BOTH THE TAOISEACH Enda Kenny and the Minister for Finance Michael Noonan have publicly stated there would be no increase in income tax in 2014. They have not kept this promise, as a vulnerable section of society discovered in January of this year.
Budget 2014, following a recommendation by the Commission on Taxation in 2009, replaced the “one parent family tax credit” with a “single person child carer credit”.
In the past, a couple that experienced marriage breakdown were entitled to a tax credit in respect of dependent children. In practise, this was awarded to both parents. Since January of this year the renamed tax credit is available to only one parent. The tax code has, in effect, created a hierarchy in that there is now a “primary” and a “secondary” parent, the former receiving the tax credit, the latter not.
Revenue by default allocates the new credit to the parent in receipt of Child Benefit who, in the majority of cases, is the mother. Only if she cannot avail of the credit for any reason is the credit transferred to the father.
Thus the result of the change in the vast majority of cases is a decrease in the father’s tax credits of €1,650 and a €4,000 reduction in his standard tax band.
According to Census 2011, there are 204,964 people either separated or divorced in Ireland. Not all, of course, have dependent children. The additional tax burden will primarily fall on the 45,276 of these who are males in employment.
A man earning up to the limit of the 20 per cent tax band will pay around €600 more in tax per annum. A man subject to the 41 per cent tax band will pay approximately €2,500 in an additional tax.
The Commission on Taxation Report of 2009 states that the purpose of the one parent family tax credit was to “support labour market participation of single parents”. The Report also noted that the “cost of this relief is considerable” but did not specify a figure. It claimed that removing the credit from one of the parents would “restore greater balance between the cost of the tax credit and the benefit derived from it”.
Budget 2014, estimates that the partial removal of the credit will raise €18 million in 2014 and €28 million in a full year. Hardly “considerable” in the greater scheme of things. Consultancy fees for Irish Water have so far amounted to €85.97 million.
This gain in tax revenue has to be balanced against the cost of an anticipated fall in the labour force participation rate. The labour force participation rate for separated/divorced people is 73 per cent for males and 65 per cent for females.
Higher income taxes will reduce labour force participation because it lowers the monetary return from work. As people drop out of the labour force, they are likely to register as unemployed and claim social welfare payments.
It is possible that the Commission on Taxation was attempting to remove an anomaly in the tax code. Under the old system the tax credit could have been claimed by both parents if a child resided with each parent for at least one night in the year.
Consider the case where a child resides 364 days of the year with one parent. The other parent contributes little or nothing to looking after the child except for a one-night stay during the year. Why should this spouse be treated any differently in the tax code from a single person with no children?
Under the new system, the child must reside with the secondary parent for at least 100 days in the year. This measure, on its own, would remove the “one night” anomaly. The removal of the tax credit for the secondary parent was unnecessary other than as a revenue generating exercise.
There are further important considerations.
Marriage breakdown inevitably leads to some financial distress. Separate accommodation may entail a second mortgage; there is a doubling of utility bills and transportation costs; child maintenance costs increase and there are legal bills to be paid. Reducing after-tax income could adversely affect the quality of parenting and have a number of possible social repercussions for the children and their upbringing.
Furthermore, the removal of the tax credit for the secondary parent could tip the balance and result in mortgage default.
Recent research by Yvonne McCarthy, cited in these pages by John McManus, shows that of a total 800,000 mortgages, 160,000 are currently in arrears. She finds that “heads of distressed households more often fall into the category widowed, divorced or separated”. That is, marital status has a significant bearing on the risk of incurring mortgage arrears. Furthermore she states that “75 percent of arrears cases include households where the head is currently employed”.
The removal of the tax credit will exasperate this situation as it indirectly Increases the mortgage repayment burden. This will be particularly true for people who took out mortgages in the boom period where loan to value ratios were very high.
These people are depending on their incomes remaining high and no deterioration in their employment conditions. To maintain mortgage affordability a logical reaction would be to attempt to renegotiate child maintenance arrangements. But this can only be achieved by returning to the Circuit Court. This will entail significant expense and create a possibly hostile environment for children.
It would appear that the Commission on Taxation recommendation, implemented after a five-year lag and with very little debate or publicity, is an ill-conceived measure that will have significant adverse effects on a very vulnerable section of society.
Dr Anthony Leddin, Department of Economics, University of Limerick is co-author with Professor Brendan Walsh of Macroeconomics: An Irish and European Perspective, Gill and Macmillan, 2013.
Follow Opinion & Insight on Twitter: @TJ_Opinions
To embed this post, copy the code below on your site
have your say