One of Taoiseach Leo Varadkar's key taxation promises could be "inequitable" and lead to increased benefits for higher earners while middle-income taxpayers lose out, the Department of Finance has said.
Mr Varadkar has long promised to merge the universal social charge (USC) and pay-related social insurance (PRSI), and a tax strategy group was established within the department to see how it could be done.
The promise was one of Mr Varadkar's main policies when he ran for the leadership of Fine Gael in 2017.
Minister for Finance Paschal Donohoe has described it as a medium-term goal. However, the tax strategy group's latest report, published on Wednesday, found the policy would be extremely complex to enact.
It said that each of the five options that were considered involved a “trade-off” between a simple design, a loss of revenue to the State and losses and gains for taxpayers.
“Options included implementation on a revenue neutral basis which gave rise to inequitable outcomes with middle earners losing and higher earners gaining, as well as approaches which mitigated such undesirable impacts on individuals which in turn had not insignificant cost implications for the government finances,” the department said in its annual tax strategy group , which were published on Wednesday.
The group, which publishes a number of reports each summer aimed at informing budgetary policy, also said the Taoiseach’s pledge to raise the threshold at which the higher-rate income tax applies to €50,000 would cost €2.3 billion if it were implemented in a single year.
Raising threshold
For a single worker, this higher rate kicks in at incomes above €35,300, which is 10 per cent below the average industrial wage. If done in stages, a €3,000 increase to all standard rate bands in one year would cost €524 million in the first year, and €610 million in a full year.
It also suggested that raising the threshold for the higher 4.5 per cent rate of universal social charge would ease the tax burden on low to middle-income earners.
The group also noted the current PRSI regime was lower than in other countries, and that consideration should be given to a phased increase in PRSI contribution rates over a five- to 10-year period, with annual increases of a quarter or a half percentage point. Depending on the increase chosen, that would raise either €200 million or €400 million, which could be used to fund USC cuts.
Commercial stamp duty
The department noted the predominant view from a recent public consultation that any additional carbon tax revenues should be ring-fenced for the purposes of enhancing the current Sustainable Energy Authority Of Ireland grant scheme for household energy efficiency improvements and to fund sustainable transport infrastructure.
Consideration should also be given to further increasing the rate of commercial stamp duty, which Mr Donohoe controversially trebled to 6 per cent in 2018. Concern that this would dampen investment in the commercial property sector here have proved unfounded, the department said, noting a further 1 per cent hike could raise another €94 million in annual revenue.
Food supplements, which amounted to a €60 million market in 2016, according to Revenue, are also likely to come under the VAT regime in the October budget. The tax strategy group confirms that there is no legal basis in the EU to zero rate such supplements as has been done in Ireland for many years.
