JULY 2014

WILLIE ODEA TD
Spokesperson on Social
Protection and Social Equality
REFUNDABLE TAX CREDITS
FOR THE LOWER PAID
SHOULD BE INTRODUCED


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DISCUSSION
PAPER
INTRODUCTION
It is clear that a major structural reform of Irelands
taxation system is necessary and we believe that a
move to a targeted system of refundable tax credits
for low income employees hould be considered.
This would make the tax system fairer, address
part of the working poor problem and improve
the living standards of a substantial number of
people in Ireland.
This proposed system would benet 113,000
low-income individuals (240,000 when you include
other adults & children in the household) in an
efcient and cost-efective manner. The cost of
making this change would be 140m.
INTRODUCING REFUNDABLE
TAX CREDITS
If a low income worker does not earn enough to
use up his or her full tax credit then he/she will
not benet from any tax reductions introduced by
government in its annual budget. The benets of
the current tax credit system are not distributed
equally amongst all employees as low paid
employees do not benet to the full value of their
tax credit.
MAKING TAX CREDITS
REFUNDABLE WOULD BE A SIMPLE
SOLUTION TO THIS PROBLEM.
This would allow the part of the tax credit that
an employee did not benet from would be
refunded to him/her by the state. The major
advantage of making tax credits refundable lies in
addressing the disincentives currently associated
with low-paid employment.
THE MAIN BENEFICIARIES OF
REFUNDABLE TAX CREDITS
WOULD BE LOW-PAID EMPLOYEES
(FULL-TIME AND PART-TIME).
With regard to administering this reform, the
central idea recognises that most people with
regular incomes and jobs would not receive a cash
refund of their tax credit because their incomes are
too high.
They would simply benet from the tax credit as
a reduction in their tax bill. Therefore, no change
is proposed for these people and they would
continue to pay tax via their employers, based on
their net liability after deduction of their tax credits
by their employers on behalf of the Revenue
Commissioners.
For other people on low or irregular incomes, the
refundable tax credit could be paid via a refund by
the Revenue at the end of the tax year. Following
the introduction of refundable tax credits, all
subsequent increases in the level of the tax credit
would be of equal value to all employees.
Overall the advantages of this approach are that
every beneciary of tax credits could receive the full
value of the tax credit, the system would improve
the net income of the workers whose incomes are
lowest, at a modest cost, and there would be no
additional administrative burden placed on
employers.
The refundable tax credits approach has enjoyed
increasing attention outside Ireland, including
a detailed Brooking Policy Brieng on the issue
published in the United States in late 2006.
During late 2010 Social Justice Ireland published
a detailed study on the subject of refundable tax
credits. Entitled Building a Fairer Tax System: The
Working Poor and the Cost of Refundable Tax
Credits, the following is a summary of that proposal:
THE BENEFITS OF MAKING
TAX CREDITS REFUNDABLE:
It would address the problem identied already
in a straightforward and cost-efective manner.
No administrative cost to the employer.
It would incentivise employment over welfare
as it would widen the gap between pay and
welfare rates.
Would be more appropriate for a 21st century
system of tax and welfare.
REFUNDABLE TAX CREDITS FOR THE
LOWER PAID SHOULD BE INTRODUCED
DISCUSSION
PAPER
DETAILS OF SOCIAL JUSTICE
IRELAND PROPOSAL
Unused portion of the Personal and PAYE tax
credit (and only these) would be refunded.
Eligibility criteria in the relevant year.
Individuals must have unused personal and/or
PAYE tax credits (by denition).
Individuals must have been in paid employment.
Individuals must be at least 23 years of age.
Individuals must have earned a minimum annual
income from employment of 4,000.
Individuals must have accrued a minimum
of 40 PRSI weeks.
Individuals must not have earned an annual
total income greater than 15,600.
Married couples must not have earned a
combined annual total income greater than
31,200.
Payments would be made at the end of
the tax year.
COST OF IMPLEMENTING
THE PROPOSAL
The total cost of refunding unused tax credits
to individuals satisfying all of the criteria
mentioned in this proposal is estimated at
140.1m.
MAJOR FINDINGS
Almost 113,300 low income individuals would
receive a refund and their disposable income
would increase as a result of the proposal.
The majority of the refunds are valued at under
2,400 per annum, or 46 per week, with the
most common value being individuals receiving
a refund of between 800 to 1,000 per
annum, and 15 to 19 per week.
Considering that the individuals receiving these
payments have incomes of less than 15,600
(or 299 per week), such payments are
signicant to them.
Almost 40 per cent of refunds ow to people in
low-income working poor households who live
below the poverty line.
Over 91,056 men, women and children below
the poverty threshold benet either directly
through a payment to themselves or indirectly
through a payment to their household from a
refundable tax credit.
More than 91,056 individuals living below the
poverty line that benet from refunds, over 71
per cent receive refunds of more than 10 per
week and 32 per cent receive in excess of 20
per week.
A total of 148,863 men, women and children
above the poverty line benet from refundable
tax credits, either directly through a payment
to themselves or indirectly through a payment
to their household. Most of these beneciaries
have income less than 120 per week above the
poverty line.
Overall, some 240,000 individuals (91,056 +
148,863) living in low-income households would
experience an increase in income as a result of
the introduction of refundable tax credits, either
directly through a refund to themselves or
indirectly through a payment to their household.
Once adopted, a system of refundable tax credits
as proposed in this study I believe would result
in all future changes in tax credits being equally
experienced by all employees in Irish society.
Such a reform would mark a signicant step in the
direction of building a fairer taxation system and
represent a fairer way for Irish society to allocate
its resources.
CONCLUSION
I believe the system of refundable tax credits
should be an integral part of any reformed taxation
system in Ireland. It would make the taxation
system simpler, more progressive and it would
better serve those individuals currently working in
low-paid employment.
Willie ODea TD
SPOKESPERSON ON SOCIAL
PROTECTION AND SOCIAL EQUALITY
Dil ireann,
Leinster House,
Kildare Street,
Dublin 2.
Constituency Ofce,
2, Glenview Gardens,
Farranshone,
Limerick
061-454488
v 061-328849
* willie.odea@oireachtas.ie
8 www.willieodea.ie
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