The USC was designed and incorporated into the Irish taxation system in 2011 to replace two other charges, namely the Health and Income Levies. Its primary purpose was to widen the tax base and to provide a steady income to the Exchequer to provide funding for public services.
The USC is an individualised tax, meaning that a person’s liability to the tax is determined on the basis of his/her own individual income and personal circumstances. The USC is applied at a low rate on a wide base, which ensures that it is a stable and sustainable source of revenue for the State.
Currently individuals with incomes of less than €13,000 are exempt from USC. For 2022, it is estimated that 28% of all taxpayer units will be exempt from USC. I would also note that in recent Budgets, including Budget 2022, this Government actively increased the USC ceiling for the 2% rate in line with increases to the national minimum wage, to ensure that a full-time adult worker who benefits from the increase in the hourly minimum wage rate would remain outside the top rates of USC.
The USC has played a vital part in meeting the many expenditure demands placed on the Exchequer. USC receipts have been central to the current stability of the public finances since March 2020, despite the challenges arising from the Covid-19 pandemic.
Receipts from the USC in 2021 amounted to €4.4 billion – 16.5% of total income tax receipts or 6.4% of total Exchequer receipts. The projected USC yield for 2022 is broadly similar. If USC were to be abolished, it would be necessary to raise approximately €4.4 billion from other sources.
In 2016, joint Department of Finance/Economic and Social Research Institute (ESRI) research found that USC represented a more stable form of revenue than income tax. The findings highlighted that USC revenues would fluctuate by less than income tax revenues whenever income is volatile, for example where the economy moves from a boom into a bust. Given the openness of the Irish economy and consequent susceptibility to economic shocks, the contribution that the USC makes to the stability of the State’s revenue sources is considerable.
The Deputy may wish to note that an inter-departmental working group was established in February 2018 to examine and report on options for the amalgamation of USC and PRSI over the medium-term. The Report of the Working Group can be located here: //assets.gov.ie/180893/1c9cd219-fb8a-47d2-86c3-d1cd9c3bcf03.pdf.
The report acknowledged the complexity of the amalgamation proposal and confirmed that there is no single option that can deliver the proposed amalgamation without leading to implications at the individual level, with some people paying more, or significant loss of Revenue for the State overall. In the light of the information brought forward in the report, the proposal has not been pursued.
The Deputy refers to the concept of incorporating the USC into the wider taxation system. I have already referred to the examination of USC/PRSI above. Another idea might be to incorporate the USC into the personal income tax system and, on the face it, a single unified income tax system may appear to offer advantages as compared with current arrangements. However, many of the significant challenges outlined in “The Report of the Working Group on the Amalgamation of USC and PRSI”, published in September 2018, remain valid in the context of an amalgamation of USC and Income Tax.
There are no plans at present to carry out any further analysis on the proposal suggested by the Deputy.
Ireland has one of the most progressive personal income tax systems in the world, which plays a crucial role in the process of income redistribution. Our redistributive tax system has been acknowledged by the IMF, the OECD and the ESRI. In my view, a broad-based, progressive income tax system, where the majority of income earners make some contribution but according to their means, is the most fair and sustainable income tax system in the long term.