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Universal Social Charge

Explainer: Was the USC meant to be a temporary measure?

Some politicians’ stances on the tax have changed over the years.

THERE HAS BEEN much talk in recent days about whether or not the Universal Social Charge (USC) was meant to be a temporary measure when it was brought in 11 years ago.

Taoiseach Micheál Martin yesterday reiterated that his Government will not abolish the USC.

Martin told Today’s FM The Last Word: “It will not be abolished. We have to be honest with people. All of the time, there are increasing demands on public expenditure.

“The last two years have seen an unprecedented intervention by Government, by the State, in the economy, underpinning wages, underpinning employers in terms of the EWSS scheme to keep employees linked with employers.

“And likewise with the CRSS scheme in tourism and hospitality, [and] the Pandemic Unemployment Payment. It has been quite unprecedented.”

The USC currently brings in over €4 billion a year for the Exchequer.

To put that in context, the Department of Finance recorded the highest ever tax take of €68.4 billion in 2021. Income tax generated last year totalled €24.4 billion.

Finance Minister Paschal Donohoe last week insisted he never said the charge was temporary.

“That is never a point I have made. If you look at the USC, the USC involved the integration of two levies – the health and income levy – which were longstanding parts of our personal tax code at that point.

“I have never indicated otherwise,” Donohoe told Newstalk Breakfast on Friday.

But what exactly is the USC and who has backed it, or not, over the years? Let’s take a look.

What is the USC?

The USC is a tax on income that replaced both the income levy and the health levy (also known as the health contribution) on 1 January 2011.

People pay USC if their gross income is more than €13,000 per year. USC does not apply to social welfare or similar payments.

If you are aged 70 or over or a medical card holder aged under 70 and your total income for the year is €60,000 or less, you pay a reduced rate of USC.

The tax is calculated on a weekly or monthly basis.

Total income for USC purposes includes the following:

  • employment income
  • taxable employer benefits
  • self-employed income
  • rental income
  • share option gains
  • dividend income

Who brought in the USC?

The USC was introduced in December 2010 by the then-Finance Minister Brian Lenihan at the height of the financial crisis. The measure came into effect on 1 January 2011.

At the time it applied to all gross incomes over €4,004, with the threshold increasing over the following years.

Members of the opposition labelled the USC “unfair and regressive”.

However, Lenihan and others in the Fianna Fáil-Green Party coalition Government at the time indicated the measure would be temporary as Ireland sought to make it through the worst of the recession.

The USC was sometimes called “the bailout tax” as it was brought in shortly after Irish banks were bailed out by the International Monetary Fund (IMF) and the European Union.

90220748 Brian Lenihan pictured in 2011 Laura Hutton / RollingNews.ie Laura Hutton / RollingNews.ie / RollingNews.ie

In his Budget 2011 speech, Lenihan said: “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. The universal social charge does not apply to welfare payments.”

Budget 2011 was Lenihan’s last Budget before he lost office.

In the February 2011 general election, Lenihan held onto his seat as a TD but Fianna Fáil lost over 50 seats. A new coalition Government was formed by Fine Gael and Labour.

Lenihan died on 10 June 2011, at the age of just 52, from pancreatic cancer.

New Government 

Despite their criticism of the USC when in opposition, many members of the new Government viewed it as necessary when they came to power.

In a Dáil debate in March 2011, Sinn Féin TD Pádraig Mac Lochlainn noted that some new ministers had changed their stance on the USC.

Mac Lochlainn singled out certain Labour ministers in particular. He said they now appeared to back the USC but, when in opposition, had said the tax was “a blatant and unjustifiable attack on the poor”.

As Ireland’s finances improved and we exited the bailout programme, the rates of USC were changed in recent years but the tax itself remained.

In 2013, the entry point was raised from €4,004 to €10,036; increasing to €12,012 in 2014.

Speaking in 2014, then-Finance Minister Michael Noonan ruled out getting rid of the USC.

“There will be USC for the foreseeable future … Some people wouldn’t pay tax at all if it wasn’t for the USC. From an Exchequer point of view it’s very efficient,” he said.

Noonan told the Dáil that when the USC was introduced in Budget 2011 “it was a necessary measure to widen the tax base, remove poverty traps and raise revenue to reduce the budget deficit”.

“It is a more sustainable charge than those it replaced. It is applied at a low rate on a wide base. I should point out that it was never intended that the USC would be a temporary measure.

“It was designed and incorporated into the Irish taxation system as part of its permanent structure and the revenues collected play a vital part in meeting the many expenditure demands placed on the Exchequer.”

2016 election

However, during its 2016 election campaign, Fine Gael said it would indeed abolish the USC.

In January 2016, Leo Varadkar tweeted that his party would “abolish USC over the lifetime of the next Government”.

A month later, in February 2016, Paschal Donohoe tweeted about how “abolishing USC will benefit every worker”.

Fine Gael was re-elected but this promise was never delivered. Instead, the party merged the USC with the PRSI levy.

Fianna Fáil leader Micheál Martin later criticised Fine Gael for making “false promises” about the USC, claiming the party always knew it was not feasible to abolish it.

Speaking in 2017, Donohoe, Noonan’s successor as Finance Minister, said the USC “should be at the heart of a new social contract between our citizens through how we integrate it into the PRSI code”.

However, he added that he was “very clear on what the long-term end-point will be for the USC”.

“We have a new Minister for Finance and a new Taoiseach. We are entitled to make our assessments of the landing points for important policy areas such as this,” he said.

Speaking to reporters in an end-of-year interview in 2019, Martin discussed the Fine Gael promise with reporters.

He said: “I think there were very false promises made in the last election by Leo Varadkar and by Fine Gael that they would abolish USC. That was never going to happen… because the money was never there to do that.

“When they came into office, they knew that was a false promise. Sure they abandoned it straight away.”

Martin made these comments a few weeks before the 2020 general election.

2022

Echoing comments made by Martin and Donohoe in recent days, Tánaiste Leo Varadkar last week reiterated that there are no plans to scrap the USC.

Speaking in the Dáil on 10 February, he said: “We had a relatively low national debt before the banking crisis 10 or 12 years ago. We accumulated a lot of debt dealing with the financial crisis. We had started to pay it down and along comes the pandemic.

“In the context of people calling for measures earlier such as the abolition of the USC, for example, or much better packages than the Government can do today, we must not forget … that we owe a quarter of a trillion euro.

“We cannot lose sight of that. It may have appeared that there is no limitation on Government spending in recent years, but that is not true and that is going to come back to affect us.”

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