As we head towards Budget Day, and as budgetary negotiations continue, possible changes to tax bands and their indexation are being mooted by some as solutions to the problem of the rising cost of utilities.
This is despite Ireland’s low overall levels of taxation, and low effective income tax rates. If Government really wants to deliver a fair budget, then reforming the income tax system, not changing tax bands is what should be on the table.
Analysing the Revenue Commissioners projection of income and income taxes after last year’s budget it is worth noting that 17.4 per cent of tax cases have an income below €10,000 and just over half have an income below €30,000. This gives an insight into where taxpayers are across the income distribution and should also inform any income tax decisions in Budget 2022.
The benefits of any increases to standard rate tax bands would be skewed towards those on higher incomes. On the other hand, making tax credits refundable would ensure that low income workers are prioritised by Government. If a low income worker currently does not earn enough to use up his or her full tax credit then he or she will not benefit from any income tax reductions introduced by Government in its annual budget. This has been the case for a large number of low income workers following recent Budgets.
Making tax credits refundable would be a simple solution to this problem. It would mean that the part of the tax credit that an employee did not benefit from would be “refunded” to him/her by the state. The main beneficiaries of refundable tax credits would be low-paid employees (full-time and part-time) and all of the benefits from introducing this policy would go directly to those on the lowest incomes. By making this change in Budget 2022 Government would reform the income taxation system by making it fairer and improve the net income of the workers whose incomes are the lowest, at a modest cost.
If Government really wants to make the income tax system fairer, then making tax credits refundable is the best option. But what of those who are outside of the tax net. Those on social welfare, who have been ignored in the past two budgets. It is important to recall that core social welfare rates were not increased in either of the last two Budgets. The prospect of people on social welfare being left behind for a third successive budget is very concerning.
Talk of an increase of €3 to €5 in core social welfare rates is simply not good enough. Neither is an extension of the fuel allowance. A €10 increase in core social welfare rates is required in Budget 2022, nothing less. This would set Government on the correct path to benchmark social welfare rates to 27.5 per cent average weekly earnings in 2023.
If Government is going to deliver on the Programme for Government commitment to a ‘new social contract’ then budgetary policy should prioritise low income households. To prioritise low income households Government must commit to benchmarking core social welfare rates to 27.5 per cent of average weekly earnings (€222 per week), and to reach this benchmark over two years.
Given the very difficult situation people across the country are in as a result of Covid-19, benchmarking minimum rates of social welfare payments to movements in average earnings is an important policy priority. The benchmark of 27.5 per cent of average earnings, the standard delivered in Budget 2007, is most important to the living standards of Ireland’s poorest and most vulnerable, and to meeting our own anti-poverty commitments.
Beyond supporting incomes, it is investment on sufficient scale that will deliver a fair budget for everyone. Major investment is needed to ensure the housing strategy, the climate change strategy and the revised national development plan achieve their worthy goals.
Investment in our social infrastructure is what will truly deliver a fair budget that improves the living standards of all. This means resourcing effective and integrated social protection systems. Investing in education, training and lifelong learning. Ensuring quality, accessible and affordable childcare and out of school care are available to all families. Funding is also required to support long term care, health care, and disability services.
In short, social investment must be a top priority in Budget 2022, because it is by supporting people through incomes and through services, and by providing a minimum social floor for everyone that a fair and robust postpandemic recovery for all will be delivered.
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