PRE-BUDGET KITE-flying is a reliable annual past-time every September but within that particular political game there is a more specific niche pursuit: USC kite-flying.
This has started right on cue this year, with suggestions that Finance Minister Michael McGrath is considering reductions to the income-based Universal Social Charge.
This consideration was seconded yesterday by Tánaiste Micheál Martin, who said that cuts to various taxes “including USC” were being considered.
The USC was introduced in late 2010 as a levy on people’s gross income and as a replacement of two existing levies.
Its rateS and bands have changed a number of times over the years but a change in this coming Budget would have some symbolic significance.
The history
This year’s Budget by McGrath is the first by a Fianna Fáil finance minister since Budget 2011, when the USC was first introduced.
It was then-finance minister Brian Lenihan who brought the letters USC into Irish life, declaring at the time that the measure “requires that everyone makes some contribution, however small, to the provision of services”.
Lenihan had teased its introduction the year previous, saying it was his intention to broaden the tax base and merge two previous income charges into one.
In Budget 2010 he had used the term ‘contribution’, not the ‘charge’ it subsequently became:
A new universal social contribution will replace employee PRSI, the Health Levy and the Income Levy. It will be paid by everyone at a low rate on a wide base as a collective contribution to public services.
Fast forward 12 months and it became a reality, albeit without the PRSI element which still remains as a stand alone contribution.
The USC was introduced during what was the most austere budget in Ireland’s history and weeks after Ireland’s EU/IMF bailout was confirmed.
Lenihan didn’t use the term ‘temporary’ during his budget speech when speaking about the USC, but such was the emergency nature of the measures at the time the USC was seen as an extraordinary response to extraordinary times.
Lenihan had begun his speech by saying that Ireland was facing an “intractable and complex crisis”. After he delivered the bitter medicine, he described the budget as “a substantial down payment on the journey back to economic health”.
The Fine Gael years
As one might assume that paying a down payment eventually results in a return, there was much debate in the succeeding years about whether the USC should stay and if so at what level.
As Ireland’s finances improved and we exited the bailout programme, the rates of USC were indeed changed but the tax itself remained.
The entry point was raised in Budgets 2013 and 2014, taking some people out of its net and reducing the obligation on those it covers.
Speaking in 2014, then-finance minister Michael Noonan ruled out getting rid of it altogether.
“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.
However, during the 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”.
5 years ago, 1000s paid their #1st USC under #fiannafail. @finegael will abolish USC over the lifetime of the next Government #ffardfheis
— Leo Varadkar (@LeoVaradkar) January 16, 2016
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.
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.
The present
The fact that the USC has remained has long been used as a criticism of intervening governments, especially seeing as Fine Gael pledged to remove it.
However, it has also been argued that the USC raises significant income for the public purse and is more progressive than some alternative taxes.
The USC is levied on all forms of income except social welfare payments so, for example, USC should be paid on company dividends and rental income. In addition, the USC does not allow for the loopholes and allowances that are available to other forms of income tax, making it more difficult for the better off to avoid paying it.
The USC exempts those earning under €13,000 a year, with previous calculations showing that about a third of the USC take comes from those with incomes in excess of €100,000.
Finance Michael McGrath says he’s doing a trawl through the entire taxation code, including the USC, to see what could be tweaked in the budget. pic.twitter.com/HXEBPsbWUh
— Christina Finn (@christinafinn8) September 11, 2023
Officials in the Department of Finance are also keen on the USC because it is efficient to collect and has been shown to be less sensitive to economic fluctuations than other forms of income tax.
Speaking in the Dáll before the summer recess, Finance Minister Michael McGrath described the USC as “a sustainable source of revenue for the State” and that it is estimated to raise €5.2 billion for the public purse this year.
“If the USC were to be abolished it would be necessary to generate this yield from alternative sources,” he said.
McGrath had been responding to People Before Profit TD Richard Boyd Barrett who said the minister was “rewriting history” because the USC was in fact “an emergency tax in response to a crisis created by banks and developers”.
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