Abolishing the USC would involve a reduction in public spending equivalent to the largest austerity budget implemented during the current government’s term of office. And it would not just be a once off reduction - it would be an annual loss, a form of ‘permanent austerity’. That is why it is essential that significant changes to the tax system are assessed in terms of their potential impact on Ireland’s general tax revenue (which provides the funding for public services) and wider economic inequalities.
There is a lack of appreciation of just how low Irish tax revenue actually is, and even less realisation of how low it is projected to go. Ireland had the third lowest government revenue in the EU at 33.2per cent of GDP in 2015, but this is projected to fall even further to 32per cent this year, and 31per cent in 2017. This will result in severe pressure on public services.
Therefore, abolishing, or substantially reducing, a tax such as the USC without providing alternative tax raising measures is likely to make this unsustainable situation significantly worse. The USC raises approximately €4billion in revenue each year which equates to the entire annual budget for capital infrastructure (housing, hospitals, schools, roads etc.).
The USC is also a progressive tax as those on higher incomes pay a higher percentage of their income. An average earner on €25,000 per year would benefit from its abolition by approximately €750 while someone on €150,000 would benefit by over 20 times that amount (€16,000). Take note here of the misconception about who the ‘middle earners’ are that would benefit. Those earning €70,000 and above are not ‘middle income’ earners they are in the top 10per cent and two-thirds of earners have an income of less than €35,000. Also lower income households are more affected by indirect consumption taxes such as water charges and VAT than the USC.
The President, Michael D Higgins, recently asked if it is “possible to have a decent society and at the same time continue to lower taxes for the purposes of securing the best short-term benefit?” Based on the evidence outlined above the clear answer to that is an unambiguous ‘no’. The level and fairness of taxes have a direct impact on both the quality of public services and on levels of economic equality, key measures of a ‘decent society’.
And Ireland is a deeply unequal country. Half of the households in the country have less than 5per cent of the net wealth while the top 20per cent of households have 70per cent of the wealth. And, despite the economic recovery, inequality is getting worse. The top 10per cent of earners received 50per cent of the increase in gross income between 2011 and 2016 while only 6per cent went to the bottom 50per cent of earners. Rising economic growth is clearly not ‘lifting all boats’.
In terms of deprivation, another measure of a ‘decent society’, 29per cent of the population now suffer from deprivation - which is three times the level in 2004. One of the most pernicious aspects of inequality with long-term impacts is intergenerational inequality, and child poverty in particular. Ireland has the third highest deprivation rate for children aged 0-6 in the EU15 - at 25per cent. This is over 8 times Norway’s level. Ireland’s younger generations are also affected by high levels of emigration with 35,000 young Irish people leaving last year while youth unemployment is still at 19per cent.
More equal countries such as Norway, Denmark and Sweden have much higher levels of tax revenue than Ireland. This allows them provide universal public services, infrastructure, and invest in training and state enterprise, with the result that they have much lower child poverty rates, and are economically more competitive and sustainable. It is proven that more equal countries like these do better in terms of their social and economic indicators, particularly in having less social problems and better weathering economic storms.
A key way to address growing inequality in Ireland is thus to ensure high quality, affordable, universal public services in areas such as health, childcare, education, and world-class economic and social infrastructure, particularly housing and transport which can provide the basis for a sustainable, equitable and competitive economy.
And the Irish public appear to be increasingly supportive of such policies. The USC was vehemently opposed as an ‘austerity’ tax that was imposed unfairly on people in order to bail out Irish and European banks. While there is still substantial anger at this, the recent opinion polls show that the public want public investment in areas such as health and housing to be prioritised before tax cuts.
There is a growing realisation that lower and middle income earners actually lose in the tax-reduction policy agenda as the minimal ‘cash-in-the-pocket’ gain they receive does not cover the high costs of childcare, healthcare and education and they would benefit more from their taxes going to the provision of affordable public services. They also realise cuts to income taxes and the USC are being replaced with increases in indirect taxes and charges such as waste, A & E, medical prescriptions and so on, which do not affect
higher income earners in the same way.
Furthermore, tax cuts undermine the sustainability of the tax base needed to withstand a fragile global economy.
Along with the economic recovery people are also looking for a ‘social’ recovery. An economy dominated by the free-market and ‘laissez-faire’ policies will not provide this. It is substantially increased investment public services such as health, education, training, housing, communities, and transport infrastructure that can provide it. These are also key to achieving growth in all parts of our cities and regions.
But in order to do this there must be sufficient funding available and that is where decisions about cutting or raising taxes play a critical role. Ireland needs to increase its taxation base from its current low levels if it is to provide adequate public funding.
Potential ways to do this in a fair manner include maintaining our tax base (such as the USC) and raising taxes on higher incomes, wealth, employers social insurance (which is one of the lowest in Europe) and using the majority of the proceeds of the divestment of the state’s shares in the banks to invest in infrastructure rather than using it to pay back debt.
If Ireland is to achieve greater levels of economic equality and a flourishing society which gives all of its citizens a sufficient, secure and dignified standard of living there is a need for an equality analysis to underscore all decisions about how the economy operates, particularly in relation to taxation.
Dr Rory Hearne, is a Senior Policy Analyst, at TASC, the Think-tank for Action on Social Change