Personal Income Tax in Ireland: The Future of the Universal Social Charge

Government plans to gradually but completely phase-out the Universal Social Charge, one pillar of the current personal income tax system, face an evident trilemma: how to continue to generate revenue and maintain progressivity without imposing distortionary high marginal tax rates? The brief first provides a detailed analysis of the main features of the Irish income tax system. Then, using the EUROMOD microsimulation model, it looks at the impact of alternative tax reforms, including on the distribution of disposable income. The brief does not advocate or prescribe any specific tax reform. Instead, the brief demonstrates the difficulty of designing a reform of the Irish income tax system that simultaneously reduces high marginal rates and is revenue neutral, without being regressive. Potential reforms might include a broadening of the tax base and the introduction of a third income tax band. However, the ultimate resolution to the tax trilemma could lie beyond the income tax system. More comprehensive, structural reforms could instead entail a shift toward other tax heads.