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Minister for Public Expenditure Brendan Howlin and Minister for Finance Michael Noonan present Budget 2015.

Plans to slash the USC are rash and dangerous - here's why

Pre-election commitments to further reduce and abolish the USC make little social or economic sense, Rory Hearne writes.

THE PRE-ELECTION promises of tax “giveaways” have begun in earnest with Labour and Fine Gael’s respective proposals to further reduce and abolish the universal social charge (USC).

But changing the charge would be a bad economic and social decision. The USC is a progressive tax that provides enough revenue to cover the entire capital spending budget.

Reducing and abolishing the USC is likely to have a devastating impact on the provision of funding for much needed public services such as universal childcare, education and healthcare.

Funding public services

There are a number of reasons why cutting the charge and potentially abolishing it would be a bad social and economic decision for the next government to make.

Firstly, the USC raises a substantial amount of revenue that is used to fund vital public services and investment.

This year, the charge will raise €4 billion, which is greater than the government’s entire capital investment budget for spending on infrastructure (housing, hospitals, roads etc).

The USC raises about two thirds of what is raised through corporation tax and comprises 8.5% of the total revenue raised by the state.

Abolishing the USC would be the kiss of death to welcome plans for investment in areas such as early childhood education and universal health care.

Funding for public services and investment in Ireland is at chronically low levels. According to projections, we are likely to end up with the lowest government expenditure in the EU by 2019.

Cutting the USC will make this worse. A 1% reduction in the 5.5% rate will reduce revenue available for public spending by almost €400 million per year.

Abolishing the USC for all income earners earning less than €70,000 would cost €2.52 billion per annum of lost revenue.

13/10/2015 Budget Day 2016

It should also be remembered that the minister for finance has outlined that the government would only allocate €500 million for tax cuts and spending increases in Budget 2017. This is down on the €750 million allocated in Budget 2016.

Reducing the USC will take up much of that €500 million and leave little for spending increases without other taxation increases.

Note as well that the government has also outlined that EU rules will not allow supplementary spending increases in next year’s Budget which will reduce spending increases further.

If we want to address some of the chronic deficiencies in our public services – such as in the health service, where all too many patients are left waiting on trolleys – then we need to maintain funding for such services through taxation measures like the USC.

Cutting taxes like the USC removes the base for investment in high quality public services.

Progressive taxation

The second reason the USC should be left alone is that it is a highly progressive tax in contrast with the previous health and income levies, which had flat contribution rates.

It also allows fewer tax allowances and tax credits, which mainly benefit those on higher incomes to reduce their income tax.

For example, of the €5.5 billion in tax allowances in 2012, Revenue has estimated that 53% of these tax allowances accrue to the top 10%.

Thus the USC ensures those on higher incomes pay more and cannot use the various accountancy measures and expertise they can afford to avoid it.

12/9/2014. Fine Gael Think Ins

The discussion about the proposed reductions to the USC has again, incorrectly, referred to those on €70,000 as “middle income” earners.

The facts are that the middle income range is between €25,000 and €40,000.

A half of all earners have an income less than €27,000, while earning over €60,000 puts you in the top 16% of earners and over €50,000 puts you in the top 22%.

And note that 30% of earners (703,000) earn below €12,000 and thus are exempt from the USC.

Abolishing the USC would benefit someone on €25,000 by approximately €750 while someone on €150,000 would benefit by over 20 times that amount (€16,000).

Of course, other taxes can be raised to bridge the gap but, in the context of the various political parties making the case for a reduction in taxes such as the USC, it is difficult to see why, and how, they will make the case for other tax increases.

Lower and middle incomes 

The reality is that those on lower and middle incomes lose out in the tax-reduction policy agenda as the “cash-in-the-pocket” benefit is a fallacy.

They lose out because the amounts gained through tax reductions would go much further for these households if they were invested in public childcare, transport and healthcare.

14/10/2014 Budget Day 2015

Investing in our tax system can achieve economies of scale and offer lower, controlled prices, as public services do not seek profits in the way the private sector does.

A system of lower taxes (as is the current case) means that the private for-profit market plays a big role in providing services like childcare, healthcare and housing, with the result being that people end up paying exorbitant prices. Those on lower incomes lose out most in terms of access and quality.

Keeping the USC would allow an improvement in the quality and availability of much needed public services and infrastructure such as universal health care.

The hard reality is that if we are to address the current unacceptable levels of inequality and deprivation, and provide the infrastructure base for a sustainable and equitable recovery, then we need to find ways to increase taxation revenue – quite the opposite to what the current political agenda unfortunately favours.

Rory Hearne is a senior policy analyst with Tasc. 

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