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]