International Monetary Fund staff are opposed to any further cuts to the universal social charge (USC), raising questions about election proposals to eliminate or radically cut the tax in the lifetime of the next government.
Only weeks from the general election, IMF staff said in a new assessment of the Irish economy that its officials argued against more USC reductions when they met Government figures after the October budget.
The report, published last night, comes as Fine Gael prepares to campaign in the election with a plan to abolish the USC. Labour wants to scrap the USC on the first €72,000 of income, Fianna Fáil wants to scrap it on earnings up to €80,000 and Sinn Féin wants to remove minimum-wage earners from the USC net. *
The report was issued as the IMF’s executive board said the fiscal plan in Budget 2016 was “broadly appropriate”. The board added that tax base erosion could have been avoided.
“While it is appropriate to share some fruits of the recovery after years of difficult adjustment, fiscal discipline must be maintained to rebuild room for policy manoeuvre,” it said.
The IMF staff report follows a biannual post-bailout inspection in Dublin that ended in mid-November, a month after the budget. It said Ireland was enjoying robust growth but added that challenges remained.
Burden
The report noted budget measures to remove 42,500 from the USC’s scope, as well as reductions to the three lowest USC rates and changes to the USC income brackets for low and middle earners.
“These changes aim to lessen the tax burden and encourage labour market participation for low wage earners and women. While supporting in principle the reduction in distortionary taxes, staff noted that the impact of USC changes appears regressive, with half of the benefit accruing to households with incomes above €70,000,” the report said.
“Staff also emphasised the risks associated with tax base erosion and argued against further reduction of the USC, which has played an essential role in restoring a sustainable revenue base.”
It said Irish authorities indicated the very progressive nature of Ireland’s tax system made virtually any change regressive. “However, post-Budget 2016 it is estimated that the top 1 per cent of income earners will pay 22 per cent of the total income tax and USC collected, up from 21 per cent in 2015.”
While IMF staff also expressed concern about implications of the property tax valuation freeze, the Irish authorities defended the move.
*Edited at 2.13pm on 20/1/16
