rate of USC would.

Income tax and USCSource: Revenue Ready Reckoner

Adjusting the USC and income tax bands is also an option for the government and would, in some instances, cost less than reducing the rates.

For example, increasing the income threshold at which the 7 per cent USC rate is applied from €16,016 to €17,516 would cost €77.2 million in the full year:

usc rate bands Source: Revenue Ready Reckoner

Changing the bands

On income tax bands, the government has consistently spoken of the unfairness on workers who see 52 per cent of their income over €32,800 go straight to the taxman.

Jobs Minister Richard Bruton said last month: ”I am on record as saying the point at which Irish workers hit the 52pc rate is far too low. That sets us out on a limb. It means the tax wedge for investors and employers is too large at low levels of income. That is something that we need to change.”

That kind of talk indicates that many in the coalition are in favour of changing the bands as opposed to reducing the rates.

The government could increase the income tax band by €1,000 so that workers, for example, begin to pay the 52 per cent rate on income over €33,800 and not €32,800 as they currently do.

This would cost €75 million in a full year. While increasing the band by €1,500 to €34,300 would cost €112 million in the full year.

These are some of the options on the table as Budget discussions continue.

It’s believed the tax package is being discussed by the Economic Management Council – which is made up of the Taoiseach, the Tánaiste, and the Ministers for Finance and Public Expenditure – today and is expected to go before Cabinet tomorrow where deliberations over its content will begin.

Don’t be surprised if there’s another Cabinet meeting on Sunday and then a final meeting on Tuesday morning before Michael Noonan takes to his feet in the Dáil at 2.30pm.

Before that we’re sure, through the inevitable leaks, to get a better idea of just how much you stand to benefit in Budget 2015.

Read: Here are 7 things we know about the Budget so far

Read: The Socialists think they could raise €3.3 billion by taxing millionaires

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