Scrapped tax breaks helped poorer families most
TAX breaks for home buyers scrapped in 2012 after being blamed for helping overheat the property market actually benefit lower-income workers disproportionately, according to a surprise finding contained in new research from the ESRI.
Mortgage interest relief, one of the most common income tax reliefs in the past, is notably progressive, according to the study.
Progressive tax policies hit wealthier households harder.
Mortgage interest relief lowers the monthly cost of buying a home by providing tax relief on the interest paid. It is widely seen as a boon to the better off and is being phased out. However, the Irish data shows the tax break actually benefits people on lower incomes proportionally more than higher earners, according to the report by Jean Acheson (Department of Finance), and the ESRI’s Yota Deli, Derek Lambert and Edgar Morgenroth.
Mortgage interest relief was stopped for new borrowers after the crash, but the support has been retained and even extended for those who bought their home during the boom. It can be worth around €850 a year.
Higher earners do benefit more in absolute terms, the research found. However, the high levels of home ownership here, including among lower-income families, mean the overall effect has been to make the tax system more progressive.
The same research found that tax credits help make the income tax system relatively more progressive than the Universal Social Charge (USC). However, the broader taxable base that USC is levied on means it’s a more reliable tax for the State, the report said.
Standard income tax such as pay as you earn (PAYE) is less consistent, because it peaks and troughs along with the number of people in work, but is more progressive, hitting higher earners disproportionately hard, the researchers found.
Income tax (including USC) is the largest individual source of tax revenue in Ireland, accounting for more than 35pc of all tax collected by the State. The amount it raises automatically increases by 2pc for every 1pc increase in the overall level of taxable income, faster than the increase from USC, the report said.