Annex C

EXAMINATION OF BUDGET 2001 - INCOME TAX MEASURES

USING THE NATIONAL ANTI POVERTY STRATEGY GUIDELINES.

Background

The National Anti Poverty Strategy Unit of the Department of Social Community and Family Affairs has issued guidelines (the ‘NAPS guidelines') which are to be used by Departments for poverty proofing policy proposals. In addition to reviewing the impact of the Budget tax package using the NAPS guidelines, the income tax package measures were assessed over various income distributions in conjunction in some cases with social welfare measures.  It should be noted that the primary aim of the poverty proofing process is to identify the impact of the policy proposal on the poor so that this can be given proper consideration in designing policy.  It is not intended that poverty proofing would require that all policies be fundamentally transformed so that they are explicitly targeted at the disadvantaged.

It should also be pointed out that the impact on poverty is one criterion for assessing the Budget.  There are many other legitimate goals and targets such as increasing economic efficiency, rewarding effort and enterprise and risk taking, removing market distortions, controlling inflation and encouraging capital accumulation, all of which improve economic welfare generally.

What is the primary objective of this policy/programme/expenditure proposal?

The principal purpose of income tax measures is to raise revenue to fund  the provision of services by the State. In looking at the effect of changes to income tax measures it needs to be borne in mind that we are looking at changes to tax paid by people - those in lower income deciles do not pay income tax. Twenty seven percent of those returning income for tax purposes pay 71% of all income tax. Accordingly, changes to income tax affect some sections of the population more than others and do not affect those not paying tax. In this Budget the policy priorities driving the changes to the income tax  regime are: to remove those on low incomes from the tax net, to reduce the tax burden especially on average incomes and to increase the incentive to work by appropriate tax rates and policies.

Does it  . . .

 i) help to prevent people falling into poverty?

By increasing levels of income, increasing the reward for work and helping to underpin economic development which will secure employment, the Budget’s main income tax measures (increases in personal and PAYE credits, reduction in the rates, widening of the standard rate band) help to prevent people in the target groups from falling into poverty. The Budget delivers significant progress towards the agreed policy goal of exempting the minimum wage from income tax - for a single person the first £144 per week earnings is made free of tax.  A further example is that the exemption limits from income tax for persons aged 65 and over are being increased by an annual sum of £1000 single/£2000 married bringing them to £8,500 and £17,000.


ii) reduce the level (in terms of numbers and depth) of poverty?

iii) ameliorate the effects of poverty?

Changes to direct taxation will not directly impact on those in the lowest income households, who are already by and large outside of the tax net. However, the income tax measures in Budget 2001 will increase income levels. The Budget removes a further 133,000 taxpayers from the tax net bringing the total of income earners outside the tax net to 668,000. For a married couple, with one income (PAYE) and a carer in the home, the first £308 per week is made free from tax while for a single person the first £144 per week of income becomes free from tax. The 33% increase in rent relief will assist those income earners who rent their accommodation. Taken as a whole these measures help to improve the welfare of people on lower incomes.  Removing additional lower income earners from the tax net helps to increase disposable incomes at this level. Similarly the circumstances of those on lower incomes, and who continue to be in the tax net, will be improved by increases in credits and the reduction in the standard rate.

iv)  have no effect on poverty?

By taking people out of the tax net Budget 2001 will help to improve disposable incomes.

v) increase poverty?

The Budget does not increase poverty.

vi) contribute to the achievement of the NAPS targets?

In so far as persons defined as consistently poor are within the tax net the Budget income tax measures will contribute to progress towards the overall NAPS target to reduce poverty among that section of the population. While the income tax system is not modulated on a regional basis, nevertheless,  in relation to two of the other NAPS targets - disadvantaged urban and rural areas - the income tax package will have a beneficial impact on people on lower incomes living in such areas.

vii) address inequalities that might lead to poverty?

viii) as proposed, reach the target groups?

By taking more of the lower paid out of the tax net and by reducing tax at lower levels of income, the Budget addresses inequalities that might lead to poverty.  To the extent that target groups are income earners, the Budget will impact positively on their welfare. While the Budget is directed at the entire community and affects people at all levels of income, tax changes will remove 133,000 from the tax net and will reduce the burden for other low income households through the increase in credits and the reduction in the standard rate.

Changes in the PRSI regime for the self-employed, improvements to the Family Income Supplement and a substantial increase in child benefits, in addition to the increases in other social welfare payments, achieve balance in the distributional effects of this Budget. (In relation to social welfare expenditure measures, the responsibility for poverty proofing lies with the Department of  Social Community and Family Affairs.)

The basis for this assessment is the analysis by both the Department of Finance and the Revenue Commissioners of the distributional impact of the changes to income tax in Budget 2001. Examples 1 - 15 in Annex A show the net income changes for a range of incomes and family types including the impact of Child Benefit and FIS.  Figure 1 - 3 shows the net income gains for single / Married One Earner (Two Children) and Married Two Earners (Two Children) on full rate PRSI. 

The ESRI SWITCH model was also used as an input to some of the assessment.  

If the proposal has the effect of increasing the level of poverty, what options might be identified to ameliorate this effect?

Not applicable.

If the proposal has no effect on the level of poverty, what options might be identified to produce a positive effect?

Not applicable.