As budget day nears, our social policy officer Dr Laura Bambrick explains the background on income tax.
In his budget for 1799, the British Prime Minister and Chancellor of the Exchequer, William Pitt the younger put a tax on people’s income as ‘a temporary measure’ to help pay for Britain’s costly war against France.
A yearly income below £60 was exempt from income tax - equivalent to just under €10,000 today - which took all workers earning below the average skilled tradesman out of the tax net. Incomes between £60 and up to £200 were taxed at a lower rate. There were 29 tax bands and rates, compared to the two we have today – 20% and 40%. Everyone with an income over £200 a year - equivalent to €32,500 today - was taxed at the top rate of tax, which was 10%.
Unlike today, a tax-free allowance was available to taxpayers with children, if ‘born in wedlock’, in recognition of the cost raising a child has on a family’s ability to pay tax on their income. The amount of the tax relief depended on the size of the father’s income and the number and age of his children.
The new tax raised £6 million in its first year, £4 million behind expectations. But the money proved essential for plugging a hole in the public finances and set a precedent for raising tax revenues.
War with France ended in 1815 when Napoleon was defeated at the Battle of Waterloo. A year later, the widely unpopular ‘hated tax’ was abolished ‘with a thundering peal of applause’ from Westminster MPs. All official income tax records were order to be destroyed, with some burned by the Chancellor of the Exchequer in a public ceremony.
In 1842, income tax was re-introduced to help offset lost revenues from a series of bad harvests - including potato crop failure throughout Ireland - and lifting tariffs on imported grain, the repeal of the Corn Laws being a cornerstone of a Tory government policy to promote free trade.
Yearly incomes under £150 were exempt, while all income above the exemption was taxed at a flat 3%.
It was a further 11 years, in the budget for 1853, before the tax was introduced into Ireland. Income tax had not been extended to Ireland earlier because the Revenue Commissioners didn’t have the administrative capacity to assess or collect the tax.
Peel and future Prime Ministers continued to consider income tax to be a temporary measure. In fact, it was only as recent as 1972 - little over 50 years ago - that income tax was made a permanent feature of the Irish tax code. Up until then, the Minister for Finance needed to renew the tax for the next year in the provisions of the Finance Bill on budget day.
Income tax is now our largest source of revenue – 38% of total tax revenues. The Department of Finance estimates the tax take from income tax will be just under €35 billion this year and €37 billion next year.
The history of the ‘temporary’ income tax serves as a salutary tale for all those expecting the Universal Social Charge – a temporary tax introduced during the austerity years – to be abolished any time soon.
