Increasing USC charge a levy too far for taxpayers
Opinion:At a time when the UK, our closest competitor in the inward investment game, is sharpening its tax strategy and strengthening its “invest in Britain” message, it would be unwise and short-sighted for Ireland to increase its marginal rate for higher earners to 55 per cent by way of an increase in the universal social contribution from 7 per cent to 10 per cent.
With our current marginal rate of 52 per cent for PAYE workers, Ireland is already ranked joint 10th highest in the Organisation for Economic Co-operation and Development in terms of marginal income tax rates. An increase to 55 per cent would make our marginal rate higher than the UK’s (52 per cent) and it would send us beyond the rates which apply in other EU countries including Germany (47.5 per cent), France (50.5 per cent) and Luxembourg (43.5 per cent).
The Economist Intelligence Unit has already issued a strong cautionary message for Ireland on this very issue. Its 2012 report, Investing in Ireland – A Survey of Foreign Direct Investors, praises our pool of domestic and foreign workers, but says income taxes could be discouraging senior talent. Investors are concerned about what they see as imbalances in our personal tax system; a large gap between the average all-in tax rate paid by the typical worker, which is among the lowest in the OECD, and the marginal tax rate for top earners, which is among the highest.
They believe that these high marginal rates will make it less attractive for senior executives to settle here.
The fact that high earners in our competitor countries can earn much more before they enter the higher-income tax brackets brings the proposal for a USC increase into even sharper focus.
Just a 50-minute flight away in London, the highly skilled and highly mobile can earn a salary of £150,000 (€187,000) before they enter the top rate of income tax. In Germany, workers can earn more than €250,000 before entering the top rate, while in Spain the threshold is €175,000.
The new global trend towards lower corporate tax rates, a key element of Ireland’s tax strategy to date, means that international investors are concentrating on other taxes and income tax is coming into sharper profile. It is no longer good enough to just have a competitive corporate tax regime.
London is making serious play of its corporate tax rate reduction and is putting its marginal rate cut from 50p to 45p up in lights. Others are following where the UK has headed. There are now nine EU countries with corporation tax rates below 20 per cent, while outside the EU Singapore is tending towards reducing corporate tax and Israel has introduced an array of tax measures, with a particular focus on high-tech industry.
The upshot is that income tax rates are playing a greater role in determining the location of jobs and so recent suggestions that a 10 per cent rate of USC is “not really an income tax increase” are worrying.
There is no doubt but that the USC is a tax; it is one of the bluntest tax instruments in the State’s armoury, reducing net pay while yielding €3.1 billion for the exchequer in 2011. Combined with the 41 per cent income tax rate and a 4 per cent PRSI rate, the USC brings our marginal rate for PAYE workers to 52 per cent.