Income Tax Accounts Government Revenue

Question: Describe about the Income Tax Accounts for Government Revenue. Answer: Section one Introduction According to (TaxPolicyDivision, 2016) Income tax accounts for about 40% of the Ireland tax collections. This is a significance source of government revenue and a careful scrutiny of the existing tax system should be regularly conducted to establish its soundness. A good tax system is one which complies with the basic tax principles of efficiency and equity. The nature of taxable income has experienced some significant changes over the years in Ireland and around the world which necessitates a review of existing tax systems in order to accommodate the realised changes. Otherwise, governments will end up losing revenues from this untapped sources (Tax policy division, 2016) Due to the changes identified, the minister of finance introduced some key tax measures in his 2017 budget in order to address the pointed issues. The measures were carefully formulated to ensure that tax receivable will increase as a result of tapping into the new sources and at the same time reduce the tax burden on taxpayers. The new tax measures which were introduced in 2017 budget included a reduction in USC tax rates by 0.5% on the first three lower USC tax groups which basically affects the middle and low income earners, an Increase of home carer credit from 1000 to 1100 and Increase in Earned income credit to taxpayers in self-employment from 550 to 950 among other measures (Cahill taxation services, 2016) Section two Discussion of the new tax measures in 2017 budget The tax measures adopted in the budget were to a have favourable tax impacts on various classes of taxpayers who were affected by the measures. It was in line with Social justice of Ireland which was advocating for an efficient tax system which will achieve the required tax take and guarantee a sustainable economic growth .This was to be achieved through reforms in the existing tax system which were considered inefficient. The proposed reforms were incorporated in the 2017 budget and included the following (Social Justice Ireland, 2016). a) Reduction of three lower USC categories charges by 0.5% The minister in 2017 budget reduced the rate of each of the three lower categories of USC by 0.5%. This was in line with the proposed changes to the existing tax system which was considered inefficient according to Ireland justice social system. The 2017 budget was supposed to deal with low levels of living standards which were existing in the country. The existing low levels of standards of living was as a result of recession witnessed by Ireland in prior years. Therefore, by lowering the rates, the living standards of the majority citizens who are low and middle-income taxpayers will increase. This is because they will have more disposable income as a result of paying fewer taxes (Social Justice Ireland, 2016) In addition, the tax measure was meant to reduce the gap between the high earning and low-middle income taxpayers. This was aimed to ensure that there was an equal distribution of wealth among citizens in the country. Also, reduction in USC rates had an effect of encouraging self-employment of citizens which will translate to low unemployment rates as more jobs will be created through the tax savings realised by the reduction of the rates. Another notable impact on the reduction of USC was that Irish immigrants will return back home and contribute largely to the Ireland GDP through doing business and going to formal employment .There was a survey done sometimes back which showed that Irish immigrants were reluctant to return home because of the current tax system which was seen to overburden the taxpayers (Irish Tax Institute, 2016) The tax implications on the income of taxpayers as a result of the measure introduced can be illustrated by comparing the effects on disposable income before the tax measure and after the introduction. By taking a hypothetical case involving taxpayers A B who are married couples and their sources of income are as follows. A is self-employed earning 50000p.a and B is employed earning 40000 p.a., the effects of their income as a result of the tax measure can be established as follows. A B Tax computation Illustration On Tax effects 2016 2017 Gross Income 90,000.00 90,000.00 Less Pension Contribution @ 4.5% p.a 4,050.00 4,050.00 Net Taxable income 85,950.00 85,950.00 Income tax Liability 15,360.00 14,960.00 PRSI 3,600.00 3,600.00 USC 3,536.00 3,081.00 Gross tax liability 22,496.00 21,641.00 Take Home Income 63,454.00 64,309.00 Amount of savings as result of the tax measure 855.00 Tax savings as result of the tax measure 1% Observation Assuming no tax credits was given, it is evident from the comparison of the disposable income above that a reduction in USC tax rates leads to increase in disposable income for the couple A B of 855 in the year 2017 by 1%. b) Increase in Home carer Credit from 1000 to 1100 p.a This is credit given to taxpayers who are taking care of the elderly of age 65 years and above, children and incapacitated persons in their homes. The condition to qualify for the credit is that the taxpayer must be a couple who are assessed as one for tax purposes and are both working(Commissioners, 2016). This is restricted to earnings of 7200 per year. It is given by the government to encourage taxpayers to take care of the qualifying class of persons. The government will save on transfer payments if this class of persons are taken care of by the taxpayers. The overall impact of the credit is that it will increase the disposable income of the taxpayer and at the same time save on government transfer payments(Michael Noonan, 2016) Below is an illustration of the effects of the tax measure using the case of couple A B by comparing the effects on disposable income in years 2016 and 2017 which represents a period before the tax measure and after the measure. Assume the only credit given is carers home credit. A B Tax computation Illustration On Tax effects 2016 2017 Gross Income 90,000.00 90,000.00 Less Pension Contribution @ 4.5% p.a 4,050.00 4,050.00 Net Taxable income 85,950.00 85,950.00 Income tax Liability 15,360.00 14,960.00 PRSI 3,600.00 3,600.00 USC 3,536.00 3,081.00 Gross tax liability 22,496.00 21,641.00 Less Tax Credits Carers Credit - - Net Tax Liability 22,496.00 21,641.00 Take Home Income 63,454.00 64,309.00 Amount of Tax savings as result of the tax measure 855.00 Tax savings as result of the tax measure 1% Observations It is established that the tax measure will not affect taxpayer AB disposable income since there is no change as a result of the measure. This is because AB are not entitled to this type of credit as their yearly earnings are more than 7,200. However, it will affect couples whose earning per year is less than 7,200 p.a and will be expected lounge a tax claim refund with the government each fiscal year. c) Increase in Earned income credit from 550 to 950 Earned income credit is a kind tax credit which applies only to self-employed taxpayers. The increase in this credit will translate to increase in disposable income of the self-employed citizens. This will lead to increase in standards of living for this category of taxpayers since their tax burden will be lowered. The government introduced this credit in an effort to reduce the tax differences between employed taxpayers and the self-employed. Employed taxpayers were entitled to PAYE in addition to other tax credits they qualify for while self-employed taxpayers had no credit equivalent to PAYE hence ended paying more taxes. This was against the principle of equity. In addition, the government introduced this credit to encourage more citizens to venture into self-employment and entrepreneurship which could stir more growth in the economy (Michael Noonan, 2016) Below is an illustration of the effects of the increase in Earned income credit on A B and the overall effects on the three tax measures introduced in 2017 budget. A B Tax computation Illustration On Tax effects 2016 2017 Gross Income 90,000.00 90,000.00 Less Pension Contribution @ 4.5% p.a 4,050.00 4,050.00 Net Taxable income 85,950.00 85,950.00 Income tax Liability 15,360.00 14,960.00 PRSI 3,600.00 3,600.00 USC 3,536.00 3,081.00 Gross tax liability 22,496.00 21,641.00 Less Tax Credits Carers Credit - - Personal Tax credit 3,300.00 3,300.00 PAYE credit 1,650.00 1,650.00 Earned Income Credit 550.00 950.00 Net Tax Liability 16,996.00 15,741.00 Take Home Income 68,954.00 70,209.00 Amount of Tax savings as result of the tax measure 1,255.00 Tax savings as result of the tax measure 2% Section three Conclusion The three tax measures introduced in the 2017 budget will result to the realisation of more disposable income of Irish taxpayers affected. For example, in the case of taxpayer AB, the overall effects of the three tax measures combined is an increase of 2% on their disposable income. This will result in a realisation of government objectives of having a fair tax system which is more productive. Like in this case, more taxpayers will realise more disposable income which will translate to improvement standards of living. Also, citizens will be encouraged to create more jobs through SMEs and to take up formal employment (Department of Finance, 2016). References board, C. I., 2016. Citizens Information Budget 2017. [Online] Available at: https://www.citizensinformation.ie/en/money_and_tax/budget_2017.html#l01933 [Accessed 16 October 2016]. CTS, C. t. S., 2016. Income Tax Reform Plan. [Online] Available at: https://www.cahilltaxation.ie/income-tax-reform-plan/ [Accessed 16 October 2016]. Finance, D. O., 2016. Summary of 2017Budget measures Policy Changes, Dublin: Stationery Office. institute, I. T., 2016. Removing the Paye tax credit - The impact on Ireland's competitiveness. [Online] Available at: tax institute.ie Tax Policy and Practice Irish Tax Policy [Accessed 16 October 2016]. Ireland, S. J., 2016. Budget Choices, Dublin: Social Justice Ireland. Mr Michael Noonan, T., 2016. Financial Statement of the Minister for Finance. [Online] Available at: https://www.budget.gov.ie/Budgets/2017/FinancialStatement.aspx [Accessed 16 October 2016]. Revenue, R. I. t. a., 2016. Home Carer Tax Credit. [Online] Available at: https://www.revenue.ie/en/tax/it/credits/home-carers.html [Accessed 16 October 2016]. TaxPolicyDivision, 2016. Income Tax Reform Plan 2016, Dublin: Department of Finance.