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Let’s talk income tax – it should work for taxpayers and not the other way around

Tom Maguire discusses the recent Income Tax public consultation in his latest Business Post column

The income tax system was subject to a public consultation which closed recently. Launching the consultation, Minister for Finance Michael McGrath said: “As signalled in Budget 2023, the Government is committed to a review of the personal tax system, having regard to the medium-term. As the largest annual source of revenue for the Exchequer, income taxes make a significant contribution to our public finances. Equally, the personal tax system has an important role in supporting a competitive economy”. So it’s good to talk.

Before getting into some suggestions, recent Budgets referred to the introduction of a Personal Tax Roadmap. We’ve successfully done the roadmap approach with Corporation tax. It’s like a “tax policy priority to do list” which we can tick off each year. Bottom line, we should seek to make Ireland the number one location for enhancing employment and economic activity. To achieve this, adopting a similar strategy approach for income tax would be a good move.

The level of income taxes paid in the year is critical. The Department’s consultation explains that “Income taxes are the largest annual source of revenue for the Exchequer, accounting for 37% of tax revenues forecast in 2023 (€32.1 billion total, c.€24.5 billion Income Tax, c.€5.2 billion
Universal Social Charge (USC), c. €2.4 billion Other”; the “other” being certain forms of withholding tax e.g. Deposit Interest Retention Tax. The document continues that it’s desirable “… that the personal tax system should maintain the characteristics of stability and resilience in terms of its contribution to the total taxes collected by the State”. The latter has echoes of the roadmap point made earlier. Also, the “resilience” reference is important given the recent reports on the possible economic effects of the corporate tax changes that may be necessary to comply with EU and OECD tax agreements.

Let’s be clear, our income taxes are high, and they kick in at low income. The Standard Rate Cut-Off Point is the maximum amount an individual can earn at the standard rate of Income Tax (20%) before paying the higher rate of Income Tax (40%) - €40,000 a single person. This was increased by the last budget but it’s still low and should be increased so that more or all of the average wage suffers the lowest rate of tax. Then that person has the USC and PRSI on top of that with the result that marginal personal tax rates can be up around 52%-55%. The difference between the two top rates is that self-employed persons are liable to an additional 3% of USC depending on their income levels. Therefore, our marginal rates of tax should be reduced, and existing reliefs, bands, thresholds, and credits should be indexed annually.

The current structure of personal taxes is complex and as I have noted in these pages previously, when it comes to investment, simplicity eats complexity for breakfast. Consideration should be given to simplifying this regime and maybe merging USC and income tax. Making the personal tax regime more attractive needs to be a key policy move for retaining and attracting FDI and key talent. An attractive personal tax regime is also vital for the SME and indigenous business community which relies on access to talent in order to grow and scale business.

Regular readers of this column will know my views on the Employment Investment Incentive Scheme (EIIS) and the Key Employee Engagement Programme (KEEP) and both of which play in the income tax arena. The former provides a tax relief for investments made in certain corporate trades. It’s given as a deduction from an investor’s total income to reduce the individual’s income tax liability but not PRSI or USC. Reading that, you can almost hear the needle scratching across the playing vinyl record for those pre-CD player era readers. This additional complexity in a regime designed to encourage investors into entrepreneurial companies should be removed. A simple transaction with a complicated tax answer. Of course, there are other changes that could be made when one considers the recently issued Revenue guidance weighs in at 108 pages.

KEEP’s aim is to allow “David” companies to appropriately compete with the “Goliaths” with more cash resources to society’s benefit by providing an exemption from income taxes on any gain realised by an employee on the exercise of a qualifying share option. Instead, the gain will be subject to the lower Capital Gains Tax (CGT) rate on a subsequent disposal of the shares. However, we know KEEP’s take up has been very low. There is a valuation requirement i.e. that the share options have been granted at market value, that each employee’s entitlement does not exceed the relevant annual/lifetime limit and that the aggregate issued but unexercised share options do not exceed a certain monetary limit. Some suggestions here include Revenue providing safe harbour for valuations as well as providing additional guidance on appropriate methodologies for undertaking share valuation and guidance on how long a valuation remains “in date” (i.e. from last funding round / last professional valuation).

Consideration should be given to areas of our economy and make the income tax system work for us; for example, where there is a shortage of talent or where additional resources would be welcome e.g. housing, R&D etc. This could involve income tax exemptions for a certain proportion of employees income. There are some R&D reliefs for certain employees but more could be done here. The certainty of a proportionate tax exemption beats the possibility of a tax credit every time. Of course, EU approval may be necessary and indeed certain checks and balances would be necessary but we’ve done this sort of stuff before. Myron Scholes (Nobel prizewinning economist) and others once wrote "Success is achieved when the tax rules subsidise activities that benefit society as a whole more than they benefit the individuals engaging in the activities…". We got this.

The issue of income tax is a substantial one in terms of policy and Exchequer returns. It’s good to talk because, bottom line, isn’t the cash you take home what matters?

Please note this article first featured in the Business Post on Sunday, 16 April 2023 and was re-published kindly with their permission on our website.

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