Scrapping USC for those earning under €70,000 would cost exchequer €1.7bn

Donohoe argues against proposed changes to USC, noting cost to exchequer

Abolishing the Universal Social Charge (USC) for those earning less than €70,000 a year would cost the exchequer €1.7 billion annually, Minister for Finance Paschal Donohoe has said.

Speaking during the committee stage of the Finance Bill, Mr Donohoe said some of the changes being advocated by Opposition TDs in relation to USC would significantly erode the State's tax base while damaging the competitiveness of the tax code.

The Regional Independent Group of TDs had tabled an amendment to the Bill, calling on the Minister to abolish the USC for those earning less than €70,000 and replace it with a new national solidarity tax on incomes above €120,000 and on the profits of companies whose net profits exceed €1.5 million per year.

But Mr Donohoe said the removal of the USC on incomes below €70,000 would cost in the region of €1.7 billion in a single year.

Structure

Assuming no other policy changes to the structure of the USC, a new 14 per cent rate on those earning over €120,000 would be needed to raise the same level of revenue “and ensure that this is a cost neutral proposal”, he said.

Mr Donohoe also noted that an amendment tabled by People Before Profit TD Richard Boyd Barrett, calling for the USC to be scrapped and replaced with a high income social charge of 10 per cent on all earnings above €90,000, would have similar implications.

Abolishing the USC entirely would cost the exchequer €4.4 billion in a single year, Mr Donohoe said. And while replacing it with a social charge of 10 per cent on incomes above €90,000 would yield €1.59 billion, there would still be a shortfall of €2.8 billion, Mr Donohoe said.

“In fact it is estimated that it would be necessary to place an additional charge of 28 per cent on all earnings over €90,000 in order to raise an equivalent level of revenue for the deputy’s proposal to be cost neutral to the exchequer,” Mr Donohoe said.

Base

The Minister said the current exemption threshold for USC – €13,000 per annum – effectively exempted 28 per cent of all income earners.

To further increase this entry threshold to €70,000 would exempt about 88 per cent of income earners from USC, or 100 per cent if the USC was abolished in its entirety.

“This would significantly narrow the income tax base and would expose our economy to significant risk in the event of a future economic downturn,” he said.

Mr Boyd Barrett said the contribution of workers in terms of tax and USC “went through the roof” after 2007, noting workers were paying about €13 billion in tax during the pre-crash era which has risen to €27 billion now.

The big jump happened as a result of the USC, “that’s never been rolled back”, he said. “We’ve essentially turned an emergency tax into a permanent tax,” Mr Boyd Barrett said.

He said the shortfall in his proposals for abolishing the USC would be made up from tax changes elsewhere.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times