USC winding down proposals ignite row over tax base

The proposed abolition of the universal social charge (USC) by three of the big parties has provoked a row on whether or not it will narrow the tax base.

The USC was introduced in late 2010 by the Fianna Fáil-led government as a replacement for the health and income levies. It has generated €4 billion for the State annually.

Because it was levied on gross income, including from low earners, it resulted in payments from more than 500,000 additional people than had paid the health or income levies.

It removed the scope for higher earners to avoid paying any tax through contributions to pension funds, forestry and mining exemptions, patent royalties and capital allowances for passive investors.

Fine Gael, Labour and Fianna Fáil have made winding down USC a central part of their manifestos. Fine Gael has promised to scrap it with countervailing collection measures for those earning above €70,000. The other two parties have committed to discontinuing the levy by 2021 for those on under €70,000-€72,000.

Of the other parties, Sinn Féin and the Social Democrats have said they will retain the tax, with some minor adjustments, on the basis that the State cannot afford to lose the revenue. They have also argued that it will narrow the tax base and allow higher earners to avail of tax shelters.

A report examining USC by the tax policy group within the Department of Finance robustly defended it on the basis it had broadened the base. It also said the levy had been wrongly blamed for the big cuts in pay packets in 2011. Those cuts were mostly attributable to reductions in credits and bands.

Tax base

A senior Fine Gael source said much had changed since 2011 and 70 further measures had been introduced to broaden the tax base, which cumulatively increased the take by €3.5 billion annually. Virtually all of the tax breaks and loopholes available then have been closed. “The argument might have been valid in 2011 but not any more. The key point is that USC abolition is not narrowing the tax base: it is just reducing rates to encourage work, effort and entrepreneurship,” the source said.

Sinn Féin finance spokesman Pearse Doherty said the levy was synonymous with austerity, and others had done the populist thing by promising to scrap it. He said it would narrow the tax base and top earners would benefit most.

Stephen Donnelly of the Social Democrats said it would narrow the base. "If you get rid of a tax people cannot avoid, you narrow the base. For me and my party, USC is efficient and progressive, especially for high-income earners," he said.

A Fianna Fáil spokesman separately defended its measures on the levy, saying those earning more than €70,000-€72,000 would continue to pay it. New taxes such as property tax, water charges, the end of the PRSI exemption for unearned income and the lifting of the PRSI ceiling had served to broaden the base, it was argued.