The Universal Social Charge (USC) has never been loved. And little wonder. Introduced after the financial crash to help plug a hole in the public finances, it takes a big chunk out of household income. It will cost many middle-income households about €1,500 this year, climbing sharply to €4,500 as €100,000 in annual earnings is approached. That is a lot of cash.
Now the signs are that the USC will be taken hostage in the general election campaign. The big budget initiative of new Minister for Finance Jack Chambers was to cut the main USC rate which applies on earnings of €25,000-€70,000 from 4 per cent to 3 per cent. That will save a middle earner about €200-€250 a year depending on their exact income level, and will be worth €450 a year to anyone earning €70,000 or above. Because of the way the tax works, a family with an income of €175,000 will still pay a hefty €10,000 a year in USC.
You can bet your bottom euro that the two big parties in the Coalition will target more reductions in their general election campaign. Sinn Féin, meanwhile, in its alternative budget, has said it would aim to exempt the first €45,000 of earnings from USC over a term in government, and would start by exempting those earning less than €30,000.
Paul Murphy and Richard Boyd Barrett of People Before Profit/ Solidarity – using an interesting definition of “ordinary workers” – said in Dáil questions recently that those earning below €100,000 should not have to pay. Only Labour and the Social Democrats have avoided calling for cuts to what former minister for finance Michael Noonan dubbed “a hated tax”.
And so the USC is likely to be caught up in a general election arms race, ignoring the fact that the tax base needs to be maintained, or even widened, in the years ahead because of some really big bills coming down the line for the exchequer. State spending is already increasing very quickly, likely to be up 9 per cent this year alone.
The USC was introduced in the December 2010 budget by the late Brian Lenihan who as minister for finance was engaged in a desperate austerity exercise to try to close a hole in the public finances after the financial crash and in the midst of the bank bailout. The talk in the years since is that it was an emergency measure and thus temporary. “The emergency is over,” Noonan said during the 2016 election campaign when Fine Gael called for the tax to be abolished by 2021.
While it was indeed initially presented as part of a series of emergency measures, Lenihan certainly did not see it as temporary, though he did believe that in time it could be merged with other taxes on income. It replaced two such levies – those on health and income, as they were called – but charged significantly more than those two combined. It kicked in on all incomes over €4,000 – far lower than income tax – and was designed as a measure to widen the tax base, applying to a broader sweep of earnings than traditional income tax or PRSI.
Lenihan’s view, as expressed in the budget speech at the time and the subsequent budget debate, was that, in time, it would be merged with income tax and PRSI to create one tax on earned income. However, the different base and rate of the taxes, and in particular the unique features of PRSI in the tax and welfare system, meant this was never going to be easy.
A later attempt to merge PRSI and USC ran into the sand because of these difficulties and particularly the fact that PRSI receipts go directly into the Social Insurance Fund, out of which many household entitlements are paid. A report drawn up by civil servants after the 2018 budget pointed out these issues and the likelihood that any reform would have winners as well as losers. The idea was quietly dropped.
Revenue from USC has grown only modestly over the year. It was originally designed to raise €4 billion a year. Reliefs after the crash – the first in Budget 2012 – removed many lower earners from the net. Those earning less than €13,000 are now exempt. By 2014 receipts were running at €3.5 billion and as overall tax revenues recovered there were significant USC cuts in 2015 and in a number of subsequent budgets. They were particularly targeted at lower and middle earners though the burden on the highest earners was hiked.
These successive cuts mean that while in cash terms the USC will raise about €5.4 billion this year, it now accounts for about 5 per cent of total tax revenues, from closer to 10 per cent when introduced in 2011 and 7.5 per cent in 2016.
No sooner had the USC been introduced, in other words, than governments started to chip away at it. This is despite the fact that a 2016 study by the Economic and Social Research Institute (ESRI) and Department of Finance found it was a more stable source of revenue than income tax due to its structure. The credits and reliefs which apply to income tax do not generally apply to the USC, while, unlike PRSI, it is also charged on over-66s. With a 3 per cent surcharge on incomes over €100,000, it is also highly progressive.
Yet talk of phasing it out remains in the air. And with the budget in strong surplus, the temptation to write this into election manifestos, or at least propose big reductions, is likely to prove irresistible. So the risk is that the tax base will be shrunk further.
There are two reasons this is a bad idea. One is the well-discussed reliance on corporation tax from a few big US companies and the income tax from their highly paid employees. The future trend of corporation tax receipts is unpredictable and Ireland has had an extraordinarily positive run. There are some obvious dangers, notably the changed environment for international trade and investment due to geopolitical tensions and the possible election of Donald Trump as US president.
The second is the calculations by the Irish Fiscal Advisory Council and the Department of Finance of the huge exchequer bills coming down the road from an ageing population and climate change. The council has warned that this will require higher, not lower, future taxes with the bills starting to rise towards the end of the decade.
Pretending that we can abolish a charge supplying 5 per cent of total tax revenue, even over a number of budgets, would be crazy. There is a case for tax reform in Ireland and for moving some of the burden off income and into other areas. But the introduction of new or increased taxes elsewhere – for example, on wealth or spending – appears politically impossible. Barring the introduction of carbon taxes, there has been no significant widening of the tax base in recent years. And there is little sign of any political appetite to do so in a meaningful way.
Local property tax was reformed in 2021 in a way specifically designed to upset as few households as possible, and its revenue remains low. The main Opposition party wants to abolish it despite the fact it is a modest charge on the main source of household wealth in Ireland. Calls by the Commission on Taxation to make this tax a much more meaningful contributor to the exchequer have received zero political support. The new so-called mansion tax – a higher stamp duty charge on the sale of houses over €1.5 million – will raise only small change in exchequer terms. Inheritance tax is being cut rather than increased as the commission has called for. As it stands, it raises little.
Reforming taxes means increasing them in some other area to allow for cuts on that income. But while Sinn Féin has called for a study on a wealth tax, there is no wider constituency in Ireland for significant new taxes on areas other than income. Anyone who supports the abolition of the USC needs to specify where else the €5 billion which would be lost can be raised. Relying on ongoing big budget surpluses to pay the bill does not look clever.
The USC was introduced to try to solve a problem which has not gone away. Ireland’s tax base is too narrow. Perhaps buoyant corporation tax will allow us to get away with this for a bit longer. Or perhaps not.
