Replacing USC with 600% Property Tax is Not Likely

Nat O'Connor: Talk of a 600% increase in property tax is a catchy headline, but not realistic fiscal policy. However, it is useful if it gets people thinking about how we pay for public services—and who pays.

There is a political promise in the Programme for Government to abolish USC (the Universal Social Charge). Yet USC brings in around €4 billion per year. So, officials in the Department of Finance (and presumably Revenue) have produced a document spelling out various ways to raise €4 billion elsewhere if the USC was abolished.

There are two key questions: Do we want to keep the same level of tax revenue in order to provide the same level of public services? Who should pay more or less tax?

The USC is paid by most people in paid employment, although if you earn €13,000 or less you don't have to pay it (details on Citizens Information). Those on the highest incomes pay a higher rate, which makes it a "progressive" tax. That is, the more you earn, you progressively pay a higher rate. That makes it a very fair tax, as it targets those who can afford to pay more.

For example, while most people will pay some USC at 3% and some at 5.5% (on earnings over €18,668), that part of incomes over €70,000 is charged at 8% and the self-employed pay 11% on that part of their income over €100,000.

To answer the first question, if USC is cut or abolished (or "phased out over time"), with no replacement income, there would be a €4 billion hole in the public finances. This is equivalent to nearly half the €8.2 billion of net spending by the Department of Education and Skills in 2016 (PER Databank). That's an enormous amount of money, so cutting public services to that extent would mean large-scale job losses in the public sector, much higher fees and charges to deliver existing services, and cuts or abolition of many specialist and targeted services—such as special needs assistance in schools, disability services, or whatever (that would be a decision for the national budget).

Given that more people would prefer higher public spending than tax cuts, this would seem to be politically impossible. And it would shrink Irish public spending to even lower than its already low level in European terms.

To answer the question about who pays, replacing USC with property tax would mean that low to middle paid workers who rent would pay less—although their rents would probably increase to cover their landlords' new tax liability. Homeowners would obviously pay more, including the many home owners who are not currently paying USC, such as pensioners, people who cannot work due to disability, etc. For example, property tax of €405 on a property valued at €200-250,000 would go up to €2,835 (or €236/month) if property tax was raised by 600%.

Actually, Irish property tax is set at a very low rate and that kind of new rate would not be very different from property taxes in some US states or European countries, but it would be high compared to the UK Council Tax for example. Yet many Irish councils have already voted to decrease the amount charged, so there would likely be huge political opposition to this move.

Replacing USC with income tax might seem like a straight swop. The disliked USC "brand name" would be dropped, but most people would still pay the same level of tax from their income. However, hidden behind this change is the fact that there are major tax breaks that apply to income tax that do not apply to USC; so those on the highest incomes would actually pay less income tax than they currently pay USC. That shortfall would have to be replaced with even higher rates of income tax than the current USC rates, which would actually mean lower and middle income earners paying more, and those on higher incomes paying less; overall, a regressive outcome.

Replacing USC with spending taxes, like VAT or taxes on alcohol and petrol, would raise Ireland's already high rates of these kinds of taxes, which have a proportionately greater impact on those on low incomes; another regressive outcome.

It actually turns out that USC is among the fairest taxes that we could have. While it might seem reasonable to reduce taxes on low to middle income taxpayers, they already pay among the lowest taxes in the Western world. And public services rely on taxing most people, even though those on very high incomes could indeed afford to pay more (or to have fewer generous tax breaks).

The big hole in Ireland's tax system is actually social insurance. Both employees and employers pay far less than would be paid elsewhere in Europe. One politically feasibly option would be to convert USC into social insurance (PRSI), which would have the advantage of propping up Ireland's State Pension, which badly needs more funding. Turning USC into PRSI might make it easier for people to agree to, as they would be paying for their own pensions, and paying insurance to cover themselves in case of disability, pregnancy or unemployment.

And if there are moves to bring the self-employed into the social insurance system, switching USC into social insurance would be the ideal time to boost the amount of money available to begin to cover the self-employed, which would be good for entrepreneurship, as it would lower some of the risks involved in striking out on your own in the economy.

My preference: swop USC for social insurance, and take the opportunity to secure the State Pension and to extend protection to the self-employed. That would be the fairest option, as long as those on the highest incomes continue to pay as much PRSI as they currently pay in USC.

Nat O'Connor is Lecturer in Public Policy and Public Management at Ulster University, and a member of TASC's Economists' Network.