Basic Income - A Green Paper

Chapter 1 - Introduction

1.1 An Action Programme for the Millennium ( [1]Page 5 [An Inclusive Society])
committed the Government to publishing a Green Paper on Basic Income.

1.2 Partnership 2000 for Inclusion, Employment and Competitivenessprovides that:
A further independent appraisal of the concept of, and full implications of introducing a Basic Income payment for all citizens will be undertaken, taking into account the work of the ESRI, CORI(Conference of Religious in Ireland), and the Expert Working Groupon the Integration of Tax and Social Welfare and international research.

1.3 In line with this commitment, a Steering Group on Basic Income was established to examine the issues involved. The Group was comprised of representatives of all four Pillars of social partnership as well as the relevant Government Departments including the Departments of Finance; Enterprise, Trade and Employment; and Social Community and Family Affairs. It was not the role of the Group to reach a conclusion or make recommendations about a specific model of Basic Income. Its role was to oversee a commissioned series of studies on Basic Income. The report of the Working Group was completed and made available to the social partners in 2001.

1.4 The specific Basic Income proposal studied by the Steering Group would involve replacing the existing social welfare and income tax systems with a universal payment to all adults (a lesser amount for children) a flat rate of income tax and a social solidarity fund to compensate low income people who would lose out from the abolition of existing social welfare payments. The relevant nominal tax rates in place during the study were 24%/46%, reduced by tax allowances (since replaced by credits), plus PRSI/levies of some 6.5% (giving a total marginal tax rate for some taxpayers at that time of 52.5%). These in the model studied would have been replaced with a universal payment of some €95 per week for adults (less for children), the Social Solidarity Fund and a flat rate of approx. 48% tax on all income (i.e. no taxallowances/credits). Current tax rates are 20% and 42%, PRSI/levies are 6% and the equivalent rate of Basic Income expressed in 2002 rates would be €118.80 per week. Asthe Steering Group based its analysis on information about the taxbase in 1999, it also concluded at the time that further economic growth since 1999 would have allowed the tax rate of 48% that emerged from its work to be reduced still further. As we shall see later in this paper, the actual tax rate that would be required in present circumstances is uncertain, essentially because of inherent uncertainty as to the dynamic impact introduction of a Basic Income system would have on the economy.

1.5 The Basic Income concept and the question of its application to Ireland have been the subject of much debate and consideration in recent years. Debate has generally focused on the potential advantages and disadvantages and also the very feasibility of such a system, given the high income tax rates that would be required to fund it and its possible behavioural implications for the labour market, tax compliance, migration and national competitiveness. The difference between nominal tax rates, marginal tax rates and effective tax rates is an important element indiscussion of the possible impact of a Basic Income system this is discussed in chapter 3.

1.6 Nominal rates of income tax are the actual headline rates at which tax is levied on income, but without taking account of credits or allowances that are available to the individual taxpayer and without taking into account additional payments (i.e. PRSI) or levies. Currently, there are two nominal rates: the 20% standard rate and the 42% higher rate. The marginal rate of income tax is the rate of tax paid on the last or the next - euro of additional income. At any particular income level, we can calculate how much of any additional income will be taken in taxes. We can then say that an individual earner is facing a specific percentage marginal tax rate. The actual rate is seen as very important in influencing the incentive to work. The effective or average rate of income tax takes account of credits or allowances and represents the actual tax payable, usually including levies and PRSI (up to6%), as a proportion of total gross income. Furthermore, in making comparisons between the current system and a Basic Income model, account must also be taken of direct payments to the taxpayer, such as Child Benefit and Family Income Supplement (FIS).

1.7 The objectives of this Green Paper are to:

facilitate and encourage further debate and discussion on the relevant issues;
highlight and examine the implications of the introduction of a Basic Income system in Ireland; and
discuss a possible framework for the development of a Basic Income system in Ireland and alternative policy options to meet the underlying objectives of social inclusion, income adequacy, simplicity and economic efficiency.

1.8 The intention is to bring the results of the examination of the Basic Income concept and the potential impact of its possible application to Ireland undertaken under Partnership 2000 tothe attention of the wider community and to encourage debate on the practical and policy issues involved. A Green Paper is,of course, a discussion document, rather than a statement of Government policy or intent and the Government sees it as a contribution to and further stage in an ongoing debate, rather than an end point in itself. The debate as it continues should include issues of design and implementation of tax and welfare policy to increase the prospects of achieving the positive benefits of Basic Income, while seeking to minimise those effects that might be regarded as less desirable. Publication of this Green Paper honours the commitment given to the Social Partners and will inform and widen future public consideration of the concept bymaking the results of the Steering Groups work and analysis on the Basic Income concept accessible to a wider audience.

1.9 The publication of the Green Paper - and the debate it is intended to facilitate take place also against the backdrop of a clear Government policy determination to tackle poverty and disadvantage, generating the resources to do so by maintaining Irelands competitive position in the world economy. The shared aims of Government and the social partners (as expressed in the Programme for Prosperity and Fairness) are to:

Keep our economy competitive in a rapidly changing world;
provide a strong basis for further economic prosperity;
improve the quality of life and living standards for all; and
bring about a fairer and more inclusive Ireland.

1.10 Between 1997 and 2001, real GDP in Ireland rose at an average rate of 9.7% per year compared with anaverage of 2.6% in the EU over the same period. This strong growth has facilitated a further improvement in Irish income levels relative to the EU average. In additional deep income tax reforms together with relatively high nominal wage increases and substantial real increases in social welfare payment rates have ledto a significant improvement in real disposable income levels overrecent years. Unemployment traditionally the weakest point of the Irish economy declined rapidly from 10.3 in1997 to some 4%, with long-term unemployment falling from 5.6% to1.2% over the period.

1.11 Within the context of this strong economic growth and increase in real disposable income levels seen in recent years, the National Anti-Poverty Strategy has provided the policy focus within which substantial progress has been made in reducing consistent poverty. The recent review of the National Anti-Poverty Strategy confirms the considerable progress that was made in its implementation exceeding expectations in some areassince 1997, but acknowledges that much remains to beachieved. The Government remains committed to tackling poverty and exclusion as a priority and has adopted a revised set of ambitious targets for the NAPS to that end across a range of policy areas and vulnerable groups. In this regard, it is clear that the single most effective way of ensuring that the NAPSobjectives can be achieved in the years ahead is through continuing sound economic and fiscal measures and maintenance of high employment. It is the economic and fiscal policies of recent years that have made possible sustained and strong economic and social performance and, although some slow down was predicted even before the impact of the particular difficulties in 2001, they arethe basis of continuing growth. The Government is equally committed to working to protect Irelands economic and fiscal situation as the key prerequisite to providing the resources needed to achieve the objectives of this Strategy.

1.12 The Government believes achievement of social justice and an adequate income for all requires a high employment, high value-added society, where individuals and households have the opportunity to engage in satisfying, well-rewarded work and adequate social protection is available for those who cannot work (due to e.g. age, disability,illness). Such a society will generate the resources to sustain, through equitable and effective tax policies, the social protection and public services needed by the whole population. Within its overall approach, the Government attaches priority to those who are weakest and most vulnerable in our society. A central element of the Governments Strategy is to ensure that the net effect of all policies impacting on income levels in the community is such as to provide sufficient income for a person to move out of poverty and live in a manner compatible with human dignity. The very significant real increases in social welfare payments in recent years have made much progress towards this aim. The Governments target is to achieve a rateof €150 per week (in 2002 terms) for the lowest rates of social welfare to be met by 2007, with an appropriate equivalencelevel of basic child income support. The Government will continue to pursue a strategy of increasing social welfare payments as resources permit, so that people will have an income level to sustain an acceptable standard of living. This policy approach will be combined with an active social policy, the objective of which will be to enable individuals to support themselves and their families.

1.13 As provided for under the PPF , a Working Group was established to progress the implementation of administrative individualization within the Social Welfare system. The Group reported in August 2002. The issue has been on the policy agenda for a number of years. At present, social welfare claimants may receive an additional income for adult dependants, but the dependant may not - in the absence of a personal insurance record -have an entitlement in their own right. Separate payment is currently only available in difficult family situations and on request. Individualization would increase the number of people receiving a personal income from public funds. It would particularly benefit women, as typically adult dependants are women whose access to income support relates to the insurance record of a male breadwinner. The Group in its report has recommended a phased approach to administrative individualization be undertaken and identified range of issues of principle which need to be resolved in deciding how to move forward. As already announced by the Minister for Social and Family Affairs, as from 1 October 2002 qualified spouses and partners of people entitled to a Retirement or an Old Age (Contributory) Pension from the Department will be given a choice of having their part payment paid directly to them.

1.14 The Agreed Programme of the new Government formed in June of this year reiterates our commitment to sustaining economic growth and maintaining full employment in the Irish economy. We are committed to keeping the public finances in a healthy condition and will keep down personal and business taxes in order to strengthen and maintain the competitive position of the Irish economy. This will generate the resources needed to implement the revised National Anti-Poverty Strategy, including the reduction of consistent poverty to below 2%. Over the next five years, the Governments priorities with regard to personal taxation include the achievement of a position where all those on the national minimum wage are removed from the tax net and 80% of all earners pay tax only at the standard rate (currently 20%).

1.15 It should be noted that, under the allowances system that applied up to recently, allowances such as personal and PAYE tax allowances were worth more to higher rate taxpayers than to those paying tax at the standard rate. The move to tax credits was completed in the Finance Act 2001. This brought a greater degree of equity into the tax system, in that such credits now have the same value to all taxpayers regardless of income. However, there remains a substantial number of people who do not have a sufficient tax liability to benefit in practice from the full value of the tax credit available to them.

Issues relating to the precise design of taxation and benefits policy and how these two systems interact will remain important over the coming years as the Government moves towards the objectives of virtual elimination of consistent poverty and achievement of a fully inclusive society that protects and has aplace for all its members. This Green Paper marks a further contribution to that debate.

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