Tax experts tell Noonan USC cut 'best for workers'
Reducing levy would help more families than income tax changes
Published 25/08/2014 | 02:30
HARD-pressed families would benefit most from a cut to the universal social charge (USC) instead of changes to the income tax system, Finance Minister Michael Noonan has been told.
An analysis by the Irish Tax Institute, seen by the Irish Independent, says that cutting the USC would benefit the widest number of people and provide much-needed relief to working families.
The deeply unpopular universal social charge was effectively an emergency tax, which was introduced in the depths of the recession in January 2011.
Since then, it has been a massive burden on middle- class families and lower-paid workers, as it is paid on top of income tax.
The introduction of the USC means that anyone earning more than €32,800 a year pays a marginal tax of 52pc - with more than half of their income over that level going to the taxman.
The Government has been examining ways of reducing the tax burden on workers in the coming Budget, in order to boost economic growth and encourage consumer spending. But it is understood that Mr Noonan currently favours changes to income tax.
However, the Irish Tax Institute has found that reducing the USC would be the more effective way of getting cash back into the pockets of the most people.
A paper by the institute's chief executive Martin Lambe says that lowering the middle rate of the USC from 7pc to 6pc would give a bigger tax break to workers than any move to lower the top income tax rate of 41pc.
It comes as the retail industry heaped pressure on the Government to ensure that consumer confidence is given a boost in the Budget this October.
The introduction of the USC in 2011 means that anyone earning more than €32,800 pays a marginal tax of 52pc.
And confusingly for workers, this is made up of 41pc income tax, 4pc PRSI and 7pc USC.
Chief executive of the tax body Mr Lambe said in his analysis: "Lowering the 52pc rate by cutting the USC rate rather than the income tax rate would benefit a wider number of income earners - everyone earning more than €16,016."
USC is paid at 2pc on the first €10,036 once your earnings are above this amount. It then applies at 7pc on income above €16,016.
Because USC applies to gross income, and there are no tax credits allowed for it, more people pay it than pay income tax.
Only 25pc of taxpayers are exempt from paying USC, compared with 36pc of workers who are exempt from paying income tax.
Mr Lambe added: "USC applies to much lower income levels than income tax due to the absence of any credits - many people pay USC who do not have any income tax liability.
"For example, a non-married employee earning €15,000 per annum would not pay any income tax but would pay €399 of USC each year."
However the calculations show that lowering the USC rate by 1pc would cost substantially more to the Exchequer than lowering the income tax rate by 1pc. The cost of lowering the rate of USC from 7pc to 6pc would be €450m in a full year. But the cost of lowering the 41pc top income tax rate to 40pc would be €195m in a full year, Mr Lambe said.
He used costings from the Tax Strategy Group Paper on Income Tax and USC prepared by the Department of Finance in advance of Budget 2014.
Fianna Fail's Finance spokesman Michael McGrath told the Irish Independent the USC should be reformed.
"Much of the criticism of the USC is that the high rate applies at too low an income.
"The fairest option for reforming the structure of the USC would be to start by increasing the range of income over which the 2pc rate is applied."
He said this would mean that proportionately, the benefit would be greater for low and middle income earners.
More than a million of the workers who pay the USC earn less than €40,000, according to the information released to the Dail last October.
The USC is estimated to be imposed on 1.66 million taxpayers this year, according to Dail questions answered by the Finance Minister. But the numbers impacted are actually much higher. This is because the Revenue Commissioners count married couples who are jointly assessed as one tax unit.
Including the USC, which raises just over €4bn, the State is expected to extract €17bn from pay packets this year.
A spokesman for Finance Minister Michael Noonan said: "We don't have any comment on the Budgetary process, but the minster is on record as saying that one of the first things that will be looked at is the high rate of income tax and the fact that workers earning more than €32,800 a year pay the high rate."
Mr Noonan has previously signalled that he is preparing to raise the band at which workers pay the higher rate of tax.
He has been given room for manoeuvre thanks to stronger than expected tax returns so far this year.