USC cut would limit other promised tax reductions

A significant cut in the USC in the October budget would leave the Government with limited room to meet other tax commitments, new analysis from the Department of Finance finds.

However, Fine Gael is sticking to its position that the Government will spend €300 million cutting the USC in the budget, with a reduction in the main 5.5 per cent rate seen as likely.

The department looked at ways the Government could continue to phase out the USC, but the €1.7 billion cost over three budgets would use the space set aside for tax cuts – and would even require cash to be raised elsewhere.

The programme for government also contains a range of other tax promises, including an increase in tax credits for the self-employed and carers, a cut in capital gains tax for entrepreneurs and a hike in the tax-free allowance for children who get inheritances from their parents.

The department’s tax strategy documents, published before the budget for the first time, show that new cash will have to be raised elsewhere, if the Government is to cut USC and at the same time meet these other commitments.

A key question will be whether to push ahead with the tax on sugar-sweetened drinks which, if it is introduced at a similar rate as the UK, could add 10 cent to the price of a regular can and raise about €100 million a year for the exchequer.

Fianna Fáil finance spokesman Michael McGrath said allocating €300 million towards USC cuts alone – out of the €330 million expected to be available for tax cuts – would not leave much resources to implement other cuts favoured by both Fianna Fáil and Fine Gael.

Mr McGrath said steep reductions in the USC are not “relevant” for the October budget and said the abolition of the USC, as advocated by Fine Gael, is still several years away from being attainable.

The department looks at ways the USC could be cut significantly over the next three budgets, but says bigger cuts are only likely to be afforded in the later years. A programme based on cutting USC rates might be worth €200-€300 in 2017 to a single employee earning between €45,000 and €55,000 and the gains would rise to more than €1,000 a year by the third year.

Clawed back

The documents also looks at how some of the gains from USC cuts could be clawed back from higher earners, mainly through a phasing out of the PAYE tax credit, estimated to kick in at €80,000 or €100,000. This could raise a significant sum for the exchequer. The documents say that if more lower earners are removed from the USC net, there could be some claw-back from them by making them liable to PRSI, while leaving a net income gain.