Tax burden on people in the lowest income group reduced

The tax burden on persons in the lowest income group would be reduced by 2 percentage points if the changes to the tax system which the government is proposing are adopted. These changes are in line with the government’s policy declaration of February 2018. In particular, they would improve the position of women, people aged 18-24, people aged 25-34, persons with disabilities, senior citizens, and those who do not own their own homes or who receive housing supplements.

A new lowest tax bracket would be added, with funds allocated for the lowering of taxes being transferred to middle and low-income groups according to plans for changes in the tax system that Bjarni Benediktsson, minister of finance and economic affairs, unveiled today. The proposals are seen as delivering about ISK 14.7 b in changes in the income tax system. Increases in child benefit in 2019 amount to ISK 1.6 b and the raising of personal tax credit by more than the rise in the consumer price index puts a further ISK 1.7 b into taxpayers’ hands. Altogether, therefore, the government’s proposals on tax cuts and increased child benefit payments come to ISK 18 b.

It has been the government’s aim to lighten financial burdens and to make for greater equality, and it is in this spirit that a task-force has come up with these proposed changes. The task-force found that the most desirable way of working towards equality is to add a lower tax bracket rather than to change personal tax credit or the tax-free threshold. It therefore recommends the use of a new tax bracket which will specifically lighten the proportion of wages paid in tax by those who are in the lowest income decile. For persons with monthly income below ISK 325,000, this will mean an increase of about ISK 81,000 in disposable income.

It is envisaged that these changes would be introduced in stages in the period 2020-2022.

The task-force’s proposals on new tax brackets, tax rates, personal tax credit and tax-free threshold are as follows:

Bracket 1. Tax rate 32.94% consisting of 18.5% income tax and average municipal tax of 14.44%.
Bracket 2. Tax rate 36.94% consisting of 22.5% income tax and average municipal tax of 14.44%.
Bracket 3. Tax rate 46.24%,consisting of 31.8% income tax and average municipal tax of 14.44%.
Personal tax credit: ISK 56,477 per month, or ISK 677,358 per year.
Tax-free threshold: ISK 159,174* per month, allowing for 4% pension fund premium deduction.

Examples of the effects of the changes on families with children.

Single parent with 2 children, one of them under the age of 7 years.

Monthly income       Increase in child benefit in 2019     Reduction in tax        Overall effect

            300,000                            114,400                              81,100                    195,500

            500,000                            106,900                              81,100                    188,000

            900,000                                   200                              79,600                      79,800

Cohabiting parents with 2 children, one of them younger than 7 years

Monthly income                        Increase

(combined)                       in child benefit 2019              Reduction in tax        Overall effect

            600,000                               171,200                            162,200                  333,400

         1,000,000                                 93,500                            162,200                  255,700

         1,800,000                                         0                            159,200                  159,200

The tax proposals constitute part of the package of proposals put forward by the government in the run-up to the current round of negotiations on collective agreements on the labour market. Others include the lengthening of maternity/paternity leave from nine to twelve months in two stages: to 10 months as from the beginning of 2020 and to one year as from the beginning of 2021. On the housing front, the government will work on the implementation of the proposals submitted by a task-force, in consultation with the social partners (unions and SA) and the local authorities. These include measures on tenant protection, the allocation of state-owned land for residential housing, including rental apartments, and the expansion of the socially-assisted public rental dwellings system by means of foundation capital contributions and higher income ceilings. The task-force’s proposals on measures to eradicate social dumping will also be implemented. Work is also in progress on the formulation of proposals to lower the threshold for young people and low-income groups to enter the real-estate market.

Measures of various types have already been taken over the past year which have a bearing on the economic position of ordinary working people. As an example of measures taken to strengthen the social rights of the individual, it may be pointed out that unemployment benefit payments have been raised from ISK 227,000 to ISK 270,000 per month and the maximum level of income-related benefits has been raised from ISK 358,000 to ISK 425,000; child benefit was raised by about 16% between 2018 and 2019 and the income level at which benefit reductions begin has been raised by 29%; the amount that senior citizens are permitted to earn through employment without paying tax has been raised from ISK 25,000 to ISK 100,000; the maximum payment from the Income Insurance Fund has been raised from ISK 385,000 to ISK 633,000 per month; the ceiling on monthly payments during maternity/paternity leave has gone up from ISK 500,000 to ISK 600,000; dental treatment costs borne by senior citizens and persons with disabilities have been cut and consultation fees at primary health clinics have been abolished for these groups.

Tax burden on people in the lowest income group reduced (in Polish)