Wednesday, 25 November 2015

Don’t cut the USC – keep it for universal health care

Rory Hearne: The pre-election promises of tax ‘give-aways’ in future Budgets have begun in earnest with Labour and Fine Gael’s reported proposals to reduce and abolish respectively the USC. But such changes to the USC would be bad economic and social policy decisions. The USC is a progressive tax that provides enough revenue to cover the entire capital spending budget. Reducing and abolishing the USC is likely to have a devastating impact on the provision of funding for much needed public services such as universal childcare, education and healthcare.

There are a number of reasons why cutting the USC and, ultimately, abolishing it would be a bad social and economic decision for the next government to make.

Firstly, the USC raises a substantial amount of revenue that is used to fund vital public services and investment. The USC will raise €4bn this year which is greater than the Government’s entire capital investment budget for spending on infrastructure (housing, hospitals, roads etc.). The USC raises about two thirds of what is raised through corporation tax and comprises 8.5% of the total revenue raised by the state.

Abolishing the USC would be the kiss of death to plans of extending the government’s welcome increases in funding in areas such as early childhood education, or providing universal health care in the near future.

Funding for public services and investment in Ireland is at chronically low levels and according to projections, by 2019 we are likely to end up with the lowest government expenditure in the EU at just over 30% of GDP, against a Euro area average that will be closer to 50%.  Cutting the USC will make this worse.

A 1% reduction in the 5.5% rate will reduce revenue available for public spending by almost €400 million per year (€253 million in the first year and €348 million in a full year). Abolishing the USC for all income earners earning less than €70,000 would cost €2.52 billion per annum of lost revenue.
The proposed cut also needs to be viewed in the context where the Minister for finance has outlined that the 2017 Budget the Government will only allocate €500 million for tax cuts and spending increases. This is down on the €750 million allocated in Budget 2016. Reducing the USC will take up much of that €500 million and leave little for spending increases without other taxation increases. Note as well that the government has also outlined that EU rules will not allow supplementary spending increases in next year’s Budget which will reduce spending increases further.

If we want to address some of the chronic deficiencies in our public services, for example in the health service – such as the situation where elderly patients are left waiting on trolleys – and move toward a universal public health system – then we need to maintain funding for such services through taxation measures like the USC. Cutting taxes like the USC removes the base for investment in high quality public services.

The second reason why cutting the USC is bad news is that the USC is a highly progressive tax in contrast with the previous health and income levies which had flat contribution rates. It also allows fewer tax allowances and tax credits which benefit mainly those on higher incomes to reduce their income tax. For example, of the €5.5bn in tax allowances in 2012 the revenue commissioners have estimated that 53% of these tax allowances accrue to the top 10%. Thus the USC ensures those on higher incomes pay more and cannot use the various accountancy measures and expertise they can afford to avoid it.

The discussion about the proposed reductions to the USC has again, incorrectly, referred to those on €70,000 as ‘middle income’ earners. The facts are that the middle income range is between €25,000 and €40,000. A half of all earners have an income less than €27,000, while earning over €60,000 puts you in the top 16% of earners and over €50,000 puts you in the top 22%. And note that 30% of earners (703,000) earn below €12,000 and thus are exempt from the USC.

Abolishing the USC would benefit someone on €25,000 by approximately €750 while someone on €150,000 would benefit by over 20 times that amount (€16,000). TASC has consistently highlighted how cuts to the USC benefit higher earners (read more here).

Of course other taxes can be raised to bridge the gap but in the context of the various political parties making the case for a reduction in taxes such as the USC it is difficult to see why, and how, they will make the case for other tax increases. Surely it would be a contradictory message to be making.

The reality is that those on lower and middle incomes lose out in the tax-reduction policy agenda as the ‘cash-in-the-pocket’ benefit is a fallacy. They lose because the amounts gained through tax reductions would go much further for these households if they were invested in public childcare, transport, and healthcare.

When the state invests our tax collectively it can achieve economies of scale and offer lower, controlled, prices (as it is not seeking a profit like the private sector) which reduces the cost of provision of such services. A system of lower taxes (as is the current case) means less public provision and the private ‘for-profit’ market plays a big role providing services like child care, health care and housing with the result that people pay exorbitant prices. Those on lower incomes lose out most in terms of access and quality.

Keeping the USC would allow an improvement in quality and availability of much needed public services and infrastructure such as universal health care. The hard reality is that if we are to address the current unacceptable levels of inequality and deprivation and provide the infrastructure base for a sustainable and equitable recovery then we need to find ways to increase taxation revenue, quite the opposite of the current political fervour.

Dr Rory Hearne is a Senior Policy Analyst at TASC. You can follow him on twitter @RoryHearne

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