Daniel McConnell: Time to tackle a nasty 'temporary' tax that never went away

Finance Minister Paschal Donohoe has admitted the USC cannot be abolished. Picture: Niall Carson/PA Wire

The universal social charge is a pox. A nasty penal tax levied on most incomes, even modest ones. It was supposed to be temporary but has become permanent.

When he sought to introduce the USC in late 2010, the late Brian Lenihan had portrayed it as a mere merging of existing levies.

With the country on fire economically, he needed to raise taxes, despite knowing it would be deeply unpopular. 

Lenihan moved to assure his Fianna Fáil colleagues that there would be no additional charge to people.

However, when it was realised that the rates would in fact be higher and applied to so many low-paid workers, Lenihan’s colleagues felt betrayed and cheated.

“We were told it was not going to be higher anyway — just one single description for payments that were coming out. And the opposite was the case, but we were sent out to sell that whole USC thing and the rest is history,” said John McGuinness.

Dara Calleary’s anger over the USC was palpable.

“Brian Lenihan was in his element trying to describe it all as no major changes. Just a merging of the health levy, PRSI. Then it kicks home at the end of January, as we were out canvassing for the 2011 General Election. I actually believe the USC cleaned us in Dublin. I think the USC cost us between 10 and 15 seats," he recalled later.

“Brian always sugared things, Brian could always deliver bad news with sugar. And you know, and as we all pointed out subsequently, he continued to do that in terms of the USC,” Calleary said.

Dara Calleary admitted options were limited when the USC was introduced, given how poor the public finances were. Picture: Gareth Chaney/Collins

Calleary also accepted that Lenihan’s options were limited given how poor the public finances were. 

“Equally, we are responsible. We knew in our hearts, we knew it had to be something horrible. And then you go out and it’s carnage.

It might as well have been called a troika tax.

Introduced at a time of deep austerity, the dreaded USC is once again back on the political agenda.

Left-wing parties in recent weeks have sought to highlight, now the Covid-19 pandemic has receded, that previous commitments from Fine Gael in particular, that it should be abolished, must now be delivered upon.

Solidarity TD Mick Barry in the Dáil described the lingering presence of the USC as the “elephant in the room”.

He said it was promised that when austerity was over, the USC would be abolished but the Government has kept it in place, warning “that it will become an issue”.

While political parties would like us to believe that abolishing the USC is possible and that they will do it, the truth of the matter is that to do so would create a gaping hole in the public finances.

Officials in the Department of Finance adore the USC, as it is a most agile tax, devoid of many opt-outs or exemptions.

I am reminded of a conversation I had with a top official from the department in mid-2011, a couple of months after the Fine Gael-Labour government had taken office.

“Stop saying the universal social charge is likely to go. It will never go,” he said.

Stunned, I asked why? “We [the department] love it as a tax. It brings in more than €4bn and hoovers up so much from so many, it is easy to apply,” the official told me.

'Most hated tax in history'

Despite the enthusiasm of officials within the Department of Finance for the USC, Fine Gael — led by Enda Kenny and Michael Noonan — set their minds to rid the country of the “most hated tax in history”.

Noonan and Kenny said the USC was essentially the last act of a failed Fianna Fáil government before it was booted from office.

Yet, 11 years on, most members of that government are no more, but the USC remains.

The hated tax became the battleground for some of the most bitter fights between Fine Gael and Fianna Fáil in the run-up to the 2020 General Election.

During the campaign, Fianna Fáil leader and now Taoiseach Micheál Martin described as “false promises” a pledge by Fine Gael to abolish the USC in the run-up to the 2016 general election.

Martin claimed Fine Gael always knew that abolishing the charge was not going to happen because the money was not there to achieve that. Fine Gael lashed back saying Martin’s comments amounted to “hypocrisy at its worst” given it was his party that introduced it.

Brian Lenihan introduced the universal social charge in 2010.

Once together in government, the parties committed no more than there will be no increases in income tax or USC rates. A disappointing development given the earlier hostilities.

Only last month, Finance Minister Paschal Donohoe made the admission that the USC cannot be abolished. He denied that the charge had been introduced as a temporary measure:

I never said it was temporary. It was the integration of two levies. The USC will remain an important part of our tax system.

The charge could not be removed because if that was done it would have to be explained where else they would generate the money it collects every year, he said.

While it may not be popular, Donohoe is reflecting the reality that to abolish the USC may sound easy but is virtually impossible to deliver upon if the current spending priorities are to be maintained.

However, what changes things is the growing unpopularity of Fine Gael, which in truth has its backbenches rattled and worried for their seats. In such a slump, political parties tend to make daft promises which they end up regretting later.

There is also a mounting desire within Fianna Fáil, as the party which introduced it, to abolish it in a bid to make up lost ground electorally.

TDs and senators tell me they would love to eradicate it as increasingly voters are bringing it up with them.

Undoubtedly, the retention of the USC is a stick the opposition parties, especially Sinn Féin, will beat the Government with in the run-up to local and European elections in 2024 and it will be telling as to whether those in charge of the national purse strings — namely Donohoe and Michael McGrath — can withstand such pressure.

Electorally, consigning the USC to the past would undoubtedly positively impact the fortunes of those who have introduced and maintained it.

Given they have essentially given up on housing and health, it may be their only hope of retaining power.

If they do not, the long-suffering electorate will deliver their judgement with relish.