It is not the biggest issue in the Programme for Government (PfG). But sometimes small proposals can speak volumes. So what are we to make of the following commitment in the PfG?
‘The 3% USC 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 percent 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’s one that is paid exclusively by the highest income earners in the economy – a 3 percent 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 PRSI ceiling for PAYE employees. This created an anomaly. Prior to the budget, high-income self-employed 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 (my post at the time highlighted this anomaly).
To fix this anomaly and return the situation to the pre-Budget 2011 status quo, the Government quickly amended their proposals and introduced a 3 percent USC surcharge on self-employed incomes above €100,000. And that’s where things stand now.
Let’s do some quick stats, but note that these are probably overstated because the Revenue Commissioners treat married coupls 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.
And 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.
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 percent PRSI contributions and now receive most PRSI benefits. However, for employees the contribution rate is 14.75 percent - divided between employees (4 percent) and employers (10.75 percent). 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 European countries address this by charging the self-employed a contribution rate somewhere midway between the employee and employer rate. We don’t do that here. The USC surcharge can be seen as a small nod towards equal treatment.
But, 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 percent USC surcharge is not one of them.
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