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

I understand what the Senator is saying. When drafting this year's budget, I discovered that the USC is far more flexible than income tax. By using the USC rather than income tax, it was possible to put in place direct relief in respect of different tranches of income and various categories of people. If we were relying on income tax alone, for example, it would not have been possible to give back anything to people earning under approximately €16,000 because these individuals do not pay income tax. However, it was possible to deliver for them because they pay the USC. A reduction in income tax rates would have had a very disproportionate benefit for high income earners. However, it was possible to cap the rate benefits at the gross income amount of €70,000 and then increase the USC by one point. Of course, this was compensated for by a reduction in the higher rate of income tax from 41% to 40%. On a net basis, nobody's combined rate of USC and income tax increased. The benefits were capped in order that a person who earns €80,000 obtained the same benefit as someone who earns €70,000. The position was the same in respect of those who earn €200,000 per annum.

One often hears about astronomical salaries of €500,000. If we had proceeded on the basis of cutting the income tax rate only by 1%, then this would have worked out at 1% on €500,000 minus €70,000, which is €430,000. As the Senator will realise, the amount involved would be €4,300. It would not be sustainable socially or in the interests of equality and fairness for people on huge salaries to receive relief in the amount of thousands of euro, while those on low incomes only received a small amount of such relief. That is why I capped the rate benefits. The point I am making is that in designing the budget to be fair, the USC is a fair more flexible instrument than income tax. There are other models of income tax and many of the eastern European countries that are new to democracy have introduced flat rates of such tax. There are advantages in this regard because rates can be pitched quite low and everything is taxed from the first €1 onward. It would probably be very difficult for us to move into that space because tax becomes bedded in, allowances are made available, etc.

I see the USC as a permanent feature of the personal taxation system. In terms of providing relief - and I hope that is what we will be doing - people will pay less personal tax. The Government has three strategies. The first of these is to widen the tax base by eliminating tax breaks, including those which apply widely to the building industry and many of which I removed in 2011. There are also corporate tax breaks, such as the double Irish and so on, which we are addressing. We hope that our actions in this regard will have a net benefit to the Exchequer. The second strategy involves widening the tax base by means of the property tax, which has already been successfully introduced, and by charging for services such as those relating to water. In the past, such services were paid for exclusively by the taxpayer and, in the main, from personal income tax. This was achieved by transferring money from central funds to the local authorities. As the economy grows there will be buoyancy of taxation. In conjunction with our controlling expenditure, this buoyancy can assist us in reducing the amount people pay by means of personal tax.

The Senator also referred to pensions and PRSI. He appears to be angling towards asking whether it would be possible to convert the USC into a form of PRSI in order to support pensions. That is a matter which would be worth debating. However, it is not something that will happen during the lifetime of this Government.