Seanad debates

Thursday, 23 October 2014

Adjournment Matters

Universal Social Charge Payments

12:00 pm

Photo of Paul BradfordPaul Bradford (Independent)
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I welcome the Minister to the House. This is not particularly a motion but simply a question for the Minister that is not for today or tomorrow but is long term in nature.

We all acknowledge and recognise the very significant funding is brought into the State's coffers by the universal social charge. Reflecting back on its introduction, we are also aware that it replaced the health and income levies. The USC was also an emergency tax and probably could have been appropriately called a national recovery levy or tax. Such was the state of the nation's finances at the time of its introduction that most reasonable political groupings and parties, and everybody interested in the future of the country, while not welcoming the introduction of the tax or levy could appreciate the necessity for same.

I hope, through the Minister's stewardship and internal and external factors, the state of the nation's finances are slowly but surely beginning to improve. We hope, with projected growth patterns and economic patterns into the future, that the State's coffers will not just improve but will have a more stable and sustainable future. With that in my mind, my question for him is three pronged. Will he look at the universal social charge anew? Will he recognise, at least, that some of the circumstances which required its introduction may no longer exist and, thus, show a bit of flexibility in that regard? Does he hope to remove the levy in the medium to long term?

My next question is not part of my official Adjournment motion but one that I formulated as I was talking and thinking. We have income tax, PRSI and the universal social charge. When looking at the long-term future of pensions and social welfare in this country one realises that we will, in the very near future, reach a situation where every citizen of the State will have some degree of social insurance cover. That means every citizen will be paying into a social insurance fund. From the perspectives of administrative simplicity, a case could be made to further streamline all the charges, levies and taxes paid by every tax paying citizen of the State and to roll them into one, rather than have between two and four charges at present. My question is not for today or tomorrow but for the future.

I would like to hear the Minister's views on two things. The first is the long-term possibility of reshaping or, hopefully, removing the universal social charge. I apologise for not tabling my second question as part of my formal motion. It relates to the various layers of taxes and levies in this country. The Taoiseach, the Minister for Jobs, Enterprise and Innovation, and the Minister for Finance have made the very obvious and important comment that we must be in a position to present ourselves internationally as an economy with a tax that is fair, as low as possible and well administered. The fewer levies, charges and taxes which apply in that regard the better and the more streamlining we can put in place, the better as well. I thank the Minister for listening to me and look forward to hearing his observations.

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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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.

12:10 pm

Photo of Paul BradfordPaul Bradford (Independent)
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I thank the Minister for his comprehensive reply, which speaks for itself. As stated earlier, a levy, charge or tax which is generating in excess of €4 billion each year can certainly not be made to just disappear overnight. The streamlining and effective administration of our taxation system is extremely important. It is possible to have a progressive taxation system without, of necessity, having a multiplicity of taxes, charges and levies. I appreciate what the Minister said with regard to the fact that the Government's decisions on income tax and the USC have led to a significant - and welcome - number of people no longer being obliged to pay them. If we had a singular income tax system, this could also have been achieved by the use of a number of bands. Will the Minister consider introducing such a system in the future, perhaps by way of recommendations from a new commission on taxation? Such a commission could examine the position with regard to the multiplicity of PRSI charges and levies, the USC and income tax. Would it be possible to introduce a singular taxation structure? From an administrative point of view, such a structure would certainly give rise to significant savings. Perhaps the Minister might reflect on this matter, particularly as there is an undue amount of complexity within the current system.

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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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.