Basic Income in Ireland 2002

Basic Income in Ireland

Dr Sean Healy CORI Justice Commission Ireland Liege, January 5th, 2002

What is Basic Income?

In our understanding, basic income is defined as an income paid unconditionally to everyone on an individual basis, without any means test or work requirement. In a basic income system every person would receive a weekly tax-free payment from the Exchequer and all other personal income is taxed, usually at a single rate. For a person who is unemployed, the basic income payment would replace income from social welfare/social security. For a person who is employed, the basic income payment would replace the tax-free allowance or tax-credit in the income tax system.

Why a Basic Income?

There has been a wide range of arguments provided to support the introduction of a basic income system. Among these are:

  • Liberty and equality,
  • Efficiency and community,
  • Common ownership of the earth.
  • Equal sharing in the benefits of technical progress,
  • Flexibility of the labour market
  • The dignity of the poor,
  • The fight against unemployment and inhumane working conditions,
  • The need to reverse the desertification of the countryside
  • Interregional inequalities,
  • The viability of co-operatives.
  • The promotion of adult education,
  • Autonomy from bosses, husbands and bureaucrats

All of these reasons, and more, have been invoked in favour of introducing a basic income system.

Early Empirical Work on Basic Income in Ireland

In the late 1970s, the National Economic and Social Council (Ireland's Government-appointed think-tank which includes representatives of social partners, government appointees and key civil servants) commissioned a report on how personal income tax and transfers might be integrated. This report examined three broad options, one of which was basic income. Subsequently, the report generated very little discussion about basic income. However, it did provide the basis for a wide-ranging debate about tax reform that culminated in the establishment of the Commission on Taxation.

The First Report of the Commission on Taxation (1982) contained a cursory examination of basic income that it rejected, mainly on cost grounds. Similarly, the Commission on Social Welfare (1986), quoting the Report of the Commission on Taxation, rejected basic income on cost grounds, but also because basic income might represent a detour from the priority objective, according to the Commission, of increasing social welfare rates to adequate levels.

This failure to analyse basic income on any serious level is difficult to justify, even if it is understandable given the focus of both of these reports and the contexts in which they were produced. However, for many years afterwards these two reports were quoted, by those opposed to analysing a basic income approach, as sufficient reason for rejecting basic income. By such cursory analysis and casual dismissal is policy often made!

From 1987 onwards

From 1987 onwards there have been two approaches to studying basic income in Ireland. The first approach preserved key elements of the existing tax and spending systems . The second approach substituted basic income for the existing tax and welfare systems and some other government spending .

The models developed by Honohan and Callan were similar. Each adult of working age would receive an untaxed payment equivalent to that paid as unemployment assistance (in the social elfare system); this was seen as a "full basic income". Elderly people would receive somewhat higher payments and children would receive smaller amounts. All social welfare payments would be discontinued. Existing 'discretionary' tax reliefs (such as mortgage interest, employee pension contributions, etc.) would be retained. All government spending programmes would also be retained.

Both authors found that a very high tax rate would be required to fund this type of proposal. Tax rates in excess of 65% would be required on all personal incomes. It was suggested that such a high tax rate could act as a disincentive to people taking up employment. In addition, Callan found that the income distribution effect of this proposal was not advantageous for significant numbers of low-income households. Honohan and Callan concluded that these models of basic income should be rejected.

A series of official reports in 1996 reviewed the findings of Callan, notably the Department of Enterprise, Trade and Employment, Forfas and the Expert Group on the Integration of the Tax and Social Welfare Systems . These reports endorsed Callan's conclusion that this model of basic income was not viable.

The CORI approach (Version One)

CORI Justice Commission agreed with the Honohan and Callan assessment that this model of basic income was not viable in the Irish context. CORI, however, wanted to achieve the main enefits of basic income, while reducing the cost, so that the tax rate (including social insurance contributions) required would be no more than 50% - which was lower than the top combined income tax and social insurance rate in Ireland in the mid-1990s.

Sean Ward had followed this approach in his 1994 study . The main characteristics of this alternative approach were:

  • A 'full' basic income for older people and for children
  • A substantial 'partial' basic income for adults of working age. This would be topped up to the level of unemployment assistance for people who were unemployed.
  • The abolition of all discretionary tax relief.
  • A range of public expenditures would no longer be required.
  • Employers' social insurance contributions would be abolished.
  • Government support for industry would be reduced.
  • This new model had several advantages over the current systems. According to Ward it:
  • Provided more equity, both horizontal and vertical.
  • Improved incentives to recruit labour and seek work.
  • Provided greater simplicity and certainty.

CORI Justice Commission adapted and developed this approach. CORI proposed a number of variations on how it might be implemented in practice. A set of principles for evaluating these roposals against the status quo position were outlined and applied.

One of the most significant aspects in this period was the fact that the various Government studies already referred to gave this particular approach very little consideration. Neither the Department of Enterprise, Trade and Employment nor Forfas gave the proposal any consideration. The Expert Working Group on the Integration of the Tax and Social Welfare Systems considered the CORI proposal. Its work, however, was seriously flawed methodologically.

The CORI Approach (Version Two)

The two major objections consistently being put forward as the basis for rejecting basic income were that it would (a) result in tax rates that were too high and (b) there was no practical way of mplementing such a system. The last few years have produced changed contexts on both of these objections.

The economic growth in Ireland in recent years has substantially reduced the tax rate necessary to fund a 'full' basic income for everyone in Ireland. As a result of this CORI developed its original proposals. Instead of having a substantial 'partial' basic income for adults of working age it was possible to pay everyone a full basic income. From 1997 onwards all CORI proposals were for he introduction of a 'full' basic income. In the interest of clarity, I refer to this as the CORI approach, version two.

At the same time CORI commissioned research to look at how it's proposals for basic income could be implemented. Charles Clark and John Healy did this work. They came up with a ecommendation on how to proceed to implementation of a full basic income system for all, over a three-year period.

Of equal importance was the issue of financing a basic income system. For years there had been arguments about the actual tax rate required to finance a basic income system. During that period CORI had sought mechanisms that would produce agreement on this issue. Government refused to study the topic or to provide the funding for such a study to be conducted independently. However, a solution was to be found in 1997.

Government-appointed Working Group on Basic Income

In Ireland, since 1987 Government has negotiated with employers, trade unions and farming organisations to develop three-year national plans. In 1996 an additional pillar of social partners was added to this partnership structure representing the voluntary and community sector. CORI Justice Commission is one of the organisations which is recognised as a full social partner as part of this pillar. In the course of the negotiations for the new programme called Partnership 2000 (covering 1997 - 9), CORI was successful in getting agreement from the other social partners and vernment to include a section on Basic Income which reads as follows

"Further independent appraisal of the concept of introducing a Basic Income for all citizens will be undertaken, taking into account the work of the ESRI, CORI and the Expert Group on the ntegration of Tax and Social Welfare and international research. A broadly based steering group will oversee the study".

A working group was established to implement this commitment, CORI was part of this working group. The working group decided to divide its work into two phases. Phase 1, examines the tax rate needed to fund Basic Income and the distributional implications of introducing Basic Income with this tax rate. Phase 2 looks at the dynamic effects of the proposal, including its effects on employment, effects on economic growth, short and long-term budgetary implications and the gender dimensions of all of these. These studies have been completed and published by Government along with the working group's report.

The ESRI study done for the Working Group found that a Basic Income system would have a substantial impact on the distribution of income in Ireland in that, compared with the present tax ndwelfare system it would:

  • Improve the incomes of 70% of households in the bottom four deciles (i.e. the four tenths of the population with lowest incomes) and
  • Raise half of the individuals that would be below the 40% poverty line under 'conventional' options above this poverty line.
  • According to the Report, these impacts would be achieved without any resources additional to those available to 'conventional' options.

The Working Group's Report also found that the tax rate (including PRSI replacement) required to finance Basic Income, based on January 1999 estimates, would be 47%. Since then the economy has grown significantly and the revised rate, based on Revenue Commissioners estimates of the tax base, is 42.7%.CORI Justice Commission welcomed the Final Report of the Working Group on Basic Income. In particular it welcomed the fact that the Report vindicates CORI Justice Commission's claims that a Basic Income system would have a far more positive impact on reducing poverty than the present tax and welfare systems. According to the CORI Justice Commission, this report shows hat a Basic Income system would be far more effective at tackling poverty and should form part of a comprehensive strategy to totally eliminate income poverty in the years immediately ahead.

Commenting on the losers identified in the Report, CORI Justice Commission pointed out two key issues that need to be borne in mind:

  • Over a three-year implementation period of a Basic Income system all the 'losers' would be better off than they are at present. They would simply not gain as much under Basic Income as they would under the present system.
  • The losers in the bottom four deciles identified in the Report can be easily targeted and compensated through the Social Solidarity Fund that forms part of the Basic Income structure.

On the macro-economic aspects CORI Justice Commission pointed out that the Report itself acknowledges that the findings were very tentative, speculative and hard to quantify. However, it elcomed the Report's conclusion that a basic income system could encourage some people to move from the unofficial economy into regular employment.

For CORI Justice Commission the critical test of any tax and welfare system is its impact on people with lower incomes. While many poor people have benefited from developments of recent years, especially through growth in employment, the fact remains that the gap between poor people and the rest of society has been widened over the past decade and a half.The choice between a Basic Income system and 'conventional' tax/welfare options is a trade off between greater equity and a risk of lower economic growth versus less equity and less risk to igher economic growth. At a time when so much concern is expressed about the country's growth rate being unsustainable, the argument in favour of introducing a Basic Income system is further strengthened.

The Issue of Tax Credits

The most recent national agreement, entitled The Programme for Prosperity and Fairness (2000-2002), contains a commitment to establish a working group to look at the viability of making tax credits refundable. This working group, of which CORI Justice Commission is a member, is nearing completion of its work. Its report should be published in 2002.

The pressure to make tax credits refundable is growing in Ireland as more than one third of those who are in paid employment are outside the tax net and, consequently, do not benefit from tax reductions in the Government's annual Budget.

The move to a tax credits system was completed in Ireland in the past year. The introduction of a refundable tax credit system would take this process a step further and would produce a situation where every person in the country had the right to some form of payment from the State. Viewed from an age-based perspective it would mean that

  • Child Benefit was paid for every child.
  • Refundable tax credits were available for every adult up to the age of 65.
  • An Old Age Pension was paid to every adult over 65.

Towards a Green Paper

In the build up to the 1997 Irish general election CORI canvassed all political parties to include a commitment on Basic Income within their election manifestos. The incoming Government (Fianna Fail / Progressive Democrats coalition) made a commitment to introduce a Green Paper on Basic Income within two years. This was a further breakthrough as it ensured that the work being done on Basic Income would be considered within the official policy making process of Government and the results of that consideration would be published for public consideration.

The normal procedure in Ireland is that a Green Paper is followed by a discussion which, in turn, is followed by a White Paper outlining what Government proposes to do which then forms the basis for a Bill which goes before the Oireachtas (both houses of Parliament). Because of the late completion of the working group's studies, publication of the Green Paper was delayed. According to Ireland's Taoiseach (Prime Minister) it is now scheduled for publication in January 2002.

Conclusion

Basic income has been around for almost 25 years in Ireland. In the 1970s it was not addressed seriously. From the mid-1980s to the mid-1990s it was dismissed in official reports as unworkable and/or too costly and/or less important than tackling tax reform or social welfare inadequacy. We have seen that these assessments were made on the basis of very little evidence.

More recently the Report of the Working Group on Basic Income, and its accompanying studies, show that basic income could be financed in the Irish context. CORI's work on implementation mechanisms has shown that a basic income system could be implemented in practice. It is clear that the model proposed by CORI Justice Commission (i.e. a full basic income for all) can be implemented in practice and can be financed without resorting to a too-high level of taxation.

The next phase of this process will see the publication of the Government's Green Paper on Basic Income later this month. Later this year the Working Group on Refundable Tax Credits is expected to publish its report. Both of these documents should lead to a much more informed public debate on the issue of basic income in Ireland. With an election due in Ireland in the first half of 2002 it will be interesting to monitor developments.

REFERENCES

Callan, Tim, Cathal O'Donoghue and Ciaran O'Neill (1994), Analysis of Basic Income Schemes for Ireland, Dublin: ESRI.

Clark, Charles M. A. and John Healy (1997), Pathways to a Basic Income. Dublin; CORI.

CORI (1994), Tackling Poverty, Unemployment and Exclusion: A Moment of Great Opportunity, Dublin: CORI.

CORI (1995), Ireland for All, Dublin: CORI.

CORI, (1996) Planning for Progress, Dublin: CORI.

Department of Enterprise, Trade and Employment (1996), Growing and Sharing our Employment: Strategy Paper on the Labour Market, Dublin: Stationery Office.

Dowling, Brendan (1977), Integrated Approaches to Personal Income Taxes and Transfers, Dublin: NESC.

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Ward, Sean (1994), "A Basic Income System for Ireland" in Brigid Reynolds and Sean Healy (eds) Towards an Adequate Income for All, Dublin: CORI.