In this opinion piece, David Quinn, Managing Director of Pascal Software, Board member of Inclusion Ireland and member of the Social Democrat party, has taken a close look at the current Irish taxation system. Here he offers a view of a different way of doing it, to be more equitable and eliminate the poverty trap for low-income earners, which could benefit people at all levels of society, including people with disabilities...
Universal income would give every adult a basic income every month.
This idea has been looked at and talked about for many decades.
It might be a way to free up people to take on other roles in society such as being a carer.
It might benefit the lesser well-off parts of society.
David Quinn’s figures make interesting reading.
Back in the 1930’s, The New Deal was an imaginative but wholly necessary series of programmes enacted in America between 1933 and 1938. They were inspired and enacted by Franklin D. Roosevelt as the means of ending The Great Depression. It involved all the R’s – Roosevelt, Relief, Recovery, Reform and preventing a Repeat of another depression. Not only did it work but its legacy is still in place today, with the FDIC (Federal Deposit Insurance Commission) and the SEC (Securities & Exchange Commission) amongst several institutions set up at that time. Some learned people suggest that the suspension of The New Deal’s bank regulatory legislation (Glass-Steagall Act) in the 1990’s marked the beginning of our 2008 financial melt-down.
So why do we in Ireland need another New Deal? Are we not recovering and well out of our recession? “Keep the recovery going” – whatever recovery was going on, it wasn’t and isn’t lifting all boats. Many people were and still are drowning in a perfect storm of reduced income, higher cost of living and penal rental costs and for those lucky enough to earn a decent income, are unable to buy their own home. My moral compass puts homelessness as our No.1 priority demanding immediate State provision, but on a wider basis, we also have to address this basic income issue for everyone as well.
What can we do? Increase Social Welfare rates? Increase wages? Take more lower-paid out of the tax net? All well-intentioned measures, but they don’t address the kernel of insufficient basic income for all. We’ve seen the fear and anger and anti-establishment sentiment that were and are a major part of the Brexit and Trump seismic events. And there’s more coming down the tracks, with Marine Le Pen looking to join this motley crew in a journey to God-knows-where. Do we have to put all our hope and faith for the future in the hands of Angela? Geez, how times have changed.
Our Social Welfare system is creaking and arguably, no longer able to provide the comprehensive support structure that our complex society now needs. We have different schemes for different special circumstances – all well-intentioned and absolutely necessary. Disability benefit, job-seekers benefit and allowance, sick-pay, maternity and now paternity benefit are amongst those benefits intended to support those who cannot work. Now, new child-care measures are being introduced. Applications are submitted, considered, approved, reviewed and hopefully they are paid to people who need to put food on the table today – and not in the perhaps 6 weeks or more that these applications might take to process fully. Those interest groups who organise, lobby and get their act together to mobilise their voting power are the ones who go to the top of a long queue for scarce State resources. Those who are tired, not as organised in mobilising their voting strength and too disparate get diddly-squat. There are lots of special-interest groups in the latter, and that includes the disability community.
Parallel to this we have the world-wide change in working patterns. We have no such thing as a ‘job for life’ any more. Science-fiction type stories about robots, automatically-driven cars and artificial intelligence suggest that we’re leaving Kansas with Dorothy, with huge implications for work/leisure life balances.
That said, in comparison with other countries, Ireland has reasonable levels of support paid to children (Child Benefit) of €140 per month and to older people (Contributory and Non-Contributory Pensions of more than €230 per week). But there are all those rules and regulations – some of these benefits are taxable although unlikely to result in actual tax deductions, exemptions for non-pension income up to a certain amount, means-testing, blah, blah, blah. The Irish Social Welfare system is complex, however – what the State gives with one hand can be taken back later as a “claw-back” if circumstances change. All benefits are subject to reviews, audits, appeals and local political intervention. The DSP seems to protect the State’s financial resources like they were minding their own Communion money. Pity the banks’ auditors and Department of Finance regulators weren’t as careful with our assets.
Those earning a regular income have the joys of income tax, social insurance and social charges deducted from their gross income. Revenue uses a variety of acronyms to make these more familiar – PAYE, PRSI, USC, P2C and now LPT, PRD and whatever you’re having yourself. We have different rates and bands and – oh yeah – tax credits as well. Nearly forgot about those – very important in the overall calculation of your tax deductions. Credits sound good, we all benefit from those right? Eh, no, afraid not. If you earn less than €16,500 per annum, you don’t earn enough to make full use of these valuable credits where there is a use ‘em or lose em’ rule. So those earning the lowest incomes get the least benefit from these credits.
Some groups get more credits than others. Some personal expenses are allowable for tax purposes. Not everyone knows what I’m talking about here, which is another reason why many people are not availing of their full entitlement and are currently paying too much tax. And that’s without trying to explain how pension contributions are used as an effective tax avoidance measure. You can check out www.revenue.ie for all of this information.
So why don’t lower-paid workers, whether employed or self-employed, get a refund of their unused tax credits? Nope – that good idea has been rejected by our political leaders, a dreadful, mean-spirited decision. Instead, we have a tax system that has innumerable gaps, loopholes and special provisions that keep the tax consultants in business giving their expertise to those higher up the food chain so as to minimise the higher-earners’ statutory deductions. Nothing illegal of course – tax avoidance is the smart play when we have to look after our own situation, isn’t it? And woe betide you if you accidentally mention tax evasion. You’ll have the libel lawyers write to you quicker than you can spell “o-o-p-s”.
Let me introduce you to an old idea. Basic Income goes back a long way. From Thomas More’s Utopia and the humanist Johannes Ludovicus Vives in the 16th century, to Thomas Paine (one of America’s founding fathers) in the 18th century, the idea was promoted further by French political philosopher Montesquieu when he wrote: “The State owes all its citizens a secure subsistence, food, suitable clothes and a way of life that does not damage their health”. [See History of Basic Income on www.basicincome.org]. It was called Social Dividend when promoted in Britain in the 1920’s where a basic income payment was to represent the return to each citizen on the capital owned by society. And in the 1960’s, J.K. Galbraith supported James Tobin’s proposal for a ‘demogrant’ – a universal, unconditional payment made to all citizens. Martin Luther King’s economic dream was for the government to provide every American with a guaranteed, middle-class income (1).
So no, I’m not proposing a wild wacky new idea. In fact, back in 2000, our government promised to look into the idea for Ireland in An Action Plan for the Millennium, and they published a Green Paper in 2002. It is still available on the Taoiseach’s website (2). Since then, there have been several research papers written, in alphabetical order, by John Baker, Micheál Collins, Seán Healy, Eamon Murphy, Bridget Reynolds, Michael Taft and Seán Ward. As well as Social Justice Ireland advocating for this, there is another group of individuals, Basic Income Ireland, and there is a wealth of background reading on their website, www.basicincomeireland.com.
Earlier this month, Social Justice Ireland hosted a day-long conference: “Basic Income – Radical Utopia or Practical Solution?”(3). In my view, it is both a radical and practical new solution. In John Lennon’s words, let’s imagine . . .
For the purposes of this example, we are using €10,000 as the level of Basic Income that is paid to all adults, with a little extra to our older folk. This is a rounding-up of the current €188 per week job-seekers benefit. A Universal Pension can replace the contributory and non-contributory pensions. The only conditions for receipt is that you are alive and not in prison. You have the choice of taking up paid employment without any risk to losing this Basic Income payment. Mind you, you’ll be taxed – but isn’t that only right, as long as it is fair and reasonable with a progressive tax system in place where those on lower levels of income pay less than those on higher levels? We should want all citizens to be engaged with the cost of the State’s service provision, and the removal of lower-paid earners from the tax net does not achieve that. Indeed, those citizens who don’t pay income tax or USC are implicitly excluded by some commentators who repeatedly refer to “taxpayers” when they should refer to “citizens”. This reinforces the sense of exclusion or semi-detachment of a large group of citizens from such commentary. In truth, all citizens are VAT tax-payers.
Some have suggested that the payment of an unconditional Basic Income would act as a disincentive to work. Yes, there are bound to be a few, but how many people would choose to live on €10,000 alone? There are bound to be changes to work patterns, but with work patterns changing so much, it can only be positive to give citizens more security and freedom to live their lives of choice. The real stumbling block that has prevented this idea from gaining a wider audience and consideration is the cost. How can it be funded out of general taxation? The 2002 Green Paper suggested that a flat tax rate of 48% would be required to fund a Basic Income of €95 per week (just under €5,000 per annum). At that time the top marginal rate of tax/PRSI was 52.5%. Whilst this Green Paper contains discussion of the uncertainty and behavioural consequences, much of the monetary analysis is considerably out-of-date. Other studies have quoted various rates of up to 65%. I know I’m taking a bit of a risk of being ridiculed, but I’ve done calculations that show that by using an imaginative range of tax rates and bands, the State can fund this project whilst holding the top, marginal tax rate to 57%, up from the current 52%. This range of rates addresses many of the negative consequences listed in the Green Paper.
To do this in a revenue-neutral manner, this proposal uses a set of 4 tax and USC rates that result in a perfectly structured progressive tax system, where the effective tax rate starts off from a negative rate, up to zero and then evenly upwards to a rate of 50% for those on a gross income of €200,000.
Subject to further development of this model, and also subject to corrections due to certain assumptions and presumptions included here, this proposal’s figures show the following:
Tax Credit of €3,300, Standard Rate Cut-Off point of €33,800, Class A PRSI and Standard USC rates.
Next New Deal calculations are based on:
- Basic Income of €10,000 paid tax free to everyone
- No tax credit, 4 rates of Income starting at 10%, then 25%, 40% and top rate of 42%
- Employee PRSI contribution added to new and higher USC rates of 5%, 10% and 15% with smaller bands
- Initial USC rate of 40% on the first €10,000. This reflects USC becoming a Universal Social Contribution, helping to fund the universal Basic Income of the same amount
- Employer PRSI to continue and increase to 15%, in line with other EU States, payable by employers and self-employed.
Note that Revenue’s PAYE tax and USC computer systems, together with most if not all current payroll software providers can cater for up to 5 rates of tax and 5 rates of USC.
So, what is this table is telling us?
- If you earn €5,000 gross, your total nett income will be €12,500, inclusive of the Basic Income of €10,000, an increase of €7,500.
- If you earn €50,000 gross, your total nett income is pretty much the same, just €40 lower.
- If you earn €100,000 gross, your total nett income is just over €3,000 less than the current nett of €60,491.
But more importantly, look at the effective rate of deductions. This table shows that the new nett income starts at €10,000, with “negative” effective tax rates on earnings of up to €24,000. This means that an employee earning up to €24,000 receives more in Basic Income than they pay in tax and USC.
From that point onwards, an employee’s new nett pay continues to be more than the current system until they earn €50,000. After that, the employee is paying more tax/USC than now, with a more progressive tax system showing a gradual increase to an effective tax rate of 50% for employees who enjoy an income of €200,000.
So where’s the catch? Well, apart from the higher-earners’ small increase in their effective tax rates and employers paying a higher PRSI contribution, you tell me.
Who could complain about a new structure of Social Welfare and Tax/USC that provides the following benefits:
- Simple, equal provision of State resources to all its citizens
- Removes any possible stigma or loss of dignity of having to apply for Social Welfare benefits
- Provides a basic income that is sufficient to live frugally if not comfortably, plugging many poverty traps
- Allows citizens to exercise choice to pursue entrepreneurial or artistic enterprises in the knowledge that they will continue to have this basic income to tie them over
- Allows citizens to choose to take time from paid employment to spend unpaid time providing care to others, including children and older members of their family or other voluntary works
- Allows citizens the option to pursue further education or training with the comfort of maintaining a basic income for the duration of the course
- Allows citizens who are already in receipt of job-seekers benefit to pursue any possible employment, care or educational option knowing that their Basic Income is not at risk.
I’m sure there are many more benefits – can you think of a set of circumstances where someone you know can’t pursue their preferred course of action because of the imperative of either staying in their current lower-paid job or keeping their benefit entitlement?
On a wider basis, I’m told that there is research to show that raising the income of the lower waged has a really positive consequence on general health and well-being. Mental health is an obvious one here, with the reduction in poverty and stress. Not all poverty traps would be plugged with this New Deal, but it would certainly have a huge influence in guaranteeing an improvement for the most marginalised in our society, including the homeless.
Staying with the macro, the economy would enjoy a significant benefit from the additional spending power of those lower-waged citizens. Economists can help us here, but with an estimated €6bn increase in total nett pay of those earning up to €50,000, there should be a sizeable volume of additional spending, with extra VAT coming into the State’s coffers, extra employment, etc.
And don’t forget the possible elimination of or reduction in a raft of existing special purpose State benefits, such as illness benefit, student grants, enterprise support grants, amongst others. Lots of other benefits will of course be unaffected, such as the household benefits package, free travel, DCA, one-parent family payments, etc.
Figures available from Revenue have been used in this model to show that the State can afford to make this happen. Calculations have been made to compute the change in State revenues arising from this proposal. Rates and bands could be tweaked further to ensure that this remains revenue-neutral. These calculations would need to be reviewed and validated by eminent experts in this field. Those experts might also be able to put figures on the other financial consequences of this major far-reaching seismic change in public policy. But the structure of a Basic Income plus an imaginative use of tax and USC rates and bands can work.
Are we up for it? Have we, as a country, not shown a willingness and eagerness to embrace major changes in our lives – in my lifetime, we’ve had the EEC/EU, the euro currency, no-smoking ban, divorce, same-sex marriage, to name a few. We changed our PAYE system from the old tax tables and tax-free allowances to the current system pretty much overnight. To quote Obama, “yes we can” be progressive and radical. Remember that the proposed Basic Income of €10,000 amounts to only 55% of the average nett pay if you were on the minimum wage, so nobody will go wild on it. But it guarantees the ability to live frugally, without oversight or assessment by any State body or official. That has to improve one’s self-respect and, over time, it will allow every citizen to seek to pursue their preferred activities, paid and unpaid.
Once we guarantee this basic dignity and income to all citizens, then the State can continue to address its responsibilities to meet the needs of those who need extra, additional support – the homeless, the sick and the families affected by the additional cost of disability come to mind immediately!
The 2002 Green Paper quotes an article by Bill Jordan discussing the writings on Philippe Van Parijs (1992):
“Other commentators have argued for Basic Income as the only effective remedy for social exclusion, seeing means-tested social assistance schemes as are prevalent throughout the Developed World as creating a permanent underclass. A Basic Income system overcomes this problem by removing the poverty and unemployment traps, thus giving the excluded minority access to the market system of reward for individual effort, and secondly by giving everyone a universal share of resources on grounds of membership (citizenship), thus acting as a mechanism for including all in the common good. Seen in this light, Basic Income is a necessity to preserve democracy in the face of deteriorating social relations and withdrawal of participation by those who feel excluded”.
And that was written nearly 25 years before Brexit and Trump!
As a nation celebrating 100 years since the proclamation that promised so much, I submit that it is time for us to look at a better way of meeting the needs of our citizens – all of our citizens, equally and fairly and transparently. Let’s all start imagining . . .
(1) Martin Luther King “Where Do We Go From Here: Chaos or Community” 1967
(2) Social Justice Ireland “Basic Income – Radical Utopia or Practical Solution?” Croke Park, 22nd November 2016 http://www.socialjustice.ie/content/civil-society-policy/social-policy-conference-2016
(3) Basic Income: Government Green Paper September 2002 http://www.taoiseach.gov.ie/upload/publications/1660.pdf