Dáil Éireann debate -
Wednesday, 24 May 1995

Vol. 453 No. 4

Ceisteanna—Questions. Oral Answers. - Tax/Welfare Trap.

Michael McDowell

Question:

9 Mr. M. McDowell asked the Minister for Finance the disposable income, namely income net of tax, PRSI, levies, and travelling to work expenses calculated at £630 per annum and adjusted for FIS, local authority differential rent and the value of a medical card, of a married employee with a spouse and four dependent children living in a local authority house, at earning levels of £8,000 per annum, £9,000 per annum, £10,000 per annum, £11,000 per annum, £12,000 per annum, £13,000 per annum, £14,000 per annum, £15,000 per annum, and £16,000 per annum during the tax year 1995-1996; the plans, if any, he has to improve incentives for such workers to earn more; the studies, if any, that have been carried out into the tax/welfare trap experienced by such employees; and if he will make a statement on the matter. [9518/95]

Liz O'Donnell

Question:

37 Ms O'Donnell asked the Minister for Finance in respect of the tax year 1995-96, the amount of gross earnings a married man with spouse and four children living in a local authority house subject to differential rent would have to earn as an employee to have a greater disposable income than as a long term unemployed person having regard to tax, PRSI, levies, FIS entitlements, the value of a medical card, the cost of getting to work estimated at £610 per annum and the usual social welfare entitlements of such a family, if he has conducted any studies of the tax welfare trap for long term unemployed persons; and if he will make a statement on the matter. [9444/95]

Mr. Noonan

(Limerick East): I propose to take Questions Nos. 9 and 37 together.

The net income for an employed married man, with a non-working spouse and four children, earning gross incomes at £1,000 intervals between £8,000 and £16,000 per annum is given in a tabular form and is being circulated to Deputies. This table also sets out the additions to and deductions from gross income in arriving at levels of net income.

The married man described would be better off in work at any level of earnings from employment when his earnings and family income supplement are taken into account. It is estimated that an unemployed married man with four children would have a net income of £7,829 per annum when account is taken of all allowances, including secondary benefits, medical card, and the costs of local authority differential rent and work-seeking. When this is compared with the information in the table it is clear that at all gross incomes between £8,000 and £16,000 this man is better off in work rather than on unemployment benefit.

Improving the incentive to work is an important policy objective. In his budget speech the Minister for Finance referred to the proposal in the Government's policy agreement to move towards a basic income for children. This will involve moving from the current general reliance on child dependant allowances and the existing family income supplement and towards a child benefit supplement. This policy was reflected in the budget which, while leaving the rates of child dependant allowances and family income supplement unchanged, put more money directly into the pockets of low income families through the income tax and PRSI systems. In addition, the significant increase in child benefit of £7 per child per month will be worth a further £336 a year to this family. These changes represent a real improvement in the income of all working families with children.

The Government recognises the considerable complexities involved in adjusting the tax and welfare systems to improve the operation of the labour market. It has set up a working group of experts in the tax and social welfare area to look at these issues with a view to developing a strategic approach to the closer integration of the tax and social welfare systems. The Government has also asked the group to develop proposals for an income related child benefit supplement and to complete its final report by the end of 1995. An interim report was made to the Minister of State at the Department of Social Welfare in December 1993 while research on basic income commissioned by the group was published by the ESRI in September 1994. The Government is awaiting the group's final report which it expects to receive towards the end of 1995.

Net Disposable Income: Man, Wife, Four Children, 1995/96, £ Per Annum

	Less		Plus		Less
Gross Pay	Tax	PRSI	Levies	Net Pay	FIS	Medi-Card Value	Net Income	LA Rent	Travel To Work Costs	Net Disposable Income
£	£	£	£	£	£	£	£	£	£	£
8,000	—	297	—	7,703	2,860	520	11,083	1,088	630	9,365
9,000	—	352	—	8,648	2,288	520	11,456	1,139	630	9,687
10,000	160	407	—	9,433	1,664	520	11,617	1,133	630	9,854
11,000	560	462	—	9,978	1,092	520	11,590	1,122	630	9,838
12,000	960	517	—	10,522	468	520	11,511	1,110	630	9,711
13,000	1,360	572	292	10,776	—	—	10,776	1,122	630	9,024
14,000	1,760	627	315	11,298	—	—	11,298	1,200	630	9,468
15,000	2,160	682	337	11,821	—	—	11,821	1,279	630	9,912
16,000	2,560	737	360	12,343	—	—	12,343	1,357	630	10,356

Notes on Table:

1. The main factors contributing to the apparent decline in net income as gross income increases are the withdrawal rate of family income supplement (60 per cent) and the operation of marginal relief for income tax (involving 40 per cent tax rate).

2. It is essential in interpreting this table that the mechanism for reviewing Family Income Supplement (FIS) is understood. FIS is renewable on a 12 monthly basis. When awarded it will not be reduced/withdrawn until the end of the period regardless of any upward movements in pay. Therefore, gross income from employment can increase significantly during the course of a year while any adjustment of FIS will not occur until after the end of the year. The expert working group has pointed out in its interim report that FIS withdrawal does not generally occur at the same time as a gross pay increase.

3. The number of people who potentially lose disposable income as gross pay increases are small. In so far as FIS and marginal relief income tax are the main elements of the trap, the number of people affected by the trap is essentially a function of the numbers who both receive FIS and pay tax. The numbers of people both paying tax and receiving FIS is of the order of 1,500 to 2,000. The OECD has also concluded that this situation potentially "applied only to a very small proportion of the employee workforce (0.75 per cent)".

Mr. M. McDowell

Will the Minister inform the House of the nine figures mentioned in the table.

Mr. Noonan

(Limerick East): Take the example of an unemployed married man with four children and a net income of £7,829——

Mr. M. McDowell

I am asking about the net disposable income.

Mr. Noonan

(Limerick East): I am coming to that. It means nothing unless one compares it with what the unemployed man is getting. Perhaps the Deputy could give me scope because I am not used to this — I was asking the Department of Finance questions for six years but I never got a chance to answer them.

Where a person is earning between £8,000 and £16,000 the figures are: £9,365, £9,687, £9,854, £9,838, £9,711. £9,024, £9,468, £9,912 and £10,356.

Mr. M. McDowell

Is the Minister aware that a married man with a wife and four children, living in a local authority house, when family income supplement, differential rent, the value of a health card and the cost of getting to work are taken into account, is significantly worse off on gross earnings of £14,000 than on £10,000? If he has gross income of £14,000 per annum his net disposable income is £9,720 whereas if he has gross income of £10,000 his net disposable income is £9,854. Therefore he is more than £100 worse off for earning £4,000 more per year. The simple fact is that in the Irish system a person is worse off on an income of £14,000 than on £10,000.

Mr. Noonan

(Limerick East): As has been pointed out by the Deputy and many others in the House, there are anomalies. The Minister has provided some of the figures. It has been known for some time that there are anomalies and much of the debate has centred on the person with an income of £8,000 and the person on unemployment assistance. As the Deputy correctly indicated, as one moves up the income scale there are anomalies which will have to be addressed. During the period when the Deputy's party was in Government there was an undue concentration on the marginal rates of tax. While the rates of tax were reduced the anomalies were allowed to remain. It is the policy of this Government to target low income earners so that there will be a better incentive to work. This was not achieved by concentrating on reducing the marginal rates of tax.

Mr. M. McDowell

I agree that reducing the marginal rates of tax is not the only issue but very few people would vote to put the clock back. When the Progressive Democrats and Fianna Fáil formed a coalition Government the standard rate of tax was 35 per cent. With PRSI, the first rate at which workers paid tax was 42 per cent while top rates were well over 60 per cent. It now transpires that if an employee earning £10,000 was offered and extra £4,000 by his employer — I accept that this is highly unlikely — he would be £120 worse off. When employer's PRSI is taken into account the figure would be almost £4,500. Surely the Government is not going to ask a task force to study this problem. When is it going to be recognised that we cannot hammer those at the lower end of the earning spectrum who cannot look after themselves and when are we going to introduce real tax reform for those in this category?

Mr. Noonan

(Limerick East): The anomaly arises because the value of the family income supplement is reduced as the value of earned income increases. That is the net point; there are other factors but they are of a minor nature. While the family income supplement has been effective in restoring the incentive to work for those on low pay, as one moves up the pay scale the value of the family income supplement is reduced. This allowance is not payable where a person has earned income in excess of £12,000. The solution lies in the text of the answer provided by the Minister's Department. If one was to move from family income supplement to basic income for children and if one was to target children, as happened in the budget, the amount of family income attributable to child benefit would be even, regardless of whether one was unemployed or at work. This would be a more effective mechanism for supplementing income than family income supplement. That is the direction the Government intends to take.

Mr. M. McDowell

I agree with the Minister that operating through the channel of an income for children is probably the right way to deal with any of these problems, but no one should cod themselves that a basic income is a global answer to the problem. The ERSI report to which the Minister referred clearly indicated that a basic income for adults as opposed to children would involve a tax rate of over 60 per cent, possibly nearer to 70 per cent. This would destroy employment completely.

Mr. Noonan

(Limerick East): I am not referring to the general concept of a basic income. A basic income for children would probably be a more effective supplement for family income than the family income supplement. The Government intends to move in that direction. There is a wider issue. The available resources should be targeted at low income earners. If we are talking about providing incentives in the economy there is a choice in where we spend money in terms of tax relief. So far as the Minister and the Government are concerned, priority will be given to the lower paid.