Negative Income Tax and the Public Finances Crisis

Today I will look at how the Negative Income Tax can help to solve public finances crisis.

We've heard it all before, but it's nice to repeat the facts again. We are currently borrowing around €22bn to finance the huge public expenditure bill, which includes the €21bn of social welfare payments and €20bn of public service pay. I would like to look at the €21bn attributed to social welfare. This is exactly the area that NIT can help to reduce. (True some might argue that public sector pay should be looked at, and I agree as well, for the sake of this post and NIT I want to concentrate solemnly on social welfare expenses.)
Firstly let's look at what compromises the whole sector of Social Welfare. The Social Welfare is meant to be a help for the individuals and families that find themselves in financial difficulties due to various factors (the most frequent ones being the inability to find a job, the inability to work and being on pensions). However, currently under social welfare the state is sponsoring many more than just those that cannot find a job or cannot work. Currently when look at the various recipients of social welfare payments it includes the following:

• Disability and illness
• Carers
• Unemployed people
• Older and retired people
• Families and children
• Death related benefits
• Back to Education
• Farmers
• Extra social welfare benefits
  

While some of these (in fact most of these) can be justified, this long list of various recipients causes problems. It creates scope for 'double payment's and even welfare fraud where people abuse system and can, indeed gain, much more from social welfare than from working. This is a serious issue when it comes to public finances because not only does state have to pay for these people but the state also looses money from the taxing of the person's income.
Along with this long list the 'extra social welfare' category includes emergency benefits that the state pays to the individual such as diet and rent supplements, heating supplement, mortgage relief and urgent needs payments. You can see that with so many various schemes and various payments there is a very high chance of the abuse of the system and also of people living much higher about the minimum that they are entitled to.
The ideal solution to this would be creating a threshold that determines this minimum and makes sure every individual or family stays at the level of this minimum at the very least. I'm talking about a threshold that the NIT establishes. In fact, we have this threshold set in the scheme of Family Income Supplement, where the family receives money to bring it up to the threshold level, if the income is too low. The payment is calculated as 60% of the difference between the threshold and the income.
Having a system that is synchronized like this, for both families and the individuals will save up from €2bn to €5bn depending on the amount of the threshold. This is almost like the whole McCarthy report!

[All information was got from Irish Citizens Information website, calculations are my own estimates and may be flawed]

Our Economic Crisis

Today I am going to concentrate my attention at another of the main policies of Breakthrough, namely the Negative Income Tax(NIT). The system of taxation has been proposed by many economist in the USA in the 1960s. Milton Friedman is attributed with this concept, though there were many other economist before Friedman, such as Juliet Rhys Williams, who have proposed this concept. At the time the idea was revolutionary and stirred up great amount of discussion and arguments about its efficiency and its ability to truly help both the poor and to improve the fiscal situation in USA. In fact some of NIT has made its way into Richard Nixon's Family Assistance Plan, however the full implementation of NIT has never truly been truly been implemented.
Before I venture into the reason why there is a reason for NIT in Ireland, let me first try to explain what NIT is, as not many are quite familiar with the concept (in fact even I have heard about it just recently). NIT, like any other system, taxes the income of the citizens at certain levels, as agreed upon by the government. However, the NIT proposes a threshold to be established above which this taxation taxes place. Furthermore for people with income below this threshold the government pays back 'negative tax'. People whose earning match this threshold break even, ie they do not have to pay any tax and nor do they receive any tax in return. There are actually quite a few different proposed systems of NIT, and I will discuss them in later posts to establish which system does Breakthrough prefer.
Having established the standard definition of NIT, however, let us now look why would Ireland need such a radical change in our tax system. Right now Ireland is in the middle of the worst economic recession in decades. In fact, some argue, we have two recessions happening here in Ireland simultaneously; the local recession caused by the property bubble and resulting unsustainable growth of wages, and the international recession that started off in the USA. With these two recessions happening simultaneously we are now experiencing an increasing unemployment (currently at around 12%) and the fall of GDP this year of around 9%. The situation thus, looks very grave for us in Ireland.
Furthermore, though, we are experiencing a great crisis in the public finances and running a debt this year of around €22bn, which is unsustainable. It is this crisis of public finances that needs to be sorted first, before the government can even think of introducing a stimulus package to create jobs and help to kick-start the economy. The Keynesian policies of great government intervention simply cannot start here, with a debt of €22bn for one year alone. Thus it is clear we must solve this crisis first before we can even start thinking of tackling the other problems.
However not many people have much time for such a thinking. It is no easy thing to do, when you have been made redundant and suddenly you find yourself singing up for social welfare payments in order to survive. Therefore the government needs to come up with a solution that would both tackle the unemployment crisis and help to make the fiscal adjustment that is required.
And this is exactly what NIT offers. How? I shall do my utmost best to explain this in the next couple of posts, so please look forward to reading them.