EXAMINATION OF BUDGET 2002 - INCOME TAX MEASURES
USING THE NATIONAL ANTI POVERTY STRATEGY GUIDELINES.
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. 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.
Having regard to the likely increase in inflation, all income groups are expected to experience real income gains as a result of Budget 2002.
The Social Welfare measures in Budget 2002 will accrue mostly to those at the lower end of the income distribution who, without such measures, would experience a deterioration in their income in relative terms. Those at the lower end of the income scale will also benefit from taxation measures if they become exempt because the entry point to taxation has been increased in Budget 2002.
The impact on poverty is one criterion for assessing the Budget. There are other acknowledged goals such as increasing economic efficiency, rewarding effort and enterprise and encouraging capital accumulation, all of which improve economic welfare generally and are additional to the fundamental role of budgeting revenue and expenditure. Also, in terms of looking at the Budget’s impact on poverty it is necessary to consider not only the income tax measures which it contains but also: -
(a) the additional increment of social inclusion spending provided for through specific Budget measures. In Budget 2002, the value of these is over €1.3 billion for 2002; and
(b) the aggregate value of social inclusion spending across all Government programmes which is provided for annually through the Estimates process and the Budget. It is estimated that in 2002, this spending, including social welfare payments, will amount to over €14 billion representing 40% of projected gross Government expenditure for the year.
These expenditures may be particularly relevant to, and of benefit to, those in the lower income categories referred to below who do not pay tax and are, therefore, not affected by tax changes.
Assessment against NAPS Guidelines
What is the primary objective of this policy/programme/expenditure proposal?
The principal purpose of income tax is to raise revenue to fund the provision of services by the State. In looking at the effect of changes to income tax it needs to be borne in mind that we are looking at changes to tax paid by people - those in lower income categories do not pay income tax. Twenty four percent of those returning income for tax purposes pay 70% 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 more of those on low incomes from the tax net, to further reduce the tax burden especially on low to average incomes and to increase the incentive to work.
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 employee credits and further widening of the standard rate band) help to prevent people in the target groups from falling into poverty. The Budget delivers further progress towards the agreed policy goal of exempting the minimum wage from income tax - for a single person, the first €209 per week of earnings, equivalent to 90% of the minimum wage, 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 €2,207 single/€4,414 married bringing them to €13,000 and €26,000. This represents an increase of over 20%.
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 2002 will increase disposable income levels. The Budget removes a further 79,300 taxpayers from the tax net bringing the total of income earners outside the tax net to 692,100. For a married couple, with one income (PAYE) and a carer in the home, the first €430 per week is made free from tax while for a single person the first €209 per week of income becomes free from tax. Altogether, 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 the personal and employee credits.
iv) have no effect on poverty ?
By taking people out of the tax net Budget 2002 will help to improve disposable incomes.
v) increase poverty ?
The income tax measures do 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 income tax measures address inequalities that might lead to poverty. To the extent that target groups are income earners, the income tax measures will impact positively on their welfare. While the measures are directed at the entire community and affect people at all levels of income, tax changes will remove 79,300 from the tax net and will reduce the burden for other low income households through the increase in personal and employee credits.
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.)
And what is the rationale and basis of the assessment (data/information) behind each of these proposals?
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. Figures 1 - 3 below show the net income gains for Single, Married One Earner (Two Children) and Married Two Earners (Two Children) on full rate PRSI after income tax and PRSI but excluding Child Benefit and FIS.
If the proposal has the effect of increasing the level of poverty, what options might be identified to ameliorate this effect?
If the proposal has no effect on the level of poverty, what options might be identified to produce a positive effect?
Budget 2001 used the SWITCH model developed by the ESRI as an aid to some of the assessment of its impact. It was not possible to use the model again this year as ongoing technical work in specifying the parameters of the model was not concluded in advance of the Budget.
 SWITCH refers to Simulating Social Welfare and Income Tax Changes. This is a computer model which may be used to simulate the effects of changes to the tax and social welfare codes.