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Irish Finance Department Moots Options For USC Reform

by Jason Gorringe,, London

01 August 2017

Ireland's Finance Department has published a paper on policy options for reform of the Universal Social Charge (USC), which include a possible merger with Pay Related Social Insurance (PRSI).

The paper is one of many prepared for consideration by the Tax Strategy Group (TSG) as part of the budgetary process. The TSG is an interdepartmental committee chaired by the Finance Department. It is not a decision-making body, and the papers produced by the Department are intended to provide a list of options and issues to be considered in the budgetary process.

The USC was introduced in 2011 and replaced the Income Levy and Health Levy. It is charged in addition to individual income tax. Budgets 2016 and 2017 reduced the lower rates of USC and increased band ceilings. The Programme for Partnership Government, published last year by the minority Fine Gael administration, included a commitment to phase out the USC.

The paper noted that, when the USC was first proposed in Budget 2010, it was intended as an eventual replacement for employee Pay Related Social Insurance (PRSI). It stated that there are a number of theoretical advantages to be gained from simplifying the existing three-charge system by amalgamating the USC with the PRSI, as opposed to amalgamating the USC with income tax.

It explained that the tax bases for USC and PRSI are similar, and that, in contrast to income tax, the USC and PRSI have few reliefs or exemptions in place. Both the USC and PRSI are individualized taxes, whereas income tax allows for the joint assessment of married couples/civil partners.

However, the paper acknowledged that a number of challenges would have to be overcome were the USC and PRSI amalgamated. For instance, individuals aged 66 and over are not liable to PRSI but are liable to USC. While PRSI operates on a week-one basis the USC is a cumulative annual tax. The Government could also have to consider whether to preserve the existing employer PRSI charge in its current form.

The paper also set out options for income tax reform. The Programme for Partnership Government committed to an increase in the Earned Income Tax Credit for the self-employed, to bring it into line with the PAYE credit, which currently stands at EUR1,650 (USD1,950).

The paper stated that the Government could increase the Earned Income Tax Credit to this level in the upcoming Budget, at a cost of EUR58m in the first year and EUR103m in a full year. Alternatively, it could increase the credit in two stages, across Budgets 2018 and 2019. This would cost EUR29m in the first year and EUR52m in a full year.

TAGS: individuals | Budgets | tax | Ireland | tax credits | tax rates | social security | tax reform | individual income tax

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