Report explores costs of raising income tax bands in budget

Raising income tax, PRSI and USC income bands by 1% in the upcoming Budget would cost €183 million, according to calculations in the Tax Strategy Group papers published by the Department of Finance today.

There is a commitment in the Programme for Government to index-link tax bands and USC rates to wage inflation to prevent a real increase in workers’ tax burden.

The paper estimates that wage inflation may currently be 1.5-2%.

The Tax Strategy Group has also recommended options to strengthen the Social Insurance Fund.

This is the fund out of which in-work benefits and the state contributory pension are paid.

It’s funded through PRSI contributions.

In a detailed paper on PRSI, the TSG points out that the rate of both employee and employer contributions to the Social Insurance Fund are way below the EU average.

Currently employee contributions are 4% of salary while the EU average is 14.6%.

Employer contributions are just over 11% while the EU average is 22.62%.

The income point at which PRSI contributions are paid are also lower than across the rest of the EU.

In Ireland, PRSI is not paid on earnings below €18,304 a year.

The TSG paper suggests this should be lowered to €13,000 to align with the level at which the USC is paid.

It also recommends that the contributions of the self-employed be increased over a phased basis and for the self-employed to receive the same benefits.

It also considers the option to make lump sum contributions or flat rate charges to access some benefits.

The Tax Strategy Group has also suggested that the Small Gift Exemption under Capital Acquisition Tax (CAT) rules should be expanded from €3,000 to €5,000 due to the explosion in savings during Covid.

CAT rules allow for gifts of up to €3,000 a year to be made tax-free. It’s estimated that increasing it to €5,000 would cost €1.1million in a full year. However, quoting an ESRI report, the paper suggests that running down these savings ‘could support the recovery of the economy.’

The same paper examines in some detail the recent changes to the Capital Gains Tax regime, particularly when it comes to entrepreneurs who sell their businesses.

On the overall level of Capital Gains Tax, the paper concludes that there does not appear to be a “…compelling case for making a significant reduction in the CGT rate at the current time.”