Cliff edges in the Irish tax-benefit system

Abstract

Trade-offs exist in protecting those on lower incomes and ensuring an adequate incentive to work. If benefit entitlements and other supports are withdrawn sharply as income rises, there may be a financial disincentive to enter employment or to work more. The same is true for tax and social insurance liabilities -if these jump at certain points or increase sharply they may disincentivise employment. This paper examines cliff edges that exist in the Irish tax and welfare system -such as income thresholds for medical cards and Pay-Related Social Insurance (PRSI) contributions -that can mitigate against the generally strong incentives to work faced by the working-age population. Where possible, it considers options for reforms to these cliff edges.

https://www.esri.ie/publications/poverty-income-inequality-and-living-standards-in-ireland-third-annual-report

“…However, a potential consequence of addressing child poverty by raising IQCs is negatively impacting financial work incentives. This is as IQCs are primarily paid in addition to a personal rate for welfare payments like Jobseekers' Allowance, Carer's Allowance and One Parent Family Payment which are heavily means-tested -in some cases subject to cliff-edges (Doolan and Keane, 2023) -and so only available to those working a small number of hours. As a result, raising IQCs in isolation weakens the financial incentive to be in paid -particularly full-time paid -work, from the current situation where very few individuals would be financially betteroff out of work (Doolan, 2022b;Bercholz and Keane, 2019;Callan et al, 2016).…”