The Universal Social Charge (USC) has always been a sore point for many. The financial crisis saw its inception as a measure to bolster public funds, but this came at the cost of families’ finances. It now represents a significant part of annual income deductions for most middle-income households, with costs expected to reach €1,500 this year and notedly increase to €4,500 for those earning close to €100,000 annually.
As we head towards the general elections, it seems USC might become a crucial bargaining chip. New Finance Minister Jack Chambers has already signalled his intention by proposing to lower the primary USC rate applicable to salaries between approximately €25,000 and €70,000 from 4% down to 3%. This reduction could save middle earners between €200 and €250 annually, and those earning €70,000 or more could pocket an extra €450 per year. Nonetheless, families earning €175,000 will still bear a substantial USC load of €10,000 per annum.
Undoubtedly, both majority parties in the Coalition will leverage this point in their electoral campaigns, promising further cuts. Contrastingly, Sinn Féin in their alternate budget suggests exempting the first €45,000 of income from USC during their tenure, starting with those earning under €30,000. People Before Profit/Solidarity members Paul Murphy and Richard Boyd Barrett also proposed that salaries less than €100,000 should be exempt from USC. However, the Labour and Social Democrats parties are the rare few not advocating for reductions of this widely disliked tax, as described by ex-Finance Minister Michael Noonan.
The question remains: is the Universal Social Charge set to be caught up in tensions of the forthcoming general elections?
The likelihood is high that the upcoming general election could overshadow the importance of maintaining, or even broadening, the tax base, especially with the USC, as the treasury faces significant future expenses. The rapid rise in governmental spending, likely to ascend by about 9% this year alone, also adds to the strain.
The USC was created as a part of the December 2010 budget by the late Brian Lenihan, a former finance minister, who found himself attempting to rectify a gaping void in public finance following the financial crash and simultaneous bank bailout. Over the years, it has been perceived as a momentary solution to an emergency. Daylighting this perception, Noonan declared amid the 2016 election campaign that “the emergency is over,” with Fine Gael suggesting that the tax should be eliminated by 2021.
Lenihan, however, did not see the USC as a fleeting measure. His belief was that it could, eventually, be integrated with other income-based taxes. It supplanted two such duties – health and income, but requisitioned a significantly larger amount in comparison. With a threshold set at incomes exceeding €4,000 – substantially below ordinary income tax, it aimed to expand the tax base, catering to a wider range of earnings than typical income tax or PRSI.
Despite hurdles in merging the various bases and rates of tax, and specifically unique aspects of PRSI in the tax and welfare system, Lenihan expressed his view that the USC would eventually merge with income tax and PRSI to form a comprehensive income tax. Unfortunately, a subsequent attempt to merge PRSI and USC ran aground due to these challenges and more so because PRSI proceeds go directly into the Social Insurance Fund, which supports several household benefits. The 2018 budget report by civil servants highlighted these issues and the potential for any reform to result in winners and losers, leading to the idea being discretely discarded.
The University College of Southern California (USC) has experienced a marginal increase in income throughout the year. Initially, the aim was to generate revenue of €4 billion per annum. Post financial crisis amendments, beginning with Budget 2012, resulted in the exclusion of many lower income earners. Those with annual earnings below €13,000 are currently not obligated to contribute. By 2014, revenue was accumulating at a steady €3.5 billion and as tax income overall began to recuperate, USC underwent significant reductions in 2015 and repeatedly in future budgets. These specific reductions were geared towards middle and lower income earners, nevertheless, a heavier load was placed on top earners.
Following each reduction, the amount of cash raised by USC is approximately €5.4 billion for the current year, accounting for nearly 5 per cent of total tax income, compared to its initial share which was around 10 per cent in 2011 and 7.5 per cent in 2016.
From the moment USC was established, it has consistently been refined by authorities. A study conducted in 2016 by the Economic and Social Research Institute (ESRI) and Department of Finance determined that it was a reliable revenue stream compared to income tax due to its framework. Income tax reliefs and credits are generally not applicable to the USC, and unlike Pay Related Social Insurance (PRSI), it is also levied on individuals over age 66. Furthermore, a 3 per cent surtax on earnings above €100,000 renders this model highly progressive.
However, discussions regarding its potential dissolution persist. With a robust budget surplus, politicians are likely to succumb to pressures to promise significant cuts in future campaigns. This invites the hazard of a further dwindling tax base.
This is ill-advised due to a couple of reasons. One, the over-reliance on corporation tax from a handful of large American organisations and the income tax from their exceptionally compensated workforce. The future pattern of corporate tax yields remains uncertain and Ireland has enjoyed a remarkably positive period. There are, however, certain risks, notably the changing global trade and investment landscape due to geopolitical tensions and the potential election of Donald Trump as President of the United States.
The Fiscal Council and the Department of Finance have projected significant future treasury bills due to demographic ageing and climate change. They warned about the necessity for higher taxes in the future, with costs predicted to escalate from the close of this decade. It would be unwise to propose abolishing a levy that accounts for 5% of total tax revenue over upcoming budgets. In Ireland, there’s a clear need for tax reform, including shifting some of the obligation from income to different areas. However, any attempts to introduce or enhance taxes in other areas such as wealth or spending are politically unfeasible. Other than the implementation of carbon taxes, there has been negligible broadening of the tax base in recent years and any significant political willingness to do so is noticeably lacking.
In 2021, reforms were made to the Local Property Tax to minimise household dissatisfaction. Its revenue continues to remain low nonetheless. The main opposition party is keen on abolishing the tax, regardless of the fact that it is a minor levy on the predominant source of household wealth in Ireland. Proposals by the Commission on Taxation to increase this tax’s contribution to the treasury have been met with no political backing. The newly implemented mansion tax, an elevated stamp duty charge on sale of houses worth above €1.5 million, will only yield a trivial amount for the treasury. The cutting, rather than increasing, of the inheritance tax as recommended by the Commission has resulted in minimal revenue.
To enact tax reform would involve increasing them in other sectors to allow for income tax cuts. Despite Sinn Féin’s request for a study into a wealth tax, there isn’t a larger consensus in Ireland to impose significant new taxes on categories besides income. Advocates for the abolition of the USC must provide alternate means for raising the lost €5 billion revenue. Depending on constant large budget surpluses to cover this cost isn’t a sensible approach.
The implementation of the USC was aimed at addressing a persistent issue: the narrowness of Irelands’s tax base. It remains uncertain whether the healthy corporation tax revenues will allow this predicament to be mitigated much further.