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Budget Tax Alert 2016 - EY
By EY Budget Reaction
Oct 14, 2015

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In last year’s Budget speech the Minister for Finance, Michael Noonan TD recalled the Robert Frost poem The Road Not Taken. He indicated that “the road ahead of us diverges and we have a choice to make. Do we take the road frequently trodden by Irish Governments in the past, a road whose signposts are tax and spend where one’s journey is through boom to bust? Or do we, like Frost, take the road ‘less travelled by’? A road whose milestones are prudence and caution.”

For a ‘less travelled’ road the journey towards the next election surely seems familiar. This time around though, it’s a Fine Gael led coalition Government that has managed to stay the distance and be in the position to reap the rewards of four years of fiscal prudence.

With a fiscal adjustment of €1.5bn, Budget 2016 seeks to reverse many of the tax increases and social welfare cuts that stand in the way of the re-election route and by so doing seeks to neuter the hounds of anti-austerity ready to nip at the heels of Government candidates. Spreading the good news is expensive. The main beneficiaries will be those USC taxpayers that contributed most to the exchequer in its time of need with 1.5% cut in the Universal Social Charge likely to have employees running for their calculators. 2020 vision is very useful and through the murky battlefield of the next election, Minister Noonan has presented the visage of the complete abolition of the USC by 2020. Perhaps more importantly the reduction in the USC brings the marginal rate down to 49.5% for many, signalling the Government’s intention to reward work.

It has long been a fundamental principle of tax equity that taxpayers in comparable situations should pay comparable amounts of tax. The news that a tax credit will be phased in for the self-employed and farmers to match the employee tax credit given to PAYE workers will be welcomed by the self-employed many of whom earn relatively low income. Budget 2016 starts the process with a €550 tax credit. This is still €1,100 short of the equivalent PAYE tax credit. To add salt to the wound, the 3% discrepancy in marginal tax rates remains a more  significant

For businesses, the USC reductions might reduce some upward pressure on demands for pay rises and thus help maintain competitiveness. The fine print of a new 20% capital gains tax rate for entrepreneurs will no doubt be explored when
the Finance Bill is published next week, coincidentally on EY Entrepreneur of the Year™ final night. However, the relief falls far short of expectations given its capital gain cap of €1mn. This forms part of a package of measures designed to bolster Ireland’s support for entrepreneurs.

Separately, the parameters of the ‘best in class’ Knowledge Development Box will also be revealed next week. However, it remains to be seen whether the announcement of a 6.25% rate will dispel some foreign direct investment concerns that the regime will be uncompetitive against other countries patent box regimes that for some years will remain unconstrained by OECD rules.

The €5 increase in children’s allowance combined with the introduction of paid paternity leave and an extension of pre-school childcare will appeal to families while pensioners will receive an increase in their pensions as well as a higher Christmas bonus, just in time for the next election.

Budget 2016 no doubt seeks to make the road towards the next election somewhat less frosty. Whether this demonstration of the rewards of stability will thaw the electorate sufficiently will be known in due course. The risk perhaps is that such an expansionary budget might actually overheat an economy expected to grow at 6.2% in 2015 especially if it creates unsustainable expectations of future largesse.

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