12 Jan 2018 | 02.39 pm
Selective ‘Fairness’ With Income Tax Changes
USC is used to minimise high earner gains
12 Jan 2018 | 02.39 pm
With the new income tax measures taking effect in January 2018, finance minister Paschal Donohoe (pictured) has continued the practice of using USC to minimise high earner gains from Budget 2018 income tax adjustments
All earners received some level of tax relief in Budget 2018, maxing out at €328 per annum no matter how much you earn. The largest gains were for people earning under €20,000, though that’s mostly down to the rise in the National Minimum Wage being foisted on employers from January 2018.
Income tax will account for 40% of government tax revenues in 2018 compared with 28% a decade ago. The peak of income tax deductions from earnings was 2013 and 2014, and a process of slow reductions commenced in 2015. Tax policy has focused on reducing income tax, PRSI and USC deductions on the large cohort of earners who are paid under €20,000 a year. This policy thrust was driven by the imperative to ‘make work pay’ relative to social welfare benefits.
High earners got a break in 2015, when the Fine Gael/Labour coalition reduced the top income tax rate from 41% to 40% and increased the standard rate income tax band, at a total tax cost of €290m.
In 2016, ahead of the general election and in the forlorn hope of appeasing Labour Party voters, all the income tax focus was on USC, and rate cuts were only directed at income under €70,000 p.a. The tax cost of the USC package that year was estimated at €560m.
For 2017, Fine Gael had Fianna Fail looking over its shoulder, and again all the USC rate cuts were for income under the €70k threshold, with an estimated tax cost of €335m. For the second ‘confidence and supply’ budget, Fine Gael got some of its mojo back. The Budget 2018 tax reductions package includes changes to the standard tax band (tax cost of €132m), though once again sub-€70k USC rate cuts are the main focus (tax foregone cost of €177m).
When the Universal Social Charge was introduced by the former finance minister Brian Lenihan seven years ago, his stated goal was to ensure that all income earners make some sort of income tax contribution to the cost of public services.
Since then, the USC exemption threshold has been raised from €10,000 to €13,000, the 2.0% rate has come back to 0.5% and the 4.0% rate is now down to 2.0%. The €20k to €70k USC rate has been whittled back from 7.0% to 4.75%, while the higher rate of 8.0% (11.0% for self-employed income over €100k) has been left untouched.
Under former finance minister Michael Noonan, the Universal Social Charge evolved into a tool to deliver tax cuts to the majority while minimising gains for the richer minority. Paschal Donohue has continued with that thinking, though high earners can be relieved that he left the PAYE credit alone – at least for now.
The Programme for Partnership Government contains a commitment to consider the tapering on a sliding scale the PAYE and Earned Income credits for high earners. The Irish Tax Institute calculated that if the credit were tapered out for income earned between €70,000 and €80,000 then the marginal rate of tax paid on income in this €10,000 band would be 68.5%. As Ireland already has the second most ‘progressive’ tax system in the OECD, Donohoe wisely decided to long-finger that PGP commitment.