By Michael Taft.
It is not the biggest issue in the Programme for Government. But sometimes small proposals can speak volumes. So what are we to make of the following commitment in the PfG?
“The 3% USC [Universal Social Charge] surcharge applied to self-employed income is unfair and proposals will be considered to ameliorate this over time as resources allow.”
Reading though the lengthy document one might miss this or fail to grasp exactly what it entails. After all, the 3 per cent Universal Social Charge (USC) surcharge is not the subject of much political discussion – indeed, none at all. Most would not be aware of it. It is a minor tax. But it is one that is paid exclusively by the highest income earners in the economy – a 3 per cent surcharge on self-employed income in excess of €100,000.
“Proposals will be considered to ameliorate this tax over time…” Hats off to whoever came up with the word “ameliorate”. We don’t cut taxes anymore. We “ameliorate” them. And this amelioration would constitute a significant tax windfall to the highest income groups in the economy.
The surcharge originates in Budget 2011, which introduced the Universal Social Charge while abolishing the complex interaction of the income levy, health contribution and Pay Related Social Insurance (PRSI) ceiling for Pay As You Earn (PAYE) employees.
This created an anomaly. Prior to the budget, high-income self-employed people paid a higher marginal tax rate because they didn’t have a PRSI ceiling (that is, they paid PRSI on the entire income). When Budget 2011 abolished the ceiling for PAYE taxpayers, this resulted in a significant tax break for very high-income self-employed visa-a-vis those in the PAYE system (I highlighted this anomaly here at the time).
To fix this anomaly and return the situation to the pre-Budget 2011 status quo, the government quickly amended its proposals and introduced a 3 per cent USC surcharge on self-employed incomes above €100,000. That’s where things stand now.
Let’s look at some statistics (but note that these are probably overstated because the Revenue Commissioners treat married couples and civil partners as a single tax unit).
- There are approximately 46,000 self-employed (including couples) whose incomes exceed €100,000
- They earn, on average, over €200,000
- There are 7,600 “cases” (including couples) that earn over €275,000 – they average over €500,000 a year
Here are some examples of the tax benefit of abolishing the USC surcharge for those on high incomes:
Someone on €500,000 a year would gain €12,000 if the USC surcharge was abolished. That’s a serious tax cut.
How much would it cost the state to abolish (or fully ‘ameliorate’) the USC surcharge? €125 million. It’s not much in the grand scheme of things but neither is it small change.
Unfair?
Why would the new tri-party coalition consider cutting this surcharge? It certainly can’t be because it is a disincentive to work (a common justification for cutting taxes). Nor does the explanation lie in ‘promoting entrepreneurship’ (are these high earners going to work harder after the tax cut?). And it certainly isn’t because it would be counter-cyclical. These people would save, not spend, their tax windfall.
Maybe it’s because, as the PfG describes it, “it’s unfair”. There are two responses to this. First, the self-employed are advantaged in the PRSI system. They pay 4 per cent PRSI contributions and now receive most PRSI benefits. However, for employees the contribution rate is 14.75 per cent – divided between employees (4 per cent) and employers (10.75 per cent).
Yes, employees pay the same rate. However, if employers’ PRSI were abolished, wages would rise (mirroring the high-wage Danish experience, which has no social insurance system). Therefore, employees pay more through reduced wages.
Most EU countries address this by charging the self-employed a contribution rate somewhere midway between the employee and employer rate. We don’t do that in Ireland. The USC surcharge can be seen as a small nod towards equal treatment.
Secondly – well, there are a lot of unfair things in this economy: unemployment, poverty, business closures, growing arrears and debt. Is the USC surcharge on incomes above €100,000 really in the same category? Even if we were to concede it is ‘unfair’ (and I just can’t) then you would, at least, put righting-this-wrong at the back of the queue – the very back.
There are many things we should ameliorate (cut) first: ameliorate homelessness, ameliorate health waiting lists, ameliorate high rents, ameliorate joblessness, ameliorate workplace exploitation, etc. etc.
The 3 per cent USC surcharge is not one of them.
Michael Taft is a researcher for the SIPTU trade union. He blogs at Notes on the Front. Follow him on Twitter @notesonthefront.
Read the full Programme for Government here.
Top image: Fine Gael and Fianna Fáil leaders Leo Vardkar and Michael Martin.
One ‘advantage’ of USC is that it is up front, no weaving or dodging. Given the number of options, available to the higher earners, a tax which catches them is not a bad idea, in principle.
The self employed issue is much broader than USC or PRSI. It became popular as a means for employers to hire and fire and avoid the costs of a desk and a chair. Most of the changes in the treatment of the self employed were introduced to “catch” what looked like avoidance, such as claiming travel expenses for going to work. There has been little or no change in the race to the bottom elements or the zero hours aspect.