45126-Invest. Qual-No111

Tax and Social WelfareThe fall in average tax rates reflects a combination of changes in taxcredits or allowances, bands, the rate schedule, PRSI and levies.The level of tax credits is particularly important for low incometaxpayers. From 1987 to 1993/94, the level of basic tax allowancesfor an employee fell in real terms, but since the mid-1990s the levelof allowances has increased substantially, giving an increase of 88.6per cent in real terms over the extended period 1987 to 2003. Theincrease in tax allowances/credits has also meant that the incomelevel at which one enters the tax system has more than doubledsince 1987. In 2003, an employee becomes liable for income taxwhen earnings rise to €11,600.The income level at which a single person (or a second earner)becomes liable for the higher rate of tax has long been of concern.This level has also increased significantly since the mid-1990s and asingle person now becomes liable for the higher rate at an income of€28,000. Increases in the band in recent years were associated withthe partial individualisation of the standard rate band (see below).The tax rate schedule has been simplified since 1987 and rates havefallen. In 1987, there were three income tax rates (58, 48 and 35 percent) while in 2003 there are two rates (42 and 20 per cent). Therehave also been significant changes to the system of PRSI andincome levies. The rates of PRSI and levies have been reduced andlower income earners have been exempted from paying PRSI andthe 2 per cent health levy. A reduced rate of employer PRSI forlower income employees was also introduced in the mid-1990s andthe ceiling on employer PRSI contributions has been abolished. Asignificant change announced in Budget 2003 was the extension ofPRSI and levies to benefits in kind. The changes made have tendedto increase the progessivity of these charges.Two major changes have occurred in the structure of the income taxsystem:● The introduction of standard rated personal allowances in 1999represented a major change to the way in which the income taxallowances operated, forming a move towards a tax creditsystem. From 2001, a full tax credit system has been put inplace. This change means that subsequent increases in the tax297