Dáil Éireann Debate, Tuesday - 8 October 2013
161. Deputy Maureen O'Sullivan asked the Minister for Finance further to Parliamentary Question No. 53 of 13 March 2013, if he will describe in detail the poverty traps mentioned in the programme for Government; and if he will make a statement on the matter. [41990/13]
View answer162. Deputy Maureen O'Sullivan asked the Minister for Finance in view of the fact that the universal social charge was introduced in budget 2011 to replace the income levy and health levy, the reason for both these levies and if this reason or purpose has changed with the amalgamation and change of name in budget 2011; and if he will make a statement on the matter. [41991/13]
View answerI propose to take Questions Nos. 161 and 162 together.
As I have stated previously in my reply to Parliamentary Question 53 (ref number 13227/13) of 5 March 2013, the Universal Social Charge (USC) was introduced in Budget 2011 to replace the Income Levy and Health Levy. It was a necessary measure to widen the tax base, remove poverty traps and raise revenue to reduce the budget deficit. The Health Levy was introduced in the Health Contributions Act, 1979 and was payable on all reckonable income and subject to certain exemptions. The Health Levy was collected along with PRSI contributions by the Revenue Commissioners. Under the legislation, it was paid into the Social Insurance Fund and transferred from there to the Minister for Health, where it was appropriated to the Health Vote as an appropriation-in-aid.
The Income Levy was introduced along with a suite of revenue raising measures in Budget 2009 in response to the economic downturn and in order to assist in stabilising the Exchequer finances. Payment of the Health Levy and the Income Levy did not confer any entitlement or specific benefits to an individual. However, individuals in general do benefit from the services provided by the State. Likewise, individuals that are subject to the USC charge do not accumulate entitlements or specific benefits.
The poverty traps under the Income Levy and Health Levy systems were related to the annual exemption thresholds that applied of €15,028 and €26,000 respectively. These thresholds meant that if an individual’s income was below the relevant exemption threshold they were not subject to charge. However, as soon as an exemption threshold was exceeded, the charge was due on all income, not just the income in excess of the exemption threshold.
The Health Levy was payable at 4% on an individual’s entire income including the portion below the threshold. Thus, what is often described as a “step effect” was experienced at income levels bordering the threshold. It led to circumstances where an increase in gross pay for a person with an income just below the threshold, resulted in a reduction in net take home pay, thereby creating a poverty trap. The step effect in the Health Levy system was very severe. A €1 increase in annual pay could lead to a net reduction of €20 in net pay per week or about €1,040 per annum.
The Income Levy was payable at 2% on an individual’s entire income including the portion below the threshold. Although, a less severe step effect than that experienced for the Health Levy, it still could result in cases where a €1 increase in annual pay could lead to a net reduction of just under €6 in net pay per week or about €300 per annum. The introduction of the USC has reduced the severity and number of step effects in the taxation system. Although, there is currently a step effect in the USC structure at €10,036 per annum, the income level at which one becomes liable for USC, the impact is lower. Furthermore, the Government increase to the exemption threshold for USC from €4,004 in 2011 to €10,036 per annum in 2012, acted to remove 330,000 from any liability to the USC.
