Budget 2016: Budget ‘sweet-spot’ of €70,000 means the Top 10% is the big winner… again.

Cormac Staunton: In our analysis of last years ‘triple effect’ of changes to tax bands, tax rates and USC rates we found that Budget 2015 gave the biggest cash return – in absolute and relative terms – to those earning €70,000: which we dubbed the Budget ‘Sweet Spot’.

Revenue’s analysis of income tax cases showed that a gross income of €75,000 puts someone in the Top 10% of earners in Ireland - which highlights the regressive nature of tax changes that give the greatest benefit so high up the income distribution. Simply put: these tax cuts were not ‘targeted at lower and middle income earners’. Looking at the changes to USC and tax introduced in Budget 2016 we see the same principle applied … with the same outcome.

Cash gains in Budget 2016

The figures in this piece are from TASC’s income tax model which we have used successfully to analyse both planned and actual tax changes in previous Budgets.

The government also published some indicative figures which can be used to verify our model. This analysis looks at changes in take home pay in absolute terms (how much cash difference) and in proportional terms (as a % of the take home pay). For simplicity these figures are all for single people under PAYE.

Minimum Wage
The analysis of tax changes at the minimum wage assumes the minimum wage increase of 50c per hour on a full-time, annual basis. A person on previously on the minimum wage of €17,542 per year is now on an income of €18,556 per year. Although they are better off by over €1,000 in gross terms, the net benefit is only €708. This is because of the impact of the PRSI step effect.

The government did announce a ‘tapered PRSI credit’ along the lines suggested by TASC which will smooth out the step effect, benefit those on (and slightly above) the minimum wage, but without ‘cascading’ the benefits to higher earners. Without this that person would actually have been financially worse off.

Lower incomes
Those on the lowest incomes, who do not earn the full time equivalent of the minimum wage, will benefit from USC rate cuts and changes to the threshold (up to €13,000). The effect will be €84 for someone with a gross income of €13,000 for the entire year – less than €10 per month. This is less than a 1% increase in their take home pay.

Average Incomes
As people earn more they benefit more – this is because of a reduction in the 7% USC rate to 5.5% which applies to those from €17,000 to those on €70,000. The benefit is not just greater in cash terms – they also get proportional benefit that is greater than those on lower incomes.

A single person on a middle income of €25,000 will gain €227 for the year, about 1% of their take-home pay. A person on €35,000 will gain €377 – just over €30 per month or 1.3% of their take home pay.

High incomes
Despite the claim that those above €75,000 will not benefit, everyone above this will gain the same amount in cash terms, though as a portion of their income it will decline.

A single earner on €70,000 will gain €902 per year (€75 per month) which is 2% of their take home pay. Someone on €150,000 will get a benefit of €902. In proportional terms this is similar to a person the median income of €25,000 (1.1%) – though in cash terms it will be almost four times as big.

Income inequality
Despite assurances from the Minister that income inequality is falling, this is simply not the case. The most basic measure of income inequality is the Gini coefficient. It was been stable over the last number of years but it has risen since the onset of the economic crisis.

This is not just the effect of budgetary choices affecting taxes and social welfare, but also the effect of wages in the labour market.

The effect of this budget in income inequality is difficult to predict but with cuts to taxes for those on highest incomes greater in relative terms to those on average incomes, and no increases in social welfare rates it will be down to what happens in the labour market. An increase in the minimum wage will help, but it would require significant wage rises for those in the middle of the earnings distribution (€25,000-€30,000) to off-set the unequal nature of the tax cuts.

Opportunity Cost
Compounding the regressive nature of the tax cuts is the fact that these measures will cost €600m per year. Though there were positive investments announced in the Budget, such as increased investment in education, childcare and free GP care for children age 3-5, €600m has been forgone - not just this year but in the years to come.

Inequality is about far more than just income, and public services play a vital part in reducing economic inequality. This should considered the ‘opportunity cost’ of cutting taxes for high earners.