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With the General Election 2020 date of 8 February fast approaching, Ireland’s political parties have released their election manifestos. The policies signal tax choices that could be made by Ireland’s next government and which are of course only one part of the decision put before the electorate.

Liam Lynch, KPMG Partner and Head of Private Clients takes a look at the choices presented by the parties on personal tax matters and which are likely to be central to any negotiations on a programme for government following the election.

In making tax policy choices, the parties find themselves in an environment where Ireland’s economy continues to grow but the pace of projected growth is uncertain. With an EU budgetary framework which requires future governments to minimise the risk of budget deficits and an international environment which poses threats, there is narrow scope for manoeuvre.

Other factors also limit some of the choices that future governments can make on personal taxes:

  • Ireland has a highly progressive tax regime with the top 1% of taxpayers (those earning over €200,000) paying 26% of income tax and the universal social charge (USC). If the top rates of tax are reduced, this will have a disproportionate impact on exchequer income tax receipts.
  • The personal tax regime is used to redistribute wealth across Irish households. A recent study by the Economic and Social Research Institute (ESRI) found that one of the effects of the highest earners paying higher personal taxes is that Ireland ranks in the middle of European Union (EU) member states for income inequality when measured on a post-tax basis. Before redistributions under the tax regime, Ireland is ranked at the top of income inequality rankings.
  • Income tax and USC currently form approximately 38.5% of annual Irish tax revenues (€22.9billion for 2019) with increased revenues projected for 2020. These taxes could account for a proportionately larger percentage of total tax receipts in the future if there is a reduction in corporation tax receipts.
  • There is considerable uncertainty surrounding the sustainability of corporation tax receipts in Ireland (€10.9billion in 2019). Corporation tax receipts are concentrated in relatively few taxpayers which means that firm-specific shocks to corporate profitability could negatively impact those receipts. Recent government reviews found it was not possible to be conclusive on whether the high levels of corporation tax receipts collected in the last few years have been windfalls or are representative of longer-term structural changes within the economy.

In the table below, we have summarised the personal tax choices signalled by four of the political parties in their election manifestos. 

Personal Tax Matters in Election Manifestos

Tax change

Fianna Fáil

Fine Gael

Green Party

Sinn Féin

Universal Social Charge (USC)

Reduce 4.5% rate to 3.5% (applies to income between c.€20k to €70k)

Reduce USC, increase exempt threshold from €13,000 to €20,500

No change

Abolish USC on income under €30,000

Income tax

Rate of income tax

No change

No change

No change

New 5% levy on earnings >€140,000

Standard rate band

€3,000 to €38,300, single; €6,000 to €50,300, married

Phase in increase from €35,000 to €50,000, single, over five years

No change

No change

Earned income tax credit (EITC)

Equalise with PAYE, €150 increase to €1,650

Equalise with PAYE, €150 increase to €1,650

Equalise with PAYE, €150 increase to €1,650

Equalise with PAYE, €150 increase to €1,650*

Home carer credit

Increase by €400 to €2,000

Equalise with PAYE, €50 increase to €1,650

No change

No change*

Income exemption limit >65’s

By €500 to €18,500, single, by €1,000 to €37,000, married

No change

No change

No change

NEW tax credits

Rental tax credit

€600

No change

No change

1 month rent relief

Childminder credit

€2,000

No change

No change

No change

CAT

Exemption Threshold

No rate change; simplified Inheritance Tax administration

Preserve €335,000 exemption; next €250,000 on a phased basis, 20%

No change

No change exempt threshold €335,000;
3% rate increase to 36%

Capital Gains Tax

Rate

Reduce rate: 33% to 25% over 5 years

Review rates in next five Budgets

No change

No change

Entrepreneur Relief (ER)

Increase lifetime gains ER limit €15m; increase annual EII ceiling to €1million

Review Entrepreneur Relief

CGT rollover relief company exit gains reinvested in early stage start-ups; exempt EII share gains

No change

Wealth Tax

Introduction of wealth tax

No change

No change

Individuals, assets> €10m

Individuals, 1% on net wealth >€1m, farms exempt

What do the parties have in common?

Based on the above constraints, unsurprisingly, none of the parties propose a reduction in the marginal personal tax rate. For those earning over €100,000 per annum, this remains 52% (55% for self-employed individuals) when income tax, USC and PRSI are combined.

Fianna Fáil and Fine Gael both propose changes that could reduce personal taxes for the “squeezed middle” with changes proposed to increase the standard rate income tax band or reduce the 4.5% rate of USC to 3.5% (which currently applies to income levels between approximately €20,000 to €70,000).

Sinn Féin and Fine Gael are targeting reliefs at those with lower incomes with a proposed increase in the USC exemption up to earnings of €20,500 (Fine Gael) or €30,000 (Sinn Féin).

All the parties support equalising the position of self-employed and PAYE workers by equalising the earned income tax credit and the PAYE tax credit at €1,650 per annum.

However, Sinn Féin proposes an additional 5% income levy for those with annual earnings over €140,000 as well as tapering out tax credits for individuals earning over €100,000 up to €140,000. Sinn Féin also proposes to increase employers’ PRSI to 15.75% for the portion of employee salaries over €100,000.

What do the manifestos suggest for Irish entrepreneurs?

There are high level promises made in relation to Entrepreneur Relief (ER) – with Fine Gael proposing a review of the current relief and Fianna Fáil promising an increase in the lifetimes gains limit eligible for the ER 10% rate of tax from the current €1million threshold to €15million.

The Green Party’s focus is on early stage companies with proposals for a capital gains tax rollover relief to defer tax on a company exit gain where proceeds are reinvested in early stage companies. No changes to Entrepreneur Relief are proposed by Sinn Féin.

Fianna Fáil and the Green Party suggest enhancements to the Employment and Investment Incentive (EII) scheme.

Tax and pensions

The Green Party is seeking to limit pension relief by capping relief for pension funding to an annual pension of €48,000. Sinn Féin suggests reducing the earnings limit for pension funding and reducing the standard fund threshold from its current level of €2million to €1.2million.

If they came to fruition, Green Party proposals to introduce a Financial Transactions Tax could also see additional costs and reduced returns related to stocks and securities held by pension funds.

As part of property tax related proposals, Sinn Féin proposes to increase dividend withholding tax on Irish property related funds (IREFs) and REITs from the current 25% rate to 33%.

Broader issues

Common themes amongst the political parties in their tax manifestos include the desire to widen Ireland’s tax base and strengthen indigenous enterprises.

All four parties whose personal tax proposals are summarised above express support for the continuation of the 12.5% corporation tax rate and have set out policies to improve access to the Research & Development Tax Credit for SMEs. All of the parties set out proposals related to climate change policies and carbon taxes.

Fianna Fáil

Fianna Fáil has proposed a new Commission on Taxation to examine the sustainability of the tax system. The proposal is that the Commission would review the future of USC, the taxation impact of moving to a low carbon economy, the sustainability of corporation tax receipts in the context of global tax reform, the taxation environment for indigenous firms and the taxation of property funds.

Fianna Fáil will also include a review of the Key Employee Engagement Programme (KEEP) as part of this work programme. 

Fine Gael

Fine Gael aims to provide a small business tax package averaging €20 million in each of the next five budgets. This is in addition to the promised review of Entrepreneur Relief and measures designed to encourage greater take up of the R&D tax credit by small domestic companies. 

The Green Party

Similar to Fianna Fáil, the Green Party has proposed setting up a new Commission on Tax and Welfare to advise on the reforms needed to prepare Ireland for future macroeconomic, demographic and environmental challenges.

It has also proposed reintroducing an 80% windfall tax on the sale of rezoned land, with a proportion of the collected funds delivered directly to the local authority as well as the introduction of a wealth tax.

To assist with ease of access for Irish SMEs, the party wants to restructure the R&D tax credit relief to encourage greater investment in third level institutions and to make the credit regime more accessible to SMEs.  

Sinn Féin

As part of a range of property related measures, Sinn Féin proposes the abolition of Local Property Tax (LPT) with the introduction of a second home charge of €400.

Sinn Féin also proposes the introduction of a wealth tax (applying to net asset values lower than the Green Party proposals but with exemptions for assets such as farms) as well as increasing the rate of Gift and Inheritance Tax by 3% to 36%.

Sinn Féin also proposes to abolish the Special Assignee Relief Programme (SARP), an expatriate relief currently capped at annual earnings of €1million.

The Labour Party

Labour’s manifesto contains high level tax proposals. On personal taxes, Labour’s will widen income tax bands to prevent inflation. Labour proposes not to raise USC but to progressively withdraw income tax credits for those on incomes over €100,000.

Like the other parties reviewed in this article, Labour supports the 12.5% rate of corporation tax and will conduct a review of the sustainability of Ireland’s corporation tax base. It also proposes to establish a Standing Commission on Taxation to conduct ongoing review of the tax system and of all tax reliefs. 

 

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