| 26.1°C Dublin

Tax cuts may well happen ... but it won't be off the hated USC

The Universal Social Charge (USC) which came into force at the beginning of 2011, is easily the most vicious tax introduced to plug the hole in the public finances that opened up after 2008.

The USC is paid at 7pc on all income over €16,000. Someone earning the average private sector wage of €33,000 a year hands over €1,630 (€30 per week) in USC.

The Universal Social Charge kicks in from the first cent earned and makes no allowance for tax credits.

This means that many people on low to average incomes are paying much more in the USC than they are in income tax.

As anyone who has followed the Herald's annual budget coverage already knows, the USC has done far more damage to most workers' pay packets than the changes in tax bands.

Now the Government, and particularly its Labour Party component, is holding out the hope of some USC relief for low and middle-income workers in the budget on October 14, just seven weeks away.

Any reduction in the USC would have an immediate impact on most workers' pay packets.

Cutting the top rate by 1pc to 6pc would boost the after-tax income of someone on the average private sector wage by €170 per year - the USC is paid at a lower rate on annual income up to €16,000.

AVERAGE

For someone earning the average public sector wage of €47,000 a 1pc reduction in the USC rate would add €310 to their after-tax income.

With water charges likely to cost the average family at least €238 per year - and independent observers think that the actual figure will be much higher - any boost to after-tax incomes resulting from a cut in the USC would be extremely welcome for hard-pressed low and middle-income households.

So will Mr Noonan listen to the pleas of his colleagues and cut the USC rate for low and middle-income earners?

After last May's near-death electoral experience, the Labour Party is understood to be especially keen on a USC cut.

That's no guarantee they, or we, will actually get one. But on the plus side, the gradual economic recovery is feeding through into higher-than-expected tax revenues with the tax take for the first seven months of the year running €550m ahead of target.

These higher-than-expected tax revenues give Mr Noonan far room for manoeuvre on October 14.

But will the minister be minded to use this wriggle room?

The Department of Finance just loves the USC and will be extremely reluctant to surrender any of this lucrative revenue stream.

REVENUE

The Government is targeting income tax revenue of €17bn for the whole of 2014. The USC will make up €4bn, or almost a quarter, of this total.

It has been estimated that cutting the 7pc USC band to 6pc would cost the Exchequer a hefty €450m a year. That's heck of a lot of revenue by any yardstick.

By comparison, cutting the top 41pc income tax rate to 40pc would cost the Exchequer less - it would come in at around €195m a year.

So if Mr Noonan is dragged kicking and screaming to cut taxes on October 14 my bet is that he will do something with income tax rates and bands rather than touching the USC.

By doing this he will keep the cost of any tax cuts as low as possible.

Call me a pessimist but somehow I can't help feeling that workers on low and medium incomes will be paying very high rates of USC for many years to come.


Privacy