Individuals
Pre-Budget 2020
With unemployment at an all-time low since 2004, (reports of 4.2% of the available labour market seeking employment) and a labour market closing in on 2.3 million individuals, it can be said with confidence that Ireland’s economy is looking stronger than ever with estimated growth in GDP set at 3.9%. However, fuelled with whispers of an economy which is “overheating” and an anxious Government nervously bracing for a hard Brexit, one cannot help but sense that a prudent fiscal policy for individual tax payers will be announced in October.
It is imperative that a budget policy be implemented which will capitalise on our economic growth and strength, rather than a reactionary, curtailed policy. Now is the time protect our indigenous sector and to encourage entrepreneurs to continue be innovative and creative, and to reward them for their contribution to our nation’s success story.
Alas, you would be forgiven for being unable to find the reward in the effective rate of tax which successful self-employed individuals are suffering. Our tax code purports to be built upon achieving equity and fairness among taxpayers. Can one possibly say that there is fairness in the disparity between the taxes paid by self-employed individuals earning similar amounts of income to their counterparts who are employed and effectively paying 3% less in taxes? We continue to call on the Government to review this policy initiative and to keep the spirit of entrepreneurship front of mind. The Earned Income tax credit for self-employed individuals is currently €1,350. In the pursuit of fairness, this credit should match the PAYE credit available to employees of €1,650 and the 3% differential should be abolished.
In a similar vein, it is necessary for the Government to completely overhaul the very restrictive Entrepreneur’s Relief which is currently in place. The relief could go further to incentivise our entrepreneurs while in turn accelerating the rate of return in respect of capital gains tax receipts. The Government could focus on a range of conditions to make the relief more attractive such as increasing the €1 million life-time limit or focussing on the interaction of the relief with retirement relief.
The Government needs to deliver on a budget which continues to shine the light on Ireland as a prime location for investment. Our headline corporate tax rate is overshadowed by a punitive income tax regime which does little to incentivise foreign nationals or indeed to bring home those who have emigrated over the past decade. The Department of Finance figures show that 84% of the total income tax and USC is paid by the top 27% of earners (those earning over €50,000).
It is hard to justify the 52% (55% in the case of self-employed individuals) top rate of tax and the attributable tax bands which draws the individual tax payer into the higher tax bracket earlier than individuals in other EU jurisdictions. Ireland cannot boast of a public services offering which matches the calibre of its European counterparts which enforce a higher top rate of tax. In such jurisdictions, for the most part, there is a direct correlation between the rate of income tax applicable and the quality of the public services provided such as health, education and infrastructure.
With respect to USC, while the Government’s medium term goal is to ultimately phase out USC, it is unlikely that such measures will happen in the short term. USC accounted for €2.7 billion of the total tax take received by the Exchequer in 2018. A more likely position would be that the rate of USC payable by low earners would be reduced or the entry threshold to come within the 0.5% band and 2% band would be increased.
Looking to our gift and inheritance tax regime, we expect that the Government will increase the Group A lifetime threshold as it continues to deliver on its promise to restore the €500,000 lifetime threshold. Furthermore, we would highlight the importance of preserving the integrity of agricultural relief and business relief without limiting the availability of the reliefs. Such reliefs have been invaluable to family businesses across the country and have contributed towards the continuation of family businesses over multiple generations. We would also call on the government to preserve the annual gift exemption of €3,000.
While, we expect little to no changes with respect to our capital gains tax regime in Ireland, with rates as high of 33%, there is plenty of opportunity to make revisions to the regime which would instil a greater level activity in the capital markets. IBEC have reported that private investment in the capital markets is expected to yield €100 billion in 2020 compared to €8.5 billion invested by the public sector. Reduced CGT rates could serve to further improve these investment figures as investors would more readily dispose of their assets.
In considering the merits of the introduction of wealth taxes into Ireland, the Tax Strategy Group observed that the yields arising from the creation of such a tax may not be additional to the existing forms of wealth tax already in place in the country vis-a-vis capital gains tax and capital acquisitions tax.
Our view
One acknowledges that a sensible strategy is to prepare for the uncertainties which are interwoven with Brexit, however the continued success of the country is very much dependent on ensuring that the standards of living enjoyed by our labour market are upheld. In order to protect our economy from Brexit, which undoubtedly is the greatest uncertainty facing this generation, it is imperative that Ireland secures a strong indigenous sector. A renewed CGT tax code would fuel the appetite of individuals to re-invest and contribute to the private capital projects. In turn, a stronger indigenous sector places the economy in a safer environment without solely relying on Ireland’s FDI model and corporation tax receipts which has been the trend of late.
With respect to the self-employed, this Government has an opportunity to incentivise individuals while yielding a good return to the Exchequer. In terms of upholding our standards of domestic living, this budget needs to focus on keeping older workers within the employment net, while attracting foreign nationals and emigrants. In order to sustain or increase labour market participation, a more favourable income tax regime is an absolute requirement.
Our prediction
Not too much movement in the way of tax incentives or the improvement of current tax reliefs. We predict a reduction in USC rates applicable to low earners, the deficit to the Exchequer being set off by a reduction in PAYE credits available to high earners.
We envisage a slight increase in the Group A threshold as the Government seeks to deliver on its promise of reaching a €500,000 lifetime exemption for gifts from parents to children.
