Ger Gibbons is a researcher with SIPTU, Ireland's largest trade union.
SIPTU proposal for new Social Solidarity Contribution to replace USC
The Universal Social Charge (USC) was introduced in the early stages of the economic crisis, solely as a revenue-raising measure. It remains firmly associated with the years of austerity and a very significant imposition on low- to middle-income earners that should be abolished.
It is time to begin the process of moving from the USC to a new progressive mechanism. SIPTU is proposing a new Social Solidarity Contribution accompanied by a specifically linked Social Solidarity Contribution Credit.
Our proposals are based on four key principles:
i) Retaining the progressive elements of the existing USC;
ii) Dedicating the yield for social investment purposes;
iii) Ensuring transparency as to the use of contributions;
iv) Reducing the charge on low- to middle-income earners.
In order to reduce the current levy on low- and middle-income earners we propose that the current rates and bands should remain unchanged. A new Social Solidarity Contribution Credit of €775 for all income earners earning up to €100,000 should be introduced and a 10% rate (as suggested by the Department of Finance in 2011) should be applied on income over €100,000.
The effect of these measures would be to exempt all incomes up to the Living Wage (i.e. approximately €23,250) and to considerably reduce the levy on other low- to middle-income earners.
The yield from the Social Solidarity Contribution would not go into central exchequer funds. It would be dedicated exclusively to redressing the ongoing social damage caused by the crisis and to addressing the key social challenges now facing Irish society.
The Social Solidarity Contribution would invest in childcare and early-school learning, education, life-long learning and re-training, healthcare, and eldercare services and support for independent living (thereby helping to address the issue of late discharges from hospitals).
Contributions would also be used to prepare for the ageing of Ireland’s population in the years ahead, such as by developing the statutory component of a second pillar pension system.
In contrast to the existing USC (which simply merges into central exchequer funding), the Government would be required to provide clear and regularly updated information to the public as to how SSC contributions are being used. Countries such as Norway, Sweden and the UK have begun to do this over recent years. Ireland should now do the same, starting with the SSC.
There is little doubt that some aspects of the existing USC are progressive, particularly in comparison to other parts of the Irish taxation system. The USC applies to many different types of income and has fewer exceptions and reliefs. This means that wealthier income earners cannot avoid paying the USC whereas they can (and do) quite easily escape other forms of taxation. These progressive features should not only be retained under the Social Solidarity Contribution but should be “exported” across the wider Irish taxation system so as to ensure all income earners pay their fair share.
Despite these progressive features, other aspects of the USC are deeply regressive. The charge amounts to a “flat tax” on all income between €17,576 and €70,044 with the 7% rate applying throughout. There are also substantial “step-effects”, with sizeable jumps in liability over a relatively narrow increase in income (e.g. from 1.5% to 3.5% over €12,012 and 3.5% to 7% over €17,576). Furthermore, the standard rates do not increase in line with income beyond the 8% rate above €70,044.
In our view, the best remedy is a credit of €775 which would be specifically linked to the Social Solidarity Contribution. Everyone would get the same on all liable income up to €100,000 per annum. Thereafter, it would cease to apply. Moreover, those on incomes above that level would pay a higher levy of 10%. This would ensure that the greatest proportionate benefit would accrue to low and middle income earners.
The current USC has contributed between one-fifth and one-quarter of total income tax each year since its introduction in 2011. The most recent estimate is that it will make the same yield in 2015. Our proposal is aimed at yielding at least the same amount as the USC, but through a fairer mechanism that involves effectively lower contributions from low- to middle-income earners counter-balanced by higher contributions from higher-income earners.
We estimate that introducing a Social Solidarity Contribution Credit of €775 per annum for all income earners earning up to €100,000 could cost in the region of €900 million. The cost of maintaining reduced rates such as for medical card holders and income earners aged 70 and over on incomes of less than €60,000 would also have to be considered.
In order to introduce the SSC Credit, additional resources would be raised by bringing in the 10% rate proposed by the Department of Finance in 2011 on income above €100,000. This could reduce the estimated €900 million cost by approximately €100 million to €125 million.
Additional resources could also be raised through new revenue raising measures. These could include reform of Capital Acquisitions Tax and the introduction of a Net Wealth Tax (estimated yield of €400m), reform of tax expenditures, such as those related to property and pensions (estimated yield of €100m), online betting tax (estimated yield of €70m), and increases in excise on tobacco (estimated yield of €35m).
These measures would be in line with EU rules that ‘excess’ spending growth (i.e. beyond Ireland’s permitted ‘fiscal space’) be resourced through discretionary taxation. Our proposal is a demand for a progressive mechanism that effectively eliminates the charge entirely for income earners below the Living Wage (i.e. €23,250 a year), that cuts it by half for all individuals on the standard band threshold (i.e. €33,800) and that reduces it considerably for middle-income earners. Meanwhile, it would raise the same level of much-needed revenue.
Any further cuts to the top rate of tax, aside from accruing to a minority of taxpayers, would only undermine the progressive elements of our proposal, and should not be pursued.