Basic income system has merit

THE income tax and social welfare systems which have developed in an uncoordinated way over the past century as a means of redistributing…

THE income tax and social welfare systems which have developed in an uncoordinated way over the past century as a means of redistributing income are seriously defective in a number of important respects.

First of all, both income tax and social welfare are unbelievably complicated, absorbing a huge amount of time and energy, not just con the part of the public service administering it, but also in the wider community.

Second, the lack of co ordination between the two arms of the system has led to the emergence of endless "poverty traps", situations in which either individuals find that if their employer increases their pay, their post tax income actually falls, or in which many unemployed people have not been able to afford to take a job because if they went back to work they would be much worse off.

And, third, the tax system is extremely inflexible: for example, there seems to be simply no way in which income tax concessions can be effectively targeted at the lower paid.

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It was in recognition of these deficiencies that as Taoiseach I asked my economic adviser, Dr Patrick Honohan, in 1985 to investigate, in conjunction with the Department of Finance, the practicability of substituting for this unholy mess a simple basic income system.

Patrick Honohan's study (published in the spring 1997 issue of Administration) showed that such a system could be introduced, but it also showed that in the circumstances of that time such a system would have required the introduction of a marginal tax rate of 65 per cent to 70 per cent over a wide range of incomes.

The basic income idea surfaced again some years ago in the context of the annual conferences on social policy organised by the Justice Commission of the Conference of Religious Institutions (CORI), which are attended by economists and politicians as well as by people involved in social policy and administration.

The energy and enthusiasm of the directors of CORI's Justice Office, Father Sean Healy and Sister Bridget Reynolds, has now brought this issue back into the public forum. They commissioned two economists, Charles Clark and John Healy, to cry out a detailed study of whether and how such a system might be introduced during a period of rapid economic growth such as we are currently experiencing, a period in which the Government can commit itself in advance to £1 billion in tax reliefs over a three year period.

In the course of the recent negotiation of Partnership 2000 CORI persuaded the Government to agree to a further independent appraisal of the concept of a basic income payment to all citizens, this appraisal to be overseen by a broadly based steering group.

To many people the idea of everyone receiving a basic income through the medium of the State may seem at first sight utopian, perhaps even absurd. But what we tend to forget is that most people already do receive the equivalent of such payments in one form or another, either through the tax or the social welfare system.

Thus about one million adults benefit from social welfare payments more than one million children receive child benefit; and more than one million income tax payers benefit from personal tax allowances which, in the case of the two-fifths of taxpayers currently on the 48 per cent rate, is the equivalent of a State payment of £1,424 per annum, £27.50 per week. In fact only a small minority of people do not receive some kind of basic allowance through either the tax or social welfare systems.

The question, therefore, is not whether such payments are feasible, but rather whether a standardisation of the existing payments and an extension of them to the one seventh of the population who are at present excluded could be substituted for the present incoherent system without undue disruption or excessive cost. And could this be done on a scale that would ensure that those dependent on social welfare would be at least as well catered for as at present?

The Clark/Healy study, published last Monday, makes a major "contribution to the clarification of these questions. It shows that in present conditions the substitution of a basic income for our income tax and social welfare systems could be achieved on the basis of a tax rate of between 44 per cent and 50 per cent from which the basic income itself would be exempt.

While a 44 per cent tax rate would provide an adult basic income payment of £60 per week, this would be less than the present level of adult social welfare payments. Realistically, therefore, a payment of £70 per week would be desirable, and this would involve a 48 per cent tax rate on other income. This would involve a much lower marginal tax rate than the 65 per cent to 70 per cent which a decade ago was estimated to be necessary in respect of a wide range of incomes.

Many people whose current marginal tax rate is 30.5 per cent (26 per cent tax plus 4.5 per cent PRSI) could look askance at an average and marginal tax rate of 48 per cent on their earned income. But although the tax rate payable by these people would be higher than now, their total tax bill would be lower, in most cases by a substantial amount.

Of course, any radical change of this kind in the tax and social welfare system must necessarily involve losers as well as gainers. However, by spreading the transition over three years, during which, on the Government's present estimates, some £900 million will be available for income tax reform, it would be possible to minimise the numbers who would actually lose.

BUT the number who would actually be worse off at the end of the period than at the beginning might be quite small. These would tend to be concentrated in the top 10 per cent of earners, and, for what it is worth, their marginal tax rate, the share taken in taxation and PRSI out of each additional £1 earned by these higher income PAYE taxpayers, would be reduced by almost one tenth, from 52.5 per cent to 48 per cent.

The advantages of a shift to a basic income system would be considerable. Because all income over and above the basic income payments would incur the same tax rate, the tax system would be greatly simplified. Because the amount of basic income payments would he determined solely by the age of recipients, all the paraphernalia of means testing would disappear, as would the somewhat notional, job seeking requirement for the payment of unemployment benefit and assistance.

These simplifications of the system would involve major savings in administrative costs, savings that might well go beyond the halving of these costs that has been provided for in this basic income costing.

Next, the disappearance of all the poverty traps and obstacles to unemployed people seeking work, and the elimination of a good part of the rationale for the black economy, would he major advances.

Finally, the proposed basic income system would significantly improve the balance of income distribution between rich and poor, in a manner that is almost impossible to achieve through the existing tax and welfare structures.

However, the obstacles to such a radical change are formidable. Such major changes always evoke a negative response from those who fear they may lose by them. Next this proposal would involve the disappearance of the social insurance system, to which many people are strongly attached. And a public service which has such a huge investment in the existing dual tax cum welfare system may be reluctant to go along with its disappearance.

Nevertheless, the CORI proposal puts this issue squarely before the public for the first time, providing a concrete model upon which the Government's proposed independent appraisal can now focus. This is a remarkable and strikingly constructive contribution by a religious organisation to the future development of Irish society. {CORRECTION} 97040300073