More than one million people could benefit from new tax rate of 30%, analysis finds

More than one million people could benefit from a new tax rate of 30 per cent, an internal Government analysis has found.

The proposal to create a new tax rate for middle-income earners was originally floated by Tánaiste Leo Varadkar earlier this year.

It is understood that it is assessed as part of the Department of Finance’s annual publication of Tax Strategy Group (TSG) papers, due out next Wednesday. These papers are produced every year in advance of the budget and set out options for tax increases or cuts.

The papers are also understood to examine the pros and cons of the proposal, as well as the potential cost to the exchequer, but not make an explicit recommendation either way.

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Some Coalition sources cautioned that such a move would involve a substantial reorganisation of the tax system at relatively short notice, and would be likely to encounter some resistance if it was pursued this year.

Two sources with knowledge of the paper said its assessment was that one million so-called “tax cases” – the technical term for an individual or jointly-assessed couple used by the Revenue Commissioners – could benefit.

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A source said this was equivalent to 35 per cent of the tax cases in Ireland. A spokeswoman for Revenue said the provisional 2022 estimated figure for taxpayer units registered in the State is 2.9 million, comprising both self-assessed and PAYE workers.

They are also expected to look at the benefit of indexing tax bands and credits, with a source indicating that such a step would benefit more taxpayers – perhaps as many as 1.7 million – but that the gains would be spread more thinly.

A tax reform package in the budget is a major objective of Fine Gael, especially targeted at middle-income earners. The exchequer is taking in significantly more income tax than a year ago. The most recent returns published by the department show income tax receipts stood at €16.7 billion at the end of July, which is more than €2.4 billion, or almost 17 per cent, ahead of the same period in 2021.

While Fine Gael sources said they were agnostic about the specific form of the tax package for middle-income earners – and were also open to a widening of tax bands, which is the approach indicated in the programme for government – the inclusion of the eye-grabbing 30 per cent rate in the TSG papers could move it to the centre of the debate about personal tax come budget time.

With fears about inflation and the prospect of an economic slowdown in sight, senior figures in Fine Gael are adamant tax relief is affordable and necessary. However, it would have to be balanced against the various “headwind risks” facing the economy, which are occupying minds in the department despite strong exchequer returns in the first seven months of the year.

The buoyant tax figures published earlier this week will bolster the case for tax cuts – although there are many demands on the exchequer, and one-off measures to ease the cost of living crisis in 2022 are likely to eat up much of the extra financial firepower accumulated on budget day.

In a statement, a spokesman for the department pointed out that the TSG is not a decision-making body and the papers produced by the department “are simply a list of options and issues to be considered in the budgetary process”.

“Papers on various options for tax policy changes are prepared annually by Department of Finance officials.”

The TSG has been in place since the early 1990s and is chaired by the department. Its membership comprises senior officials and political adviser’s from a number of departments and offices.

The spokesman said the department would not be commenting on the papers before publication.