Monday 21 January 2019

Ireland's most hated tax: Universal Social Charge

The penal tax is loved by officials, but hated by everyone else, says Daniel McConnell

Michael Noonan
Michael Noonan
Former Finance Minister Brian Lenihan

Daniel McConnell

Penal, pernicious, hated, nasty, cruel, brutal. These are just some of the phrases that have been used in recent weeks and months to describe the controversial Universal Social Charge.

Politicians hate it, but civil servants love it for its simplicity and catch-all nature.

With the Government's embarrassing U-turn on water charges complete, a fresh war is brewing within the Coalition as what to do with the USC ahead of the next General Election.

Business owners and trade union leaders like Jack O'Connor are united in their calls to abolish the USC, and there is no surprise that Government politicians are echoing such calls with that election on the horizon.

"The USC is a far bigger issue than water charges. People working hard for a living are feeling victimised by our tax system," Fine Gael TD John Deasy told me this weekend.

Finance Minister Michael Noonan has said the USC, which brings in almost €4.5bn a year to the State's coffers, is here to stay "for the foreseeable future".

Introduced in December 2010 as a temporary measure by the late Brian Lenihan in his last Budget before losing office, the USC was a highly efficient, simple tax that hit all gross incomes over €4,004.

While different people could avoid paying income tax by different methods, the USC was a catch-all sweeper tax which immediately boosted the depleted coffers for the boffins in Merrion Street.

Those same boffins are immensely proud of their USC and will not relinquish control of it to their political masters without a serious fight.

The origins of the USC were understandable.

A weary and beaten Lenihan, just weeks after handing over the country to the Troika, had a cunning plan to simplify his taxation system.

Along with his officials, Lenihan wanted a single USC to replace the income levy and health levy, which were introduced since the crash to plug the gaping hole in the public revenues left by vanishing stamp duties.

He duly announced it in his Budget speech and assured his party colleagues that people would not be paying any more in USC than they were already by way of the levies.

But, at a parliamentary party briefing, he was soon accused of misleading his own party on the full impact of the USC. When the first pay packets of 2011 were opened around the country and people were confronted with this new tax, all hell broke loose.

In an instant, Fianna Fail lost a dozen further seats in the pending election and the public's hatred of this most pernicious tax was solidified.

"The Universal Social Charge requires that everyone makes some contribution, however small, to the provision of services. This charge is separate from income tax which is levied proportionately as income increases," Lenihan argued in vain.

On taking office, Noonan has recognised to some extent the overly cruel impact of the USC on struggling families.

Last year, he raised the entry point from €4,004 to €10,036 per year.

In October's Budget, as part of his tax-cutting agenda, Noonan has gone even further.

From Jan 1, incomes of €12,012 or less will be exempt from USC. Once your income is over this limit, you pay the following rates: USC of 3.5pc will be charged on incomes between €12,012 and €17,576.

Between €17,576 and €70,044, USC will be levied at 7pc. On all PAYE incomes above €70,044 USC will be charged at 8pc.

However in a controversial move, self-employed people will pay 11pc on that portion of their income above €100,000, a surcharge of 3pc over their salaried counterparts.

This measure drew ire from small-business owners who feel once again Noonan and the Government are unfairly hammering the self-employed.

The irony of Noonan's USC tax model as announced in the Budget is that he rejected a similar proposal put forward by the Labour Party back in 2012. Such was the row within Government over the measure, the junior Coalition party was on the verge of walking out, as revealed by this newspaper back in December 2012.

As the Government came close to crumbling, Taoiseach Enda Kenny and then Tanaiste Eamon Gilmore 'went for a walk together' to hash out a compromise solution.

Noonan had rejected Labour demands for a higher USC for income earners over €100,000. Ultimately, Labour blinked and caved on the USC demand in return for a 'mansion tax' which turned out to be a puff of smoke. But now, Noonan has introduced that measure, but has decided to increase the rates at €70,000 and not the €100,000 as demanded by Labour.

But with only one Budget left to convince the people that they should be re-elected, just what are the options available to Noonan et al to stop the USC from becoming another Irish Water debacle.

Well, given how much money it brings in, €4.5bn a year, there is no chance of the USC being axed or abolished.

Given how much it raises, Noonan would be a brave man to order his officials to eliminate it and he has made it clear he is not minded to do so.

"It raises a lot of money. I believe that everybody at work should pay something, but I think that low-paid people should retain most of what they earn," Noonan said recently.

Therefore at best, the Government can seek to limit its scope, bring more people out of its reach and reduce its impact on those middle income earners who pay for everything.

But because USC applies to gross income, and there are no tax credits allowed for it, more people pay it than pay income tax. Therefore, only 25pc of taxpayers are exempt from paying USC, compared with 36pc of workers who are exempt from paying income tax.

The USC is estimated to be imposed on 1.66 million taxpayers this year and 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.

This weekend, the Labour Party appear to be pushing for further cuts to the USC and are at odds with Fine Gael as to who should benefit.

Labour have been warned in recent weeks that if it hopes to regain any of the lost ground in terms of public support, it has to deliver some good news on the USC to its core voter base, which is deeply disaffected.

Hard-pressed families would benefit most from a cut to the universal social charge (USC) instead of changes to the income tax system, tax experts have said.

A recent analysis by the Irish Tax Institute, says that cutting the USC would benefit the widest number of people, and provide much-needed relief to working families.

Fine Gael however, have set out their stall with the Taoiseach, again indicating a rate cut in income tax.

The public are demanding for a flag and a sign of love from this Government. Since the crash, the burden of taxation has not been spread fairly, despite promises to spread that tax burden on to the 50pc of workers who do not pay income taxes.

Property taxes have fallen firmly on the same middle classes, with half the working population exempted. Throw in a higher top rate of tax and the weight of Ireland's deficit falls unevenly upon a relatively small segment of the population.

In a strong Dail speech on Thursday, Fine Gael TD Noel Harrington gave voice to those in the middle who he said are "exasperated" at being forced to pay for everything.

"Those who pay all the time for everything. They contribute to everything. They contribute in their communities. They are busy 12 to 14 hours a day working, raising their families, trying to put their children through education, paying for their health insurance and, in most cases, trying not to be a burden. They are exasperated. They pay extortionate levels of income tax and they are the ones I feel sorry for," he said.

The most hated tax is now the latest ticking time bomb to threaten the existence of this Government.

Sunday Independent

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