Employees and the self employed, private sector and public sector alike are being asked to dig deep. And digging even deeper, it seems that the Minister may have actually overshot the Four Year Plan's income tax target of €2.420bn by as much as €150m.
It is unhelpful to describe the changes as bringing us back to 2006 levels. In 2006 we did not have to deal with the impact of the adjustments to PRSI and the new Universal Social Charge. These will create difficulties for all earners. Changes to the pension and benefits regime will also create difficulties for employers as they try to manage the costs of employing people.
The best news for business in this Budget is that the Corporation Tax rate is unchanged. Retaining our ability to compete for and retain investment will fuel job creation and the export-led economic recovery which is essential for the country.
The new Employment and Investment Incentive is aimed at new job creation. However, if it is implemented in the same tardy manner as the Corporation Tax holiday for start up companies from two Budgets ago, it will be ineffective. The cost of the new incentive is given as €13m. This is considerably less than the €50m or so which the BES, the overly complicated and fussy scheme it replaces, used to cost.
The Minister acknowledged in his Budget speech that revenue is generated by economic activity. The emphasis on this Budget though has been almost solely on the levying of taxes, rather than the promotion of economic activity.
Tax Credit Cuts
The Minister has chosen to inflict almost all of the income tax pain in the first year of the Four Year Plan, by reducing the main tax credits by up to 10%. While this was a necessary change towards achieving the targeted €1.245bn in general tax increases, all taxpayers, irrespective of income, will suffer an equal hit. PAYE taxpayers earning over approximately €16,000 per annum will come into the income tax net for the first time since 2006, and will already be paying the Universal Social Charge.
Narrowing the 20% Tax Band
The Minister has commented on many occasions that the tax base is too narrow, with too few individual taxpayers paying the lion's share of income tax. However the reduction of the 20% band by €3,600 appears counter to attempts to broaden the tax base.
Abolition of the PRSI ceiling
This small group of individuals earning €75,000 or more will be levied a further 4% on their incomes over this amount. The marginal rate of tax for such workers is now 52%, i.e. 41% Tax, 7% Universal Social Charge and 4% PRSI. The reduction in the marginal rate of tax is a positive in an otherwise bleak scenario.
Changes to the Pensions Regime
The initial changes for personal contributions announced today affect almost all contributors in equal measure, irrespective of the rate at which they pay income tax.
For employers however, the changes are significant. The reduction in the relief for Employer's PRSI down to 50% of pension contributions will add heavily to the cost of employing people.
Any one of the changes on their own would not have much impact on pensions savings habits, but in the context of the overall changes, it is inevitable that contributions to retirement schemes will diminish.
Property Incentives
The danger with the move to completely abolish "legacy" property incentives is that many investors relied upon the tax relief to have sufficient disposable income to pay off their loans. This could lead in some instances to defaults on loan arrangements.
Ironically, the full abolition of the incentives will have a greater practical effect on smaller investors rather than on larger investors. This is because the benefits of the tax incentives for larger investors became deferred indefinitely under the regime which requires a minimum effective tax rate of 30% for those who earn over €125,000.
One certainty is that it will make prospective investors in any future tax incentive scheme very wary indeed.