Arguments made for indexing tax

ESRI outlines to Oireachtas committee how an indexation could be implemented in Ireland

The introduction of a tax indexation system could help social welfare recipients to keep certain benefits even if their wage grows, an Oireachtas committee has heard.

The introduction of a tax indexation system to Ireland could help social welfare recipients to keep benefits such as medical cards even if their wage grows, an Oireachtas committee has heard.

Indexation is changing the monetary parameters of tax and welfare systems in line with price or earning changes.

The Economic and Social Research Institute (ESRI) outlined to the Oireachtas committee on budgetary oversight how an indexation could be implemented in Ireland, instead of the current method of the Government making discretionary tax changes usually around budget time.

“The absence of a rule for increasing welfare payments, tax credits and bands in line with inflation or earnings growth has implications for households, their purchasing power, the exchequer, poverty, and income inequality,” said the ESRI’s Claire Keane.

In other OECD countries, there is a tax indexation system linked to wage growth. The ESRI suggested that Ireland could go with an indexation based on wage growth or a second option that would link the system to inflation.

Through wage growth indexation, medical cards, housing subsidies, childcare subsidies, and student grants would be easier for people to keep, said Ms Keane.

“If tax and welfare parameters increase in line with price growth, the purchasing power of those receiving welfare is constant, exchequer revenue from income tax still rises in real terms as tax credits and bands fail to keep pace with wage growths,” she said.

It’s only by indexing tax and welfare parameters in line with wage growth do welfare recipients and workers see their income grow at the same rate. 

"This wage indexation scenario is distributionally neutral in that it keeps at risk of poverty rates and income inequality rates constant.” 

ESRI research shows that the natural index for indirect taxation is price growth. That would keep taxes, including carbon tax, at a constant level. But wage growth indexation may be more suitable for income tax and welfare recipients if the aim is to prevent poverty, Ms Keane said. The latter would end up costing the taxpayer more.

To implement an indexation, there needs to be a benchmark of a desirable level of welfare benefits, she said. 

The National Pensions Framework in 2010 suggested it should be benchmarked at just over a third of average weekly earnings to prevent elderly poverty.