Why Cash Matters (Budget 2015)

Nat O'Connor: As a follow-up to my pre-Budget post on proportions, we can now look at the results of the announced USC and income tax changes. There are seven changes in this mix:

• USC now kicks in at €12,012
• The lowest rate of USC is reduced from 2% to 1.5%
• The next rate of USC is reduced from 4% to 3.5%
• The 3.5% USC rate now kicks in at €17,576
• The higher rate income tax threshold or band has moved from €32,800 so it kicks in at €33,800
• The higher income tax rate has reduced from 41% to 40%
• A fourth rate of USC at 8% affects all income above €70,000

Taking the example of single PAYE workers, the changes affect people as follows (in ascending order of income):

• Those earning less than €10,036 never paid USC or income tax and are unaffected
• Those earning between €10,036 and €12,011 are no longer paying any USC, saving up to €280 in a measure targeted at this income cohort
• Someone on €12,0011 now pays no USC at all, €280 less than previously
• Someone on €12,0012 now pays €100 less USC, but does pay €180 as USC suddently kicks in for all his/her wages
• Someone earning between €16,016 and €17,576 is now only affected by the 1.5% and 3.5% USC rates (not 7%)
• Someone on €17,576 saves €174
• Everyone above €17,576 gets the full benefit of €174 from the USC changes
• Someone earning up €32,799 still only gains €174 from the USC changes, as he or she never paid the higher rate of income tax. The large majority of the 1.9 million people at work were already outside the higher income tax rate
• Someone earning €33,300 used to pay €205 at the higher rate, but is now only affected by the 20% band, saving €105
• Someone earning €33,800 used to pay a full €410 at the higher rate, but is likewise below the threshold for the higher rate, saving €210
• €210 is the maximum a single person saves from the wider income tax threshold/band change, and everyone earning over €33,800 gets the full benefit
• The gain of €210 from the threshold change is in addition to the €174 from the USC changes; together that makes €384
• Someone on €34,800 pays €400 at the new higher rate of 40%, saving €10 from the rate changes
• Someone on €43,800 pays €4,000 at 40%, saving €100
• Someone on €53,800 pays €8,000 at 40%, saving €200
• Someone on €63,800 pays €12,000 at 40%, saving €300
• Someone on €70,000 pays €15,252 at 40%, saving €362
• Someone on €70,001 now pays 8% USC on every euro above €70,000 cancelling out any further benefit from the drop to a 40% higher income tax rate, but retains the €362 benefit from the rate reduction
• €362 is the maximum gain from the rate change, and everyone over €70,000 gets the full benefit
• The gain of €362 from the rate change is in addition to the €384 from the threshold change and USC changes; all together the maximum benefit from all USC and income tax changes is €746

You can check the figures - and see the effects on couples - using the helpful Deloitte online tax calculator, which shows the pre- and post-Budget income figures.

The bottom line is that people from Minimum Wage levels (€17,576) to €33,800 gain €174, whereas people on incomes over €33,800 gain €384 or more, and people on incomes above €70,000 gain the maximum benefit of €746.

Whether or not you think this is equitable or 'fair' depends on whether you think the distribution of net incomes was fair in the first place. What Budget 2015 did, in terms of net income, is widen the gap between those on higher and lower incomes. Those in the Top 10% (€70,000+) got 4.3 times more cash than the many workers who earn between €17,576 and €33,800.

Importantly, bank CEOs and others on high incomes of say €500,000 will not benefit hugely from the lower 40% income tax rate, because of the new 8% USC, which is an important and valuable safeguard for equality. They only get the same €746 benefit, and also have their use of tax reliefs shaved as the extra point of USC is immune to most tax breaks.

Another way to look at what happened is to compare Person A on €17,576 (minimum wage), Person B on €35,000 (average wage), who benefits a little bit from the income tax changes as well as the USC changes, with Person C on €70,000 (Top 10%).

• Person A gains €174 from Budget 2015, leaving him or her with a post-tax income of €16,986 (was €16,812).
• Person B gains €396 from Budget 2015, leaving him or her with a post-tax income of €28,065 (was €27,669).
• Person C gains €746 from Budget 2015, leaving him or her with a post-tax income of €45,215 (was €44,469).

• The gap between A and B went from €10,857 to €11,079; wider by €222
• The gap between B and C went from €16,800 to €17,150; wider by €350
• The gap between A and C went from €27,657 to €28,229; wider by €572

As the result of a single budget - where available resources were still constrained - to widen the net income gap between some single people by €572 (and even more for some couples) is significant.

Did those on higher incomes really need the €746 they received in extra net income, compared to people on lower incomes or those reliant on public services? Will it really boost consumer spending in the economy and create jobs, or will it be used to pay down debt or spent on imports? TASC's analysis has always been that giving a little money to a lot of people will be more effective at getting money spent on essentials in the local economy to boost local jobs.

More importantly, what is the direction of Government tax policy? The signal from Government is that the gap in net incomes will be widened further, as they continue to target a reduction of income tax on the upper middle income group (those on €34,000 to €70,000).

The alternative is public services rather than tax cuts, as the effect would be diluted and it would not be affordable to give the many on low incomes the same amount of cash from tax cuts given to the few on upper middle incomes. This alternative is also based on the unpopular truth that people in low incomes pay relatively little tax and social insurance in Ireland compared to what is paid by workers across the EU. Tax cuts are illusory if out-of-pocket charges for public services will mount up due to overall under-funding of services.

Rather than giving low to middle income workers small tax cuts, the focus should be on targeted spending on public services - including perhaps some new services like properly subsidised childcare - as these would benefit everyone in society much more equally.