October 22nd Lunchtime: The Recession Diaries
Where stands the debate on the unusustainability of ‘universalism’ now? The Government has stated that only 5% of over-70s have incomes exceeding €36,400 (€72,800 for a couple) and the cost of providing them a medical card would be €10 - €15 million. Unsustainable? It amounts to pennies. In fact, it amounts to less than pennies because (a) there is a cost to not providing a medical card (e.g. drug repayment scheme, administration of means-test, etc.), and (b) the cost is gross, not net: doctors receive the payment and pay income tax on it. So: 5% and minuscule cost; wasn’t that a great little debate?Other debates are rearing their collective heads. Education cuts is one. And the impact of the 1% levy. P. O’Neill over at Irishelection.com points out the inequity of the levy’s threshold:
‘ . . . if you make €17,540, your income levy is zero. If you make €17,541, your income levy is €175.40. Lesson: don’t work for that extra euro.’
It’s called a ’step-effect’ or an income trap: where an increase in gross income leads to a decrease in net income. In the case of the income levy that’s because the threshold exempts people earning below €17,540 - not earnings below that amount. This is not an isolated phenomenon in our tax/levy/social welfare code. In fact it’s choc-a-block with these income traps. Here’s a sampling:
- The 2 percent Health Levy: if you earn €26,000 or below, you pay nil. If you earn €26,001 you pay the 2 percent on the full amount (€520). That’s a big hit.
- The PRSI Exemption Threshold: if you earn €18,304 you are exempt from the 4 percent PRSI contribution. Exceed that amount and you pay the levy on all income exceeding €6,604 (though this is phased in through in marginal relief, so the impact is not immediate).
- Family Income Supplement: The is a real killer. It is linked to thresholds with payments equal to 60 percent of the difference between net income and the threshold. Here’s a crude example: a family on €24,000 with one child will get €900 per year. However, if there income goes up €1,500 they will lost that entire amount.
- Rent Supplement: Here’s another stinger. This is a complicated means-tested programme that primarily benefits those on social welfare (though in some circumstances part-time workers may be eligible). In 2006, someone on unemployment assistance would receive €79 per week in Rent Supplement. But: get a full-time job, even if on the minimum wage, and you lose the whole amount.
There are a plethora of benefits and income supports that are withdrawn as income rises - sometimes only marginally: medical card, back-to-work allowance, back-to-school allowance, etc. This can create some bizarre situations whereby it is financially more rational to remain unemployed or part-time or working for less money. So much for the vaunted ‘incentive to work’ that we get lectured about.
Let’s take one small example: a lone parent with one child working on the minimum wage (38 hours). Just focusing the tax/levy aspect she would be paying no tax and no levies. In addition, she would receive €97 a week in Family Income Supplement. Her weekly income would be €425.
Let’s say she gets a job offer - one that pays €26,500. Understandably, she would be quite excited - after all, it’s a 55 percent wage increase. However, she starts wading through the bottom line. Through tax credits, she won’t be in the income tax net. But:
- She’ll be liable for PRSI, Health and Income levy
- More worrying, she’ll lose the Family Income Supplement
With the new job, what’s the take-home pay? €479. That’s an increase of €54 per week. So: she gets a gross wage increase of €180 per week but only keeps €54. That’s a marginal tax rate of 70 percent. Paddy the speculator-plasterer, on six figures a year, only faces a marginal tax rate of 45.5 percent.
The one thing that comes through all this is that it’s people on low incomes who are most affected by income and poverty traps. For instance, the income levy rises to 2 percent on incomes over €100,000. But unlike the threshold that operates at the low end (whereby all income below is levied), the 2 percent only applies to income in excess of €100,000.
That’s equity the Fianna Fail-way. That’s incentivising work. That’s sharing the pain. Makes one want to stand up in the bus and start singing Amhrán na bhFiann.
NOTE: For an exhaustive study on poverty and income traps arising from the interaction of the tax and social welfare codes, go to ‘Out of the Traps’, written by the European Anti-Poverty Network and OPEN - the lone parent social organisation. Though the numbers refer to 2005, the processes and operation remain the same. Here’s their follow-up on the 2006 Budget.
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