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Overhauling unfair PAYE rates would be win-win for workers and employers

As we leave the crash behind, it is important that those who got us through the recession see the benefits in their take home pay and in their standard of living.  Reducing the tax burden on workers must be a priority this year as pay increases take hold in the Irish economy.

Firstly, this is all about making work pay. Secondly, incremental steps need to be taken on an annual basis to reduce the tax burden, particularly the entry point of the high rate of tax. Thirdly, the tax code must be affordable into the future and must have consideration to overall budgetary strategy, including capital and public investment requirements in the years to come.

We should be aiming to grow the economy by more than 50% say between now and 2030. It is an ambitious target but it is possible. We must be cautious given how international factors effect Irish growth potential. But if we steer a clever path, significant tax reform is possible over the medium term. In 2017 for instance government tax revenues increased by 6% to reach €50.7 billion.

Widening the tax base has been an important element of the government’s approach to taxation and this policy approach must continue. The residential property tax is now collecting around €470 million, but still under 1% of total tax revenues.  In the October budget, stamp duty on commercial property was increased from 2% to 6% and a new sugar tax was introduced. Widening the base and tax stability go hand in hand.

In 2007, that the total income tax take on 2.2 million workers was €13.5 billion. In 2017, the income tax take on broadly the same number of workers was €20 billion. In the course of a decade, the income tax burden has increased by almost 50%. This is a massive increase in overall tax on the PAYE sector. It explains why people are not feeling the recovery.

For several years after the crisis, wages remained stagnant while at the same time the tax burden increased. As wage growth picks up this year, we need to take action soon as the non-indexation of tax bands in recent years has negatively impacted workers who are finally getting much needed pay increases.

The real problem in the tax code is that people on average or above average pay are hitting the marginal rate too early. This tax threshold problem needs to be fixed. The threshold was raised by €750 to €34,500 in the October budget. According to the CSO the average wage in 2017 was €37,400. Nobody on the average wage should be paying the top rate of tax.

Ireland is completely out of kilter with other countries in this regard. For example in the UK the 40% tax rate applies to income over £45,000 which is equivalent to more than €50,000 at current exchange rates.

When somebody on a modest income gets an increase or a bit of overtime, the government should not be taking 50%. I believe we should set a target of raising the entry level to the higher rate of tax to €50,000 by 2025. By Budget 2020, a big step should be taken by focusing tax cuts on raising the top rate of tax entry threshold by €3,000 so as to reach the average wage. Incremental steps to reach the target could be taken in each of the following years until the €50,000 target is reached. Raising the threshold by €3,000 would cost around €450 million. The cost of raising the threshold in subsequent years would decline; as the threshold is raised, fewer people would be in the wage bracket to benefit.

Reducing income tax for middle-income earners has other important advantages. The current tax system is deeply frustrating for workers and employers. Workers on €35,000 who might like to work extra time or take on extra responsibilities will see the state taking 50% of any increased earnings. Employers who want to give a wage increase for people on the average wage face similar problems.

Cutting taxes is good for workers and employers; cutting taxes puts money directly into workers pockets, reduces upward pressure on wages, and improves productivity. Ireland is a very open economy. Income tax rates are a critical element in retaining and attracting talent, particularly well-educated young professionals. Income tax rates should also support work and enterprise.  Our high income tax rates are contributing to a brain drain, particularly in the health sector and more recently in the education sector. Watch this year especially as wages are increased. Wait and see the anger as Ireland’s 50% tax rate slashes the real incomes of people on very ordinary wages.

Brian Hayes MEP

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