Michael McGrath (Cork South Central, Fianna Fail) | Oireachtas source

As I understand it, these amendments are grouped, so I will address them together. The Rural Independent Group has requested a report on the abolition of the USC for those earning less than €70,000 per annum and a report on abolishing the USC for all employees in the State. Deputy Doherty requested a report on increasing the exemption limit for the entry point to USC from €13,000 to €30,000.

By way of background, as colleagues will be aware, the USC was designed and incorporated into the Irish taxation system in 2011. It replaced two other charges, namely, the health and the income levies. The primary purpose of the USC was to widen the tax base and to provide a steady income to the Exchequer, to provide funding for public services. The USC is applied at a low rate on a wide base. This ensures that it is a stable and sustainable source of revenue for the State. For 2024, it is estimated that the USC will yield in the region of €5.4 billion.

On the specific proposal to abolish the USC for those earning less than €70,000, I am advised by the Revenue Commissioners that it is estimated this proposal would cost in the region of €1.47 billion in the first year and €1.68 billion in a full year. Assuming no other policy changes to the structure of the charge, it is estimated that in order to maintain the same level of revenue for the Exchequer and to ensure this is a cost neutral proposal, the 8% USC rate would need to be increased to 13.2%.

I would note that the estimations I have provided do not take into account any behaviour changes that could result from the significant increase in the marginal rates of taxation. By way of example, this proposal would have the effect of increasing the top marginal tax rates from 52% and 55%, to 57.2% and 60.2% for PAYE and self-employed income earners, respectively. As the Deputies will appreciate, high marginal tax rates can be a strong disincentive to work and could also cause harm to our international competitiveness. The considerable progress that has been made in recent years to restore our economy cannot be taken for granted, particularly given the challenges in the international arena that confront us at present. Exempting those earning up to the €70,000 per year, without any compensating revenue-raising measures, would considerably erode the tax base. The USC is an important and sustainable source of revenue for the Exchequer. The current exemption threshold for USC is €13,000 per annum, and it is now estimated that 37% of all taxpayer units will not be liable to USC in 2024. To further increase this entry threshold to €70,000 per annum would exempt approximately 88% of taxpayer units from USC. This would significantly narrow the tax base meaning only 12% of taxpayer units, or just under 415,000 taxpayer units, would pay USC.

The second proposal by the Rural Independent Group relates to abolishing the USC in its entirety. As I noted, the USC forms a very significant part of the tax base and to abolish it would result in an Exchequer shortfall in 2024 of some €5.4 billion. In the absence of this source of Exchequer funding, it would therefore be necessary to generate this yield from alternative sources. Both proposals give rise to substantial Exchequer costs and would expose our economy to significant risk in the event of a future economic downturn.

Turning to Deputy Doherty's proposal to increase the exemption threshold from €13,000 to €30,000, I am advised by Revenue that this is estimated to cost €185 million in the first year and €210 million on a full-year basis. This proposal would also significantly narrow the tax base by removing approximately 740,000 taxpayer units from the charge to USC. As I noted earlier, 37% of all taxpayer units are currently exempted from the charge. Increasing the exemption threshold to €30,000 would result in 57% of taxpayer units being exempt from USC. Ireland has one of the most progressive personal income tax systems which plays a crucial role in the process of income redistribution. Our redistributive tax system has been acknowledged by the International Monetary Fund, IMF, the OECD, and the Economic and Social Research Institute, ESRI. Deputies will recall that during the economic crisis, it reached a point where 45% of all income earners were exempt from income tax and that was unsustainable. It placed an unfair burden on those earners who were contributing to the income tax base, and exposed the vulnerability of the income tax system to economic shocks.

A broad-based progressive income tax system, where the majority of income earners make some contribution, but according to their means, is the fairest and most sustainable income tax system in the long run. Having regard to the impact of cost, competitiveness, and the consequential unsustainable erosion of the tax base, there is no justification to carry out further analysis of the proposals outlined by the Deputies and for these reasons I cannot accept these amendments.