BRIAN KEEGAN: Merging USC with PRSI will be a huge challenge

Tax is tax. Does it really matter whether it is in the form of income tax, or USC, or PRSI, asks Brian Keegan

Either way, it is a cumulative chunk taken from people’s pay, or paid with the self-employed return-of-income every November.

So, last week’s Cabinet decision to form a working group to merge PRSI and USC will, for many people, seem to be of little consequence.

Even though there might seem to be little difference in the net effect of USC and PRSI — a reduction in take-home pay — they operate under very different rules. PRSI is calculated on weekly earnings; USC is calculated on annual earnings.

There is just one rate of PRSI — 4% for employees and the self-employed alike.

But there are multiple rates of USC, and the self- employed, with higher earnings, pay higher rates of USC than employees earning the same amount. These complexities can make collection error prone, and government forecasting more open to mistakes.

The Government collected €12bn last year in USC and PRSI combined. If new rules have unforeseen consequences, resulting in even a drop of a few percentage points in the amounts collected, that would leave a big hole in the national finances; €12bn is a huge amount to put at risk, for the sake of simplification, despite the complexities in the system.

There must be more reasons to have a merger of USC and PRSI on the agenda than a mere simplification.

The terms of reference of the working group mention the need to preserve the Social Insurance Fund, and it is here that the main purpose might lie.

The fund is used to pay social welfare pensions, unemployment benefits, disability benefits, and the like. As the population ages, the ratio of workers contributing to the fund, relative to the citizens benefiting from it, will change. If the current demographic predictions are correct, it will be harder, in future years, to keep the Social Insurance Fund in surplus.

Furthermore, the contributions to the fund are skewed by payments from employers. While individuals pay PRSI at 4%, employers typically contribute up to an additional 10.85% of their payroll costs in employer PRSI.

In 2016, the last year for which an audited breakdown is in the public domain, the self-employed contributed €600m to the Social Insurance Fund. The employee contribution was about €2bn, but employers contributed a staggering €6.6bn.

As a quid pro quo, the social welfare benefits available to employees are greater than those available to the self-employed.

The main benefit to the self-employed for their PRSI contribution is the contributory old age pension. Their counterparts in employment can avail of a wider range of illness benefits, treatment benefits, and unemployment benefits.

A survey, last year, conducted by the Department of Social Protection, identified that 80% of those self-employed who are surveyed will be willing to pay additional PRSI, in exchange for additional benefits.

Given the complexity of the project, it is surprising that the task force commissioned by the Cabinet is to report back by the end of June. This June timeline is significant, because it would allow for any proposals or recommendations for the working group to be incorporated into the October, 2018 budget, which takes effect from January 1, 2019.

It is unlikely, however, if only because of the amount of money involved, that a USC/PRSI unification could be achieved in one fell swoop in one year.

With any reform of this nature, the risk for the taxpayer is that some people will end up paying more overall than they currently do, while some people will end up paying less.

The complexity of the tax mathematics dictates that. Because PRSI is involved, the additional risk is that some categories of worker may lose out on present or future PRSI benefits.

Nevertheless, one of the challenges of an ageing population is that we have to change how we think about providing benefits to citizens. Even apparently straightforward change (for example, the recent raising of the statutory retirement age) highlights unforeseen wrinkles and inconsistencies.

The announcement about merging USC and PRSI may have seemed innocuous, but it will be one of the main challenges for public policy in the next few years.

Brian Keegan is director of public policy and taxation at Chartered Accountants Ireland


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