Tax reduction
An English translation of a joint news
release from the Prime Minister
and the Minister of Finance November 19th 2004
Personal income tax will be cut, net wealth tax abolished
and child benefit payments substantially increased
The Government has decided to present a bill to the Althingi that proposes a 4 per cent reduction in the personal income tax, the abolition of the net wealth tax on individuals and companies, and an increase in child benefit payments by nearly half. This decision in in accordance with the Government’;s Policy Statement of June 2003. These changes will be implemented in phases during the years 2005-2007. In view of present economic prospects and the timing of power project construction, the main phase of the personal income tax cut will take place in 2007. Tight fiscal policy is an important precondition for these measures, since the preservation of economic stability is considered of great importance.
The first phase of the personal income tax cut will be implemented in 2005 when the personal income tax will be cut by 1 per cent, from 25.75 per cent to 24.75 per cent. All reference sums in the personal income tax structure, as well as for the net wealth tax and child benefits, will be increased by 3 per cent.
The second phase of the personal income tax cut will take effect in 2006 when the tax will be cut by another 1 per cent, to 23.75 per cent. The first half of the increase in child benefits will also take effect at that time and will consist of a 25 per cent increase in income thresholds and in child benefits that are unrelated to income, and a 10 per cent increase in income-related benefits. The net wealth tax of individuals and companies will be abolished as of the year 2005 which will be implemented with the tax assessement in 2006.
The final and largest phase of the personal income tax cut will take place in 2007 when the tax will be reduced by 2 per cent, to 21.75 per cent. The latter half of the increase in child benefits will also take place at that time and consist of a 20 per cent increase in the income thresholds and in child benefits that are unrelated to income. Percentages for the curtailment of benefits will be reduced from 3 per cent to 2 per cent for the first child, from 7 per cent to 6 per cent for the second child and from 9 per cent to 8 per cent for the third child and children in excess thereof.
These changes will lead to a considerable increase in the purchasing power of the country’;s households. In addition to the 4 per cent cut in the personal income tax, the standard personal income tax credit will increase by 8 per cent which implies that basic tax-exempt income will increase by 20 per cent over the period, from 71,720 krónur a month this year to 85,836 krónur in 2007.
The 4 per cent cut in the personal income tax will constitute a major step in reducing the marginal effect of the tax system which will both substantially reduce the tax burden of households and contribute to increased labour market participation and increased labour supply. The large increase in child benefit payments will benefit all families with children, particularly those with lower incomes. The reduction in the curtailment percentages for child benefits will reduce the marginal income effect of the child benefit system. Finally, the abolition of the net wealth tax system will benefit homeowners, particularly senior citizens and pensioners who live in relatively debt-free homes and must therefore pay a fairly high net wealth tax.
The total fiscal cost of these measures is assessed at about 22 billion krónur, taking secondary impacts into account, especially in the years 2006 and 2007.
As an example of the impact of these measures, the disposable income of a single parent with one child under the age of seven and a monthly income of 125,000 krónur will increase by 12,500 krónur a month or 10 per cent. The disposable income of a married couple with two children, one under the age of seven and a monthly income of 300,000 krónur, will increase by 23,500 krónur or 9½ per cent. By comparison, the total impact of these measures will lead to a 4½ per cent increase in the disposable income of all households in the country. This clearly shows the income-distributing effect of these measures.
The following charts demonstrate the impact of these measures for different family and income groups. The charts furthermore show the number of taxpayers in each income group. The charts demonstrate that the disposable incomes of couples with 1-2 children increase by 6-8 per cent as a result of the cut in the personal income tax and the increase in child benefits. The disposable incomes of single parents rise slightly more, in the range of 6 to 10 per cent.
