LEVIES:AMALGAMATING employee PRSI, the health contribution and the income levy into a universal social charge at a rate of 7.5 per cent would benefit the richest income earners and hit the poorest the most, according to a new economic paper.

In his budget speech last year, Minister for Finance Brian Lenihan said he would introduce such a new universal social charge in this year’s budget.

The matter has been considered in a paper to be delivered at the ESRI’s Budget Perspectives conference today in Dublin.

The authors looked at the effect of a charge set at a rate of 7.5 per cent that would be levied on all income. They found that the lowest decile (10 per cent) of income earners would suffer a 2.3 per cent drop in disposable income.

However, the top decile would gain by 1.9 per cent. The second highest decile would also benefit (0.6 per cent) but all other deciles would suffer a loss.

The reason the wealthiest would gain is because the income levy has a progressive rate structure while the proposed charge will have a single rate, and because the levy is only charged on income above a certain threshold.

However, the authors said changes to the structure could be introduced to offset the non-progressive aspects of the charge.

They also looked at the effect of such a charge on the situation that pertained prior to the introduction of the income levy. In that exercise they found that the charge would involve above average losses for higher income groups.

A matter flagged but not considered in the paper is how the universal charge would interact with entitlement to social insurance benefits. The authors also said that, while there is often a conflict between equity and efficiency in taxation matters, the increased taxation of pension contributions could, in some circumstances, contribute to both equity and efficiency.

The degree of concentration in the income tax system, where 4 per cent of taxpayers pay almost half of all income tax, is a product of the distribution of income itself, the authors point out. A similar pattern exists in the United States.

Restructuring Taxes, Levies and Social Insurance: What Role for a Universal Social Charge? was written by Tim Callan, Brian Nolan, Claire Keane, John Walsh and Marguerita Lane.