Wednesday 17 January 2018

Dan White: The USC is here to stay no matter what politicians tell you

Senior couple at home reacting to many bills
Senior couple at home reacting to many bills
Pictured posed

Heard the one about the lrish workers who paid almost no tax? No, that's not a joke - but the conclusion of an official OECD report.

In its latest report on taxing wages, the Paris-based club of rich countries calculates that an average married worker with two children in Ireland paid just 0.2pc of his or her income in tax in 2014.

You could have fooled me.

What about the savage tax increases, not least the introduction of Universal Social Charge (USC), of recent years? Surely these have hit the pay packets of average workers?

Does the OECD inhabit the same planet as the rest of us mere mortal taxpayers?

In reaching its conclusions the OECD takes into account child benefit, currently €135-per-month per child.

This was increased by €5 in last October's budget so a family with two children would have received €260-per-month in Child Benefit in 2014.

Further complicating matters is the OECD's vagueness on the subject of the Universal Social Charge. The average worker pays 7pc USC on most of his or her income.

Has the OECD incorporated USC into its calculations? Unfortunately the OECD report is about as clear as mud on this topic.

Despite having read the report several times I was unable to determine whether it had or had not.

The only clue in the report that it might have done so is provided by a table showing that the tax wedge - the difference between what a worker costs his or her employer, including employers' PRSI, and the worker's take-home pay - had increased by 3.4pc for a single worker since 2009.

Unfortunately the OECD doesn't provide the same information for any change in the tax wedge of married workers.

However, whatever about the position of married workers with children, it is clear from the report that single workers have been absolutely clobbered since 2008.

While a married worker with two children on the average income pays an effective tax rate of 0.2pc compared to an OECD average of 14.8pc, his single counterpart pays an average effective tax rate of 20.5pc, much closer to the OECD average of 25.5pc.

Extrapolating from the OECD's tax wedge calculations it would appear that the effective tax rate paid by a single worker has jumped by about 5pc since 2009. Ouch!

While the OECD report may have nothing to say explicitly on the topic of the USC, the clear implication is that it isn't going anywhere any time soon.

Last year the Government raised an estimated €4bn from USC.

That was almost a quarter of the total €17bn income tax take and almost a tenth of the total tax take of about €41bn.

The beauty of the USC from the Department of Finance's point of view is that it is payable from the first cent of income with no nonsense about tax credits or tax breaks.

With most of the revenue from property-based taxes such as capital gains tax, VAT on new houses, stamp duty and taxes paid by builders and building workers - €10bn-a-year at the peak of the property bubble - gone forever, no Minister for Finance will want to give up USC in a hurry.

Current Finance Minister Michael Noonan has been quite open about his desire to retain USC and the revenue it brings in.

This is why voters should treat promises to either reduce or scrap USC altogether with extreme scepticism.

In the run up to next year's general election we can expect to be bombarded with promises to "do something" about USC by politicians of all hues.

While this might play well with hard-pressed taxpayers I have some very bad news for you all: it simply ain't going to happen.

Out there in real world, with the Troika still marking our fiscal homework, the brutal truth is that the Irish exchequer needs USC or something very like to balance the books.

This means that even in the unlikely event of USC being formally scrapped, its replacement will look and feel very similar.

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