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In pre Budget comments a number of tax professionals have highlighted the deleterious impact of tax increases on job numbers in SMEs and other private sector employers Back
Irrespective of the additional tax measures announced in today's Budget, Ireland will collect substantially more from income tax in 2012 compared with 2007 notwithstanding the sharp rise in unemployment levels over that period and widespread dramatic wage reductions. The key economic indicator emerging from the Budget will be the effect on tax and public expenditure as a share of GDP in 2013.
Since the fiscal adjustment process began 8 new taxes have been introduced (income levy, the USC, carbon tax, second property charge, household, domicile, pension, and insurance levies). Over that period, eight new taxes have been introduced (income levy, the universal social charge, carbon tax, second property charge, household levy, domicile levy, pension levy, insurance levy), said Jackie Masterson, Tax Partner of Russell Brennan Keane. Budget 2013 will introduce at least one more in the form of the much heralded property tax. The November figures also indicate that we are reaching a tipping point when higher income tax diminishes incentives to work or pushes income into the black economy, with the perverse impact of reducing tax receipts, said Peter Vale, Tax Partner at Grant Thornton.

In addition, effective income tax rates have increased significantly, largely as a result of the introduction of the Universal Social Charge (“USC”) in 2009 – it may be called a different name and be calculated on a different basis but there is no mistaking that the USC is a tax on income and one of the bluntest instruments in the Minister’s armoury, Masterson said.

KPMG in a pre Budget comment quoted its 2012 Survey of income tax and social security rates around the world, which show that Ireland, along with just ten other European countries, imposes a tax burden of 50 p.c. of income or more on workers - prior to any moves in today's Budget.

There is speculation that this year’s Budget will increase the marginal rate for PAYE earners to 55% by increasing the USC from 7% to 10% for those earning over €100,000.

There is widespread consensus within the tax profession that such a move could seriously damage Ireland’s recovery process by increasing the cost of employment domestically and adversely affecting our international competiveness, said Masterson . “Much significance is attached to Ireland’s 12.5 p.c. tax rate in an EU context in terms of our ability to attract foreign direct investment. However, equally important is the ability to attract highly skilled and mobile talent to locate in Ireland so international investors are sharply focused on income tax rates also. Ireland now has the 10th highest marginal rate on wages out of 34 OECD countries. More concerning however is that our 52% rate kicks in at relatively low income levels – the same executive can earn €187,000 in the UK without paying tax at the 52% rate, whereas in Ireland the top rate applies on income over c €32,000.

An economy striving to recover needs to encourage job creation – it is widely accepted that increasing taxes on labour are counter-productive in this regard, she said.

Although Ireland has been very successful in attracting FDI investment we cannot become complacent in this regard. We have always faced tough competition in this space – in the future, the UK will also be strongly vying for a slice of this action and is very actively promoting and publicising its Tax Strategy at present specifically aimed at attracting FDI. In addition to corporate tax measures, the UK has reversed income tax rate increases introduced in 2010 with a rate of 45% set to apply for April 2013”.

With regard to incentives, Masterson hopes the Minister will have some welcome announcements. “We must acknowledge that notwithstanding the challenges of Budget 2012 certain incentives were introduced to assist exports and FDI, such as the Employment and Investment Incentive Scheme, a new SARP regime to attract foreign executives, a Foreign Earnings Deduction to drive exports in BRICS countries and enhancements to the R&D credit regime such as the ability to use the credit to reward key employees. Although experience to date indicates relatively low levels of take up of these schemes, hopefully Budget 2013 will introduce refinements to improve on this”, she said.

Commenting on the pre Budget exchequer returns statement, Peter Vale, tax partner at Grant Thornton said “The figures for November continue the October trend of failing to meet the targeted tax take. Worryingly, the income tax receipts for the hugely important month of November are 12% behind target. Clearly this will impact on projections for tax receipts in 2013 and what tax raising measures are required in the Budget tomorrow. To ignore the November figures risks creating the requirement for an even bigger adjustment this time next year.

The November figures also indicate that we are reaching a tipping point when higher income tax diminishes incentives to work or pushes income into the black economy, with the perverse impact of reducing tax receipts. The government’s recognition of this will be reflected in the move towards wealth based taxes, such as the property tax.

The so called ‘mansions tax’ on properties over €1m appears to be a replacement for a tax hike on incomes over €100,000. This measure has all the appearances of being introduced to generate newspaper headlines rather than make a substantial impact on the country’s finances, as it’s difficult to envisage significant additional tax revenues being generated based on the scarcity of such properties. The Commission of Taxation Report in 2009 estimates only 3,000 properties with a value of over €1m, and prices have dropped since then.

What does seem more likely now is that there will be a reduced cap on the size of pensions funds, as opposed to a straightforward reduction in tax relief on contributions from 41% to 20%. This will impact on people who have already built up a sizeable pension fund, but are some way short of retiring. The cap is likely to have a more significant impact on the private sector than higher end public servants due to the Department of Finance methodology for valuing pension pots not factoring in valuable elements of public sector pensions such as indexation and the pension payment transferring to spouses on death.”
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