While it is possible to estimate the additional tax paid by an individual on a certain income, to do so on an aggregated basis would require a significant number of assumptions that would have to be made about incomes and specific circumstances, for example, the definition of low and middle income workers. More generally, on a static basis, I believe it is fair to say that an increase in wages would result in additional taxes to the Exchequer. These would include direct taxes such as income tax and universal social charge, but also indirect consumption taxes such as VAT and excise. Social contributions from employees and employers would also increase. The exact gain to the Exchequer from the taxes would require an assumption regarding an individual's marginal propensity to consume, that is, for every extra euro in their pocket, how much would be spent on goods and services.
The static picture outlined above is not realistic, however. The wider economic impacts of a wage increase would have to be considered, most notably on competitiveness. An increase in wages and higher employer PRSI contributions would have to be paid directly by the employer. These additional costs would have to absorbed into the bottom line, thereby reducing operating profits available for reinvestment and additional employment, or be passed on to the final consumer, which undermines competitiveness. Research by the ESRI has shown that exporters are price-takers on international markets. This means they cannot directly pass on higher labour costs to customers in global markets. Higher wages that are not supported by productivity improvements result in a loss in market share and, ultimately, fewer exports and jobs in Ireland.
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This is a situation which Ireland experienced very recently. During the boom times, wage increases across the economy contributed very significantly to the loss in competitiveness, which resulted in Ireland's export sales beginning to decline. As a small open economy, continued export growth will be key in driving sustainable economic growth into the future. As such, any wage increases should also be viewed through this prism. Further, upward wage pressures in the private sector would also likely translate to calls for increased wages in the public sector. This would place pressures on previously announced agreements such as Haddington Road and place an additional call on the Exchequer.
The tax forecasts prepared by my Department are based on economy-wide levels of employment and income rather than focusing on specific cohorts. These forecasts take into account the most recent labour market data from the quarterly national household survey and the earnings, hours and employment costs survey, both of which are produced by the CSO. The forecasts were most recently articulated in the stability programme update.
In order to provide additional clarity, I would inform the Deputy that all specific income tax measures undergo distributional analysis in advance of budgetary decisions being made. In addition, the distribution analysis of such tax measures announced in the budget is included in annex A of the budget book. The distributional analysis is based on tables demonstrating the effects of budget changes in respect of income tax, PRSI and USC on single, married with and without children, PAYE and self-employed income earners over a wide distribution of income levels. The tables in the budget book also demonstrate the effect of changes to some payments from the Department of Social Protection, such as family income supplement.
In addition, every distributional analysis contains a section which outlines the effect of budget changes on illustrative cases. These illustrative cases examine the effect of budget changes on various categories of income earners, including single, married, lone parents and elderly in a variety of different occupations and with varying income levels, and not only demonstrate the effects of the budget tax changes but also the effect on changes to a number of payments from the Department of Social Protection, such as family income supplement, child benefit, State pension and one-parent family payment, where relevant.
With regard to potential savings in welfare payments, these are a matter in the first instance for the Minister for Social Protection, Deputy Joan Burton. However, I understand that, in terms of the potential impact on welfare payments from an increase in wages, this cannot be easily estimated. For example, the answer may be different in the case of a single person versus someone who is married with children.