No-one likes paying tax, but we need to stop hating the USC so much

A myth has growth up around the universal social charge. It goes like this. A temporary imposition of this dreadful charge was inflicted on us all in 2010 at the height of the financial crisis. Now the crisis is over – and so we will soon be rid of it.

It is a narrative driven by our politicians, with Fine Gael leading the charge in the last general election campaign to promise its abolition, and others following, including Fianna Fáil. With the two Michaels – Noonan and McGrath – effectively calling a lot of the Budget 2017 shots, universal social charge (USC) cuts look like being the beginning, middle and end of the budget tax debate, bar the likely fleeting appearance of bit players such as the promised cuts in inheritance tax.

There are two problems here, just to start with. One is practical. We haven’t got a lot of cash to spare for tax cuts in the October budget and any plausible case that USC abolition is a priority requires that pretty much all the allocation for tax reductions go in this direction.

The second is political. We are going to spend the next three months arguing about this, only for – come January – voters to find €5 or €6 extra in their pocket at the end of the week. Then we will all be asking: “what was that all about?”

Let's look at a few facts. The USC was introduced in 2010. It replaced two existing tax charges – the income and health levies. It raises €4 billion a year. As Department of Finance pre-budget tax documents published this week pointed out, this is just €420 million, or 10 per cent, more than the two levies raised, before we ever heard of the USC.

This is the central part of the myth. We were already shelling out before the USC was introduced, just under another name. The department’s documents were careful not to draw any politically-charged conclusions. But they warned Ministers that Irish economic activity was more volatile than the norm – a point surely underlined by the latest GDP figures.

The civil servants added, in their usual understated language: “Given the importance of income tax and USC in terms of the overall tax take, their tax bases will be a major contributor to the stability and breadth of the overall tax base.”

Roughly translated, this is a message to politicians – abolish the USC at your peril.

None of us love the USC, of course, but there are reasons to respect it as a tax-collecting tool. It takes a small contribution from everyone who earns over about €13,000 a year – thus pulling significantly more people into the tax base.

Hard cash

More importantly, however, in terms of hard cash, the USC does not include the many reliefs and allowances that pepper our income tax code. This means the better-off find it much more difficult to avoid. For this reason, the charge is hugely progressive – in other words the better-off pay proportionately more. Department of Finance figures show that more than one euro in every five collected in USC comes from the top 1 per cent of earners, those making more than €200,000 a year.

This is not to say the charge is perfect. Like any tax on income, there are economic advantages to cutting it, but ideally – if you want to protect your tax base – replacing the revenue with cash raised in less economically damaging ways. Here, however, is where we run into the sand in Ireland. Residential property tax was introduced, but there is a promise that it will not increase before 2019. Water charges? Let's not even go there. The moves to spread the tax base have come to a juddering halt – but still we pretend that we can slash taxes on income as well.

So the Government is back to hoping that economic growth moves ahead at a fast enough pace to allow a decent chunk to be taken off the USC each year.

Trouble is, even on the relatively optimistic existing forecasts, the tax package this October will be limited.

Abolition

For future years, hopes that there might be more to spend depend entirely on strong growth being maintained, and, with the Brexit threat, the risks are rising. We could spend the next three months arguing over how best to plot the route towards USC abolition, and the next three years realising it isn’t going to happen.

In the short term, meanwhile, there are political potholes all over the place here. The Government hasn’t enough money to make a big USC cut in 2017. Even making a limited move will mean it has little left over to meet other tax promises – such as cutting capital acquisitions tax for children inheriting from parents, adjusting capital gains tax for entrepreneurs and so on.

It might just about square the circle this year, but it won’t leave too much extra cash in anyone’s pocket. And the distribution of what gains there are will be hugely controversial – just watch the row on planned restrictions to PAYE credits, designed to claw back some gains from the better-off.

Yet this is the route the debate – and the budget – will follow. Other priorities could be found for tax reform – for example, the low income level at which the higher 40 per cent income tax rate kicks in, and the horrendous complexity of the system of taxes and charges on incomes. But it will be, as it has been been in recent years, all about the USC.