The Personal Tax Credit and the Employee (or PAYE) Tax Credit were both reduced from €1,830 to €1,650 in Budget 2011 in the context of the financial crisis. This took effect from 1 January 2011. Cumulative inflation in the period from 2011 to 2018 has been of the order of 3.5 per cent.
General increases to tax credits result in an increase in a level of income that is effectively exempt from income tax. It is estimated that in 2020, some 28 per cent of taxpayer units will be exempt from income tax and USC. An increase in the Personal and Employee Tax Credits would be likely to increase the proportion of earners who are exempt from income tax and would also narrow the income tax base. In addition, it would give rise to calls to increase the value of the Earned Income Tax Credit which applies to self-employed persons.
During the financial crisis our income tax base narrowed to the point where 45 per cent of taxpayers were exempt from income tax. This was unsustainable and placed a disproportionate burden on those who were within the tax net to provide the tax revenues needed for public services and social supports.
It is the Government’s position that earners start to pay the marginal rate of tax at too low an income level and it is committed to reducing excessive tax rates for low and middle income earners while also keeping the tax base broad.
As a result of changes in recent Budgets, USC rates have been reduced to 0.5%, 2% and 4.5%. The income level at which taxpayers begin to pay the higher rate of tax has also been increased by €2,500 and there have been increases in both the Home Carer Tax Credit and the Earned Income Credit. The impact of these changes is that the top marginal rate on incomes up to €70,000 has been reduced from 52% to 48.5%.