Christmas comes early for employers, high-income groups and right-wing ideologues. The Sunday Times (behind a paywall) reports on demands from Government backbenchers to introduce a mini-budget in an attempt to salvage the Government’s fortunes. And what would be the centre-piece of such an initiative? The race is on between Fine Gael and Labour backbenchers over who can make the most outrageous tax cutting promises, including the notion that the Universal Social Charge (USC) be abolished. Ho-ho-ho.
Let’s first deal with the idea of abolishing the USC. Who would be the greatest beneficiary?
As seen, someone on the minimum wage would get a boost of 2.2 percent in net take-home pay from the abolition of USC. This rises to over 10 percent for those on €100,000 and it gets even more lucrative for those on very high incomes. Abolishing the USC would be highly regressive – benefitting those on the highest incomes the most.
But this doesn’t tell the full story as the above refers to headline tax rates. High income groups can hire an army of accountants to avoid paying large amounts of income tax, inheritance and gift taxes, capital gains tax – exploiting a huge array of reliefs and allowances and other legal tax reduction strategies. However, that army is defeated when it comes to USC. There is no getting out of paying it. So, if anything the benefit to high income groups would be disproportionately higher than the chart above.
Let’s put this in Euros and cents.
Someone on the minimum wage would get €7 per week; at the higher end they would get over €350 per week (that’s right, a €16,000 annual tax cut). From my own, admittedly back-of-the-excel-sheet, calculation, over 46 percent of USC revenue comes from those earning €70,000 or above. Less than 10 percent of USC revenue comes from those earning less than €30,000. Guess who wins out in that tax-cut auction.
To be fair, some proponents of abolishing the USC claim that alternative means of getting revenue from high income groups can be introduced. This is simply not realistic. USC collects over €4 billion per year. That’s over one-third of what income tax takes in. How could you make it up?
- Increase the top rate of tax from 40 percent to 57 percent. That would do the trick (though as mentioned above, those who can afford accountants would be able to get around the high marginal tax rates).
- Abolish tax relief on pension contributions, health insurance and mortgage interest. However this would only bring in €1.5 billion – or 37 percent of the USC loss.
- Abolish PAYE tax relief. This would raise €2.8 billion – still, far short of the USC loss. And every worker above the income tax threshold would lose €1,650, wiping out gains for all low and average income earners.
- Increase VAT to nearly 30 percent.
There are other measures such as a wealth tax which the Nevin Economic Research Institute estimates could raise €250 and €500 million. You could toss in increases on capital income (inheritance, capital gains) but there’s a limit. Of course, there’s a real loss here. Instead of using the additional revenue from wealth and capital taxes to invest in social housing, education and health, we would only be clawing back a tax break that we gave to higher earners in the first place.