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In advance of General Election 2020, Liam Lynch, KPMG Partner and head of Private Clients, took a look at the choices presented by the parties on personal tax matters.

These policies, set out in the respective Party manifestos, played a central part in negotiations on agreeing a Programme for Government between Fianna Fáil, Fine Gael and The Green Party. Indeed, we are informed that many of these were only agreed between the parties in the final negotiating sessions.

In making their tax policy choices, the three parties find themselves in an environment which is utterly changed from when they published their manifestos. At that time, Ireland’s economy continued to grow but with risks to the pace of that growth. Now, the impact of Covid-19 means that urgent support is required to restart the economy, the EU budgetary framework has been overhauled to support such stimulus but the longer term challenges such as climate and housing remain the same. 

Factors impacting taxation

As set out before the General Election, there are other factors that also impinge on some of the policy choices on personal taxation taken in the Programme for Government:

  • 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, i.e. using pre-tax income.
  • Income tax and USC currently form approximately 38.5% of annual Irish tax revenues (€22.9bn for 2019). 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 the current level of corporation tax receipts in Ireland (€10.9bn 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 papers 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. Having said that, these receipts have remained strong during the current public health crisis.

In the table below, we have summarised the personal tax choices signalled in the Programme for Government, although many of the longer term choices will depend on the outcome of the deliberations of the proposed Commission on Welfare and Taxation.  

Personal Tax Matters in Programme for Government

Tax change

Universal Social Charge (USC)

Eliminate extra 3% rate chargeable on self-employed taxpayers as resources allow

Income tax

Rate of income tax

No change

Standard rate band and credits

No change in 2021 but increased for 2022 if necessary to ensure no increase in effective rate of income tax

Earned income credit

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

PRSI (social security contributions)

Rate

Consideration to increasing rates of all classes of PRSI over time

Coverage

Possibility to opt into PRSI post age 66 to build up retirement benefits

Capital Acquisitions Tax 

Rate and Exemption Thresholds

No change

Capital Gains Tax

Rate

To be reviewed in each budget for duration of Government with the objective of supporting innovation driven enterprises that enable transition to a low carbon economy.  It is not clear if this includes potential changes to entrepreneur relief.

Wealth Tax

Introduction of wealth tax

Not proposed

What does the Programme for Government propose to support private sector investment?

There is reference to supporting Venture Capital to provide long term financing for Irish businesses.  It is unclear what this might entail, but it is feasible that it could include some adjustment to the current EII scheme. The Programme also commits to encouraging greater uptake of R&D tax credits by SMEs through examining issues with respect to preapproval procedures and reduced record-keeping requirements.

What is proposed for Irish entrepreneurs?

There are high level commitments made in relation to supporting entrepreneurs and SMEs but the detail has yet to be determined. Overall, there is a strong recommitment to the 12.5% corporation tax rate included.

Tax and pensions

Commitment to introduce auto-enrolment to fund pension provision. Employer and employee contributions will be matched, and an additional State top-up provided (prior proposals set this at 1/3rd of employee contributions). Employee contributions will be phased in over a decade, but with provision to opt-out. A choice of a range of pension savings products is proposed, along with a cap on charges by pension providers. 

Commission on Welfare and Taxation

A Commission on Welfare and Taxation is to be established to consider medium and long term ways in which the tax system can support economic activity and increased employment, while ensuring that sufficient resources are available to meet the costs of public services and State supports. Much of the longer term tax policies can be expected to emanate from the deliberations of this Commission. Of interest here in particular is the direction to this Commission to consider policies adopted by similar sized OECD economies.  

Measures to support the reopening of the economy

The Programme for Government does not itself include any specific tax related measures aimed at supporting the reopening of the economy, other than the review of local authority rates for 2020.

Taxation of real property

The only specific tax measure proposed relating to real property is a widening of the base for Local Property Tax (LPT) to include new houses, while aiming to keep the cost of LPT flat for most people.

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