Written Answers. - Tax Credits.

Robert Molloy

Question:

26 Mr. Molloy asked the Minister for Finance the study, if any, his Department has carried out on equity arguments for tax credits in substitution for tax allowances; and if he will make a statement on the matter. [8588/96]

The question of introducing a tax credit system has been considered over the years. In looking at possible options in the area of taxation it is important that there should be no confusion between the underlying policy considerations, such as equity, progressivity or efficiency, and the essentially administrative issue of how best to realise these in practical terms. Tax credits are simply an alternative means of pursuing goals which could equally be advanced within the framework of the present allowance system. Thus, the same effect could be achieved by reducing the standard rate tax band by an amount equivalent to the relevant allowance. The choice between a credits system and an allowance system should, therefore, rest on considerations of simplicity from the standpoint of taxpayers and the administation of the system by both employers and the Revenue Commissioners.

As regards the question of substituting tax credits for allowances, this would considerably increase the progressivity of the tax system in the absence of other changes. The tax system is already quite progressive. Moreover, without other changes in the tax system, it would bring about a situation where a greater proportion of income tax payers would be liable at higher rates. I do not believe that this would be generally seen as an improvement in the income tax system. It would certainly run counter to the view that economic and employment objectives are likely to be best served by keeping marginal tax rates as low as possible.