Recently some commentators have highlighted that market income inequality in Ireland is the highest in the OECD. While this may be the case, the Irish tax and social welfare system is the most effective at reducing income inequality, of the OECD member countries.
The redistributional impact of the Irish tax and social welfare system is the largest in the OECD and leaves Ireland's level of inequality at around the OECD average. Consequently it is unfair to characterise Ireland as unequal, when compared to its peers. Nor is it true to say that the gap is widening over time. Despite the significant economic decline that has occurred over the past 7 years, the level of disposable income inequality in Ireland has been stable over the period. This has been achieved in part because of the Government's commitment to making everyone in society pay their fair share. For example, the changes introduced in Budget 2015 will ensure that the top 1% of tax units (by income) will pay 20% of all income tax and USC collected in 2015, up from 19%. In contrast, the bottom 76% of income earners will pay only 21% of all income tax and USC collected.
As I have pointed out many times before, it was never intended that the USC would be a temporary measure. It was designed and incorporated in to the Irish taxation system as part of its permanent structure and the revenues collected play a vital part in meeting the many expenditure demands placed on the Exchequer. In addition, it is difficult for higher earners to shelter income from the charge to USC through the use of various income tax reliefs and incentives.
Notwithstanding the above, since coming into government, I have made several significant changes to the USC which has increased its fairness. As a result of a Review of USC by my Department, the Government decided in Budget 2012 to increase the entry point to the Universal Social Charge from €4,004 to €10,036 per annum. It is estimated that this removed almost 330,000 individuals from the charge. In Budget 2015, I further extended this exemption threshold to €12,012 to apply from 1 January 2015 onwards. This exempted a further 87,000 individuals from the charge. This means that 28% of all income earners are not paying any Universal Social Charge at all. Furthermore, I also reduced the two lower rates at which USC is charged and extended the threshold before the 7% rate becomes chargeable. These measures, together with the introduction of a new 8% rate on income over €70,044, as well as a rate increase from 10% to 11% on self-assessed income over €100,000, has further enhanced the existing progressive nature of the USC.
As a result of the changes to income tax and USC in Budget 2015, all those who currently pay income tax and/or USC have seen a reduction in their tax bill this year compared to 2014, where incomes are equal. The Government has committed to continue to reform the tax system in this manner in the coming years, contingent on having the fiscal space to do so.
