Michael Bell
Question:78 Mr. Bell asked the Minister for Finance his views on the effectiveness of increases in personal tax allowance as a means of removing poverty and employment traps. [16501/97]
Written Answers. - Tax Reliefs.
Measures aimed at reducing tax on lower incomes, such as increasing personal allowances and reducing the standard income tax rate, are among the tools in easing unemployment traps and, to some extent, poverty traps.
As the Deputy will be aware, unemployment traps, as referred to by commentators, centre on the financial return from work when compared with social welfare payments.
The poverty trap refers to the potential for some cohorts to actually experience a reduction in take-home pay as gross earnings increase over certain income ranges. The proverty trap is mainly caused by the interaction of the withdrawal rate for FIS with the operation of the marginal relief taxation system. Those mostly affected are families with dependent children who are taxed under the marginal relief system and in receipt of FIS. Therefore, increasing personal allowances or reducing the standard income tax rate have only a limited immediate impact on this cohort, through moving some of the group into the normal tax system, where the marginal rate of taxation is lower.
As indicated, one of the main problems in regard to poverty and unemployment traps is the larger number of people who are taxed under the marginal relief system. In this regard the expert group on the integration of the tax and social welfare systems considered it undesirable, from a work incentive perspective, to have such a large proportion of taxpayers — then around one in six — being taxed under the marginal relief system. The group recommended that tax policies at the lower end of the income distribution should, therefore, be directed towards limiting and eventually abolishing the system of exemption limits. The group suggested that this could be done over time by increasing personal allowances at a rate faster than exemption limits.
Removing such traps can also be assisted by changes in the FIS system. Partnership 2000 contains a commitment to move the calculation of the FIS payment from a gross to a net income basis within the lifetime of the agreement. The first step in meeting this commitment was introduced in the budget 1997 where PRSI and the health and employment levies were removed from the calculation. When the move to FIS on a net basis is complete the difficulties with the poverty trap will be significantly reduced.
There are myriad schemes and programmes which serve to reduce unemployment traps and successfully encourage people to enter the labour market. Examples of such schemes include the back to work allowance, jobstart and workplace.