Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

I thank Senator Bradford for raising this issue today.

The situation is that the universal social charge, known as USC, was introduced by the previous Government in budget 2011 to replace the income levy and the health levy. 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 was never intended by my predecessor that the USC would be a temporary measure. The legislation under which it was introduced did not include any sunset clauses or place time limits on the charge. It was designed and incorporated into the Irish taxation system as part of its permanent structure. The €4 billion in revenues collected from the USC play a vital part in meeting the many expenditure demands placed on the Exchequer. The USC is applied at a low rate on a wide base which insures that while most people have to pay USC on their earnings the amount is lower as a proportion of their income as would be the case if the revenue from the charge was delivered through the income tax system.

The Senator should be aware that the universal social charge cannot be avoided by using tax reliefs which are mostly used by the higher earners to reduce their tax burden. In fact, by increasing the USC rates applicable to higher incomes in the budget, it has allowed me to cap the benefits that individuals get from the tax changes introduced in budget 2015. As I outlined on budget day, the progressivity of our income tax system will be copperfastened by giving greater importance to USC at higher incomes so that the capacity of higher earners to shelter their income through tax breaks is significantly curtailed.

As resources have allowed, the Government has taken steps to remove the lowest paid members of society from the USC. In budget 2012 I increased the entry point to the USC from €4,004 to €10,036 per annum. It is estimated that this removed almost 330,000 individuals from the charge. In budget 2015 I have extended this exemption threshold to €12,012 from 1 January next onward. This will exempt a further 80,000 individuals from the charge. In addition, I have reduced the two lower rates at which the USC is payable from 2% and 4% to 1.5% and 3.5%, respectively. Furthermore, I have also extended the threshold before which the 7% rate becomes payable to €17,576 in order that those on the minimum wage will only be liable to a maximum 3.5% rate of USC.

The changes announced in the budget will ensure that all those currently paying income tax and USC will see reductions in their tax bills in 2015. These changes will also improve the progressivity of our income tax system, with the top 1% of income earners now paying 21% of all income tax and USC revenues collected. In contrast, the bottom 76% of income earners will pay 20% of the total. As a Government, we recognise that the income tax burden can act as a disincentive to work and to the creation of jobs and that changes to reduce the burden can have a positive impact. We repeatedly stated that when the public finances had been repaired sufficiently, we would reduce the personal taxation burden. The changes announced in budget 2015, targeting low and middle income earners, represent the first step in this process. My Department estimates that a consistent series of reforms, along the lines announced in budget 2015, and delivered over a three-year period, could boost employment by as much as 15,000 jobs when the full impact of the changes has taken effect in the economy. That is why we will continue the process in next year's budget, while ensuring that we have a tax system which is progressive and which rewards employment.