Name:	Elaine Baker	
Student Number:	97591521	
Course:	ECN 3113: Public Expenditure and Finance	
Assignment:	Assess the Basic Income distribution scheme	
Lecturer:	John Considine	
Word count:	3306	
Date due:	26 February 2000	

Income Distribution system in Ireland

The principle components of the income redistribution scheme in Ireland are income tax and social welfare.  Revenue from income tax is redistributed through social welfare and also makes a substantial contribution towards other state expenditure.  

The Tax system

Criteria such as marital status, age and number of dependent children determine the level of income which can be earned without paying tax (tax exemption).   Those who pay tax keep a certain amount of untaxed income (tax free allowance) which is determined by the above criteria and increased for single parents, elderly people, those with dependent relatives, and for those who have or whose relatives have disabilities.   Married couples can allocate their allowances to each other. 

Tax reliefs are like additional allowances equal to the amount spent on certain expenses.  Medical expenses, rent relief for rented accommodation, mortgage interest, fees and gifts to colleges and schools, and contributions to charities are included.

The remainder of income is taxed as follows:
Tax Bands
Single/Widowed		
	14,000 @ 24%	
	Balance @ 46%	
Married Couple 		
	28,000 @ 24%	
	Balance @ 46%	
(Revenue Commissioners)
PRSI

As well as tax, pay related social insurance must be paid.  There are 11 classes of workers with different thresholds and rates.  A person’s class affects the types of benefits they are entitled to in the event of unemployment, sickness and so on.

The Social Welfare System

Short-term unemployed people are entitled to unemployment assistance (a smaller payment) if they have not paid sufficient PRSI, and unemployment benefit (a higher payment) if they have.  Long term unemployed people are entitled to the higher payments.  PRSI payers obtain a higher contributory pension, while others obtain the lower non-contributory pension.

These payments are affected by the number of children and adult “dependants” and whether they are working.  There are also benefits for single parents and low-income carers.

Supports for those on low incomes include the medical card, housing authority schemes and the family income supplement.

Reasons for reform

This complexity is a result of continuously adding new schemes to the system to cater for problems introduced by previous schemes and to adjust to changing circumstances, rather than looking at the appropriateness and adaptability of the system itself.

The alternative is to design a new system from first principles.  This would clarify the reasons behind all aspects of the system for voters.  It would allow a greater understanding of the implications and incentives attached to occupational decision making for citizens.  It would give a new set of tools to policy makers to adjust the system over time.  However, designing a new system entails uncertainty about its possible effects, and so needs to be clearly justified.

Problems with the present system

Poverty traps

A poverty trap is when a person, by earning more, receives less disposable income.  An unemployment trap is when a person, by taking up work, receives less disposable income.  At present, people who are earning and their “dependants” have their needs assessed under a complex system of tax allowances, reliefs and exemptions, while those who are not earning are catered for under a different social welfare system.  In the early 1990s this led to severe poverty traps for low-paid workers, disincentives to work for the unemployed, and the problems of structural and long-term unemployment.

The marginal tax benefit withdrawal rate is a useful tool for looking at poverty traps.  This looks at how disposable income changes as gross income changes, as a result of social welfare benefits lost as well as extra income earned and extra tax paid.  A Dáil debate on May 6 1993 demonstrated that a married couple with four children and a gross income of £8,000 had a disposable income of £9,371.  As their gross income increased to £12,000, their disposable income decreased, to £8,043. (De Buitleir, p.22) It was estimated in 1996 that a third of all unemployed people are affected by poverty traps (NSSB).  

Complexity

Various measures have been introduced in an attempt to address the problem of unemployment traps.  These include the Family Income Supplement and the Back to Work Allowance.  However, there are now a wide array of different social welfare and tax schemes, making it difficult for people to be aware of them all.  Because of this, only about 40% of those entitled to the Family Income Supplement actually take it up (Clark and Healy, 1997, p.70).  This means that extensive poverty traps still exist.   Even if the FIS is availed of,  the marginal monetary benefit of work is very low for those on low incomes.  (See appendix A) Many people, especially families, are largely unaware of what the effect of taking on part-time or low-paid work will be on their disposable income and their benefits (such as the medical card) and fear taking up work as a consequence.

Increasing inequality

The household budget surveys of 1973, 1980, 1987 and 1994 demonstrate steadily increasing inequality of direct income, regardless of which inequality measure is used (Collins and Kavanagh, p. 185). This is largely due to high earners gaining larger pay increases than low-earners.  The tax and social welfare system has succeeded in stemming widening inequality of disposable income.  However, recent revenue buoyancy has presented a dilemma in how to distribute the results of growth.  If social welfare payments are dramatically increased, this will worsen poverty traps and prevent people taking up many of the new jobs available.  If tax rates are decreased, high earners will gain much more than the low-paid, exasperating inequality.  Even if tax allowances and child benefit are targeted, greater absolute gains will go to high earners than low earners.  (Clark and Healy, pp. 58-72)  This demonstrates that the continuing with the existing system means increasing inequality during economic growth.

Work incentives

The present system distorts work incentives in many ways.  For example, unemployed people who would benefit from the social participation and education opportunities involved in taking up work, have low monetary work incentives as they lose more in benefits than they gain by earning.  Second-level and third-level students, who are already “socially participating” and occupied through education, have high monetary incentives to take on paid part-time work as they lose few benefits and pay little tax.  If one spouse takes up paid work their spouses’ benefits are affected, thereby creating unemployment traps for “dependent” people who wish to work.  Those who don’t wish to do paid work as they are occupied with non-paid work which they value more, are classified as “dependent” despite the fact that their families are dependent on them for this unpaid work.  They therefore have no independent income.

At present, unemployed people and low earners are penalised for taking up work by near 100% marginal tax benefit withdrawal rates.  Higher earners have much lower marginal tax benefit withdrawal rates of 46%.  This means that high wage workers are working and earning more, and low wage workers are working and earning less, than if there was a more coherent incentive structure.

Lack of flexibility

The work environment is changing radically in Ireland.  The predominance of full-time, long-term jobs is being replaced by an increasing need for flexibility from the point of view of both workers and employers.  Flexible hours and pay structures, movements between jobs and contract work suit the needs of workers who have families and unpaid-work responsibilities and those who seek variety and choice in their work.  However, this can cause increasing insecurity.  Moving from not working and the social welfare system, to working and the tax system, and back again entails bureaucracy and lack of coherence.  Unemployed people are not allowed to take up part-time or casual work without substantial loss of their benefits.  Employers are facing shortages of part-time workers.

Objectives

The implicit aims of the state in income distribution are:
•	To collect revenue for state services 
•	To cater for the needs of 
•	people who are not earning because of unemployment
•	children and retired people
•	those who are occupied with unpaid work (such as childcare, home-keeping, care of the elderly) or occupied in education, and so are not undertaking paid work
•	people while they are sick and people with disabilities
•	To maintain incentives so that those who undertake paid work are rewarded in proportion to their contribution

The conflict between distribution according to contribution and distribution according to needs is resolved in most systems by combining the two.  The present system rewards a high proportion of contribution and tops up according to needs.  The Basic Income awards according to needs and tops up a lower proportion of contribution.  

Basic Income system

Basic Income is a scheme whereby tax and social welfare systems are integrated.  The state pays a certain basic income to every person regardless of what they are earning.  This caters for needs and so replaces the majority of social welfare schemes.  It also replaces tax free allowances, and all earned income is taxed.

Tax rates required to finance a basic income scheme

Sean Ward analysed the following scheme:
Age	£ Basic Income per week
80+	75.50
65-79	71.00
21-64	50.00
0-20	20.00
He found that a tax of 50% on all income earned under 1994 conditions would mean that the net government revenue would be £362m less.

CORI proposed a similar scheme with slightly higher payments, a corporate employers' tax of 8% and a 50% tax rate. (O’Toole, p.65)

Callan O’Donoghue and O’Neill of the ERSI proposed three alternatives:
•	a basic family income.  This would be  based on the structure of the family instead of the sum of individual basic incomes.
Tax rate needed: 60%
•	a dual tax rate where there is a higher tax on income up to a break-even point, and a lower tax on income after this.  Present tax benefit withdrawal rates for the low paid are above 70% so this would actually be a reduction.
Tax rates:	70% up to £86 per week, 50% after
•	dual tax rate and a partial basic income which would be lower, with current social welfare schemes retained to top up.	
Tax rates:	70% up to £200 per week, 40% after

O’Toole (1995) set out the differences in methodology between the Ward and ERSI evaluations which had yielded different results.  The Ward scheme relied on greater administrative savings and the abolishment of a wider range of schemes, including third-level grants.

CORI (1996) set out figures and rates appropriate for 1997 as follows
Age	£	
80+	82	
65-79	77	
21-64	60	
20		45	
19	35	
18		25	
0-17	21	
•	Abolishment of the majority of social welfare schemes
•	Abolishment of the majority of tax allowances and exemptions
•	Social solidarity fund to ensure no one with a low income loses out
•	Replace employers PRSI with 8% social responsibility tax
•	Abolishment of PRSI and employment levies
CORI calculated that a tax rate of 50% would provide a surplus over the present net income tax revenue.

It is evident that a Basic Income scheme is becoming increasingly affordable due to economic growth.

Political parties have expressed reservations about the high rates of tax required but have tended to use the present nominal rates rather than the present effective rates (including benefits and allowances) as the benchmark for comparison.

The effects of a Basic Income system

Income distribution

Clark and Healy (1997) set out the consequences for the distribution of income.  Assuming continuing revenue buoyancy, the question is how to distribute the gains, not who will gain and who will lose.  Basic income does not involve any net losers relative to the present.  However, the top 30% of income earners will lose relative to the bottom 70%.  Continuing with the present system will mean that given family structure, the higher the family income, the higher the gains from growth (know as a regressive change). Basic Income will result in the lower the family income, the higher the gain from growth (know as a progressive change).  (Clark and Healy, 1997, p.71)  Under basic income, families with children gain substantially more than single people.  

Although not stated explicitly, the redistribution in favour of low-income families could be seen as a disadvantage politically for some parties.  Budget 2000 was largely regressive, perhaps reflecting the political power of those who gained from it and a lack of political will for a more even distribution of income.

Work incentives and labour supply

A principal argument against basic income is that high tax rates could be a disincentive to work and to employ (McDowell, 1995, Gallagher, 1995).  Basic income schemes set the marginal tax rate to around 50%.  However, the present effective marginal tax rates are in the order of 90% or 100% for low wage workers, 24% for middle wage workers and 46% (reduced from 48%) for high wage workers.  Only middle-wage workers will have a significantly higher marginal effective tax rate.

The following table attempts to provide an outline of the incentive forces on different people.  Family refers to a couple with three children.  MB refers to the marginal monetary benefit of working longer hours.  The effects on incomes of the two strategies were derived from Clark and Healy (pp. 65, 67, 71) (See Appendix B).  All comparisons (more, less etc.) refer to basic income relative to continued conventional government strategy with some revenue buoyancy, not basic income relative to the present situation.

Introduction of Basic Income scheme relative to continued conventional government strategy
	Substitution 	Effect	Income effect		Overall	
Single, low wage	MB higher,	Work more	income lower,	work more	work more	
Single, mid wage	MB lower, 	Work less	income lower,	work more	?	
Single, high wage	MB similar,	Work same	income lower,	work more	work more	
						
Family, low wage	MB higher,	Work more	income higher,	work less	?	
Family, mid wage	MB lower,	Work less	income higher,	work less	work less	
Family, high wage	MB similar,	Work same	income lower,	work more	work more	

The substitution effect suggests that low-wage workers will work more (especially unemployed people, who will take up work).  Leisure will have become more expensive.  However, the redistribution of income in favour of low and middle income families income will entail an income effect which may mean they will want to “spend” some of their increased income on non-working time and so work less.

The combined effect is difficult to judge.  The income effect will be stronger for families and the substitution effect stronger for single people.  It is possible that parents will work less hours but not withdraw from the labour force, as the “all-or-nothing” incentive structure of the present system will no longer exist.  Under basic income, there will be marginal benefits to even a small amount of work and this will allow the growing demand for flexibility from employers to be met.   A family of two part-time or term-time working parents with children will become feasible.  Unemployed single people will have much stronger work incentives and single people in general may work more.

This analysis takes the wage rate facing each person as given.  It is the case, however, that incentives to take part in training and education in order to become a high-wage earner will be reduced significantly.  This could be a large problem in a labour market with skill shortages.  It can be argued, however, that the incentives to become a high-skilled worker are not only monetary.  Self-fulfilment, social prestige and opportunities for education may mean that most people will want to become high-wage workers even if they receive only half of their high wage.

Clark and Kavanagh (1996) addressed how a basic income would affect the labour market and work incentives and concluded that overall efficiency would not be reduced.  Work incentives would be restructured but there would not be a large reduction in labour supply.  Those who are available for work, the unemployed, would be facilitated in working as their income would increase by more than 50% of what they earn.  Those who prefer to withdraw from the labour force to take part in education or non-paid work would be facilitated in this as they would independently receive an adequate income.  Basic Income will give the security required for increased labour market flexibility and so could increase efficiency and employment in the long run.   

Black economy

If tax rates are universally high, the black economy could grow and large amounts of casual work could be undeclared.  As a counter argument to this, however, the simplicity of the tax rules could make tax evasion easier to detect.  If all income is taxed, then untaxed income directly implies tax evasion.  

Uncertainty

Many reservations largely centre on the fear of fundamental change in tried and tested tax and social welfare systems with unforeseen consequences.   For this reason, a wider public debate, and a household survey centred on the effects of the proposals would ensure that adverse consequences are identified and catered for.

Suggestions for variations on CORI’s scheme

Retention and discarding of schemes

In my view the principles behind which schemes are retained and which are discarded should be clearly set out.  For example, present tax-reliefs for charity contributions should be retained or replaced by other supports for these activities, as these address specific incentives.  Medical card and local authority housing schemes should be retained as these are directed towards specific needs.   The basic income scheme should replace all measures aimed at income redistribution on criteria of unemployment, age, disability, martial status and “dependency”.

Children and households

The implicit rationale for having lower basic income for children than adults seems to be that the marginal costs of extra members of households diminish, and these extra household members tend to be children.  Arguments based on adults having greater needs than children are not expressed.

However, it is clear that there are economies of scale when households live together rather than as individuals. For example, six individuals living on their own will have more expenses than a family of six for a given standard of living.  This needs to be considered in the levels of basic income.

It can be argued that children have as great a need for money to pursue their interests and to take part in leisure activities such as sports as adults have to participate socially.

If it is assumed that i) children do not have lesser needs to adults and ii) larger households have lower expenses per head than smaller ones, the following scheme would reflect needs more accurately.

Each person under 64 would receive a basic income in the order of £32.  A higher basic income would be available for elderly people and disabled people on the basis of greater need.  In addition, each household would receive a basic income in the order of £28 based on needs which are more per-household rather than per-person in nature. 

The results would be similar in that a single person living on their own would receive £60 while a five-member family would receive £188.  However, a household of one parent and two children would not receive less than a household of two parents and one child.  

Incentives would not be skewed in favour of the fragmentation of households as the average extra costs of living alone would exceed the household payment by a small amount.  At the same time, people in the 18-21 age group would find it easier to live away from the family home.  Groups of students or friends living together would receive one household payment.

Complementary policies

A tax imposed on land-ownership in urban areas where the land is not used for residential purposes, rented accommodation or community facilities would lower the cost of accommodation and encourage businesses to locate outside urban areas.

In addition to basic and household income, farmers and rural dwellers could receive payments based on their care for their environment (in regard to fuel, waste, pesticides and fertilisers) and their contribution to rural community services and life.  This could replace headage payments which favour large farmers, intensive over-production, and environmental damage.

Charges per-volume for waste disposal and a tax on fossil fuel burning would provide incentives towards waste management, recycling and renewable energy.  Principles of shifting taxation towards destructive rather than productive activities could be adopted.   If such measures were introduced together with the basic income scheme, the short-term costs during adjustment would be cushioned through income distribution favouring low and middle income families.

Conclusion

Opposition to basic income can be based on four main premises
•	Disputing that the scheme will have the above predicted effects on work incentives, coherence, distribution and the black economy, and on the size of these effects
•	Disagreeing on the value or the positive nature of these effects
•	Claiming that more extensive research on its effects is needed in order to avoid uncertainty and risk
•	Proposal of other alternative schemes together with analysis of their effects

Proponents of the basic income scheme have performed a wide range of research on its effects, and it is clear that continued research is needed.   Opposition to the basic income scheme must set out on which of the above premises it is based, if research disputes and value judgements are to be clearly separated.  This is particularly important in a debate which fundamentally involves distribution of incomes and opportunities.

Reference list

CORI 1996 Planning for Progress Justice Commission: Dublin

De Buitleir, Donal. 1994. “Tax and Social Welfare: The Case for Change” in Towards an adequate income for all Justice Commission: Dublin

Callan, O Donoghue and O’Neill 1994 “Evaluating Basic Income Options” in Towards an adequate income for all Justice Commission: Dublin

Clark, Charles and Healy, John 1997 Pathways to a basic income Justice Commission: Dublin

Clark, Charles and Kavanagh, Catherine 1995 “Basic Income and the Irish worker” in An Adequate Income Guarantee for All Justice Commission: Dublin

Collins, Michael and Kavanagh, Catherine “For Richer, For Poorer: The changing distribution of household income in Ireland, 1973-1994”

Gallagher, Pat 1995 “The Labour party response” An Adequate Income Guarantee for All Justice Commission: Dublin

Healy, Sean and Reynolds, Brigid 1994 “Arguing for an adequate income guarantee” in Towards an adequate income for all Justice Commission: Dublin

McDowell, Michael 1995 “The Progressive Democrats Response” in An Adequate Income Guarantee for All Justice Commission: Dublin

NSSB National Social Service Board 1996. Report of the Expert Working Group on the Integration of the Tax and Social Welfare systems Government Publications: Dublin http://www.cidb.ie/live.nsf/f57cce17300100df8025626f0052e411/58db337c961f6b20802563b90038da00?OpenDocument January 2000

O’Toole, Francis 1995 “The Costings of a Basic Income Scheme” in An Adequate Income Guarantee for All Justice Commission: Dublin

Revenue Commissioners 1999 Allowances, Reliefs & Tax Rates http://www.revenue.ie/it_1.htm January 2000

Ward, Sean 1994 “A Basic income system for Ireland” in Towards an adequate income for all Justice Commission: Dublin

1996 Overview of Social Welfare Services Information Section, Department of Social, Community and Family Affairs http://www.dscfa.ie/sws/index.htm Jan 2000
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