But the average family is only expected to benefit to the tune of €300 a year from the modest tax cuts in Budget 2015.
The tax relief will be targeted to give the greatest benefit to those on middle incomes. The more a worker earns, the less their tax cut will be worth.
Labour ministers were briefed on the shortlist of tax options available to the Government by Tanaiste Joan Burton and her new economic adviser last week, the Irish Independent has learned.
A cut to the USC is virtually ruled out by Government, as it delivers a disproportionate benefit to higher earners, and is seen as too expensive.
The widening of tax bands to raise the entry point to the higher tax rate above €32,800 is the easiest way to take people out of the top rate of 52pc, which is made up of 41pc income tax, 7pc USC and 4pc PRSI.
Every euro earned above €32,800 is currently hit with the marginal tax rate of 52pc, leaving the worker with just 48c in their pocket. However, this move would deliver a big reduction to just a small number of people.
A special tax credit is also a possibility, but this would not address the issue of reducing the 52pc rate on low and middle-income earners.
Lowering the top income tax rate from 41pc to 40pc is emerging as a strong possibility, as the Government is keen to reduce the marginal tax rate.
The Department of Finance is currently examining ways of ensuring the cut would only deliver financial relief to middle-income earners. This may be done by clawing cash back from higher earners – possibly through the income tax system.
The confidential meeting took place in Government Buildings last Thursday, while Fine Gael were at their parliamentary party think-in in Fota Island.
The options were not discussed with the wider circle of Labour TDs and Senators attending the party’s think-in in Wexford yesterday and today.
Ms Burton’s economic adviser Terry Quinn, who is an economist on secondment from the Central Bank, set out the pros and cons for a number of scenarios:
* widening tax bands;
* cutting tax rates;
* cutting the USC;
* utilising tax credits.
Mr Quinn is understood to have veered heavily against a USC cut because it would not achieve the desired result.
“The USC changes, when they punched in the numbers, would proportionately benefit people on higher income than lower incomes,” a Government source said. A 1pc cut to the USC would cost €600m.
Mr Quinn spoke about lowering the higher tax rate from 41pc to 40pc. But he did appear to favour the widening of bands and a pure tax credit as a way to benefit middle-income earners.
However, government officials on all sides acknowledge tax credits are extremely difficult to administer and also do not actually reduce the marginal rate of tax.
The Labour ministers had a questions and answers session and a lengthy debate about the options available.
“It was a wide-ranging discussion and wasn’t being presented as a fait accompli. The Tanaiste didn’t go too much into his [Terry Quinn’s] analysis. She was talking about the macro-economic and political issues,” a Government source said.
The Government has formally agreed to remove low and middle income earners from the marginal tax rate.
In its Statement of Priorities, the Coalition says: “In Budget 2015, we will announce a tax reform plan to be delivered over a number of budgets to reduce the 52pc tax rate on low-and middle-income earners in a manner that maintains the highly progressive nature of the Irish tax system.”
But exactly how that will be achieved has not been set out.
Last night, the spokesperson confirmed the private meeting of Labour ministers did take place last week.
“The Statement of Priorities commits to examining ways of easing the burden for low-to-middle income earners. In line with that, the Labour ministers were presented with a range of illustrative options for consideration as to how this might be achieved,” the spokesman said.
The paper presented by Mr Quinn was entitled ‘Illustrative Options’.
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