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The EU have published their recommendations on labour policy in member states. It urges Ireland to focus on encouraging women into the labour market; improving participation in education and training; and increasing employment in services. Tax measures can help all three objectives.
The EU recommendations on Ireland point out that our labour force problems have been transformed over the last decade. They are no longer high long term unemployment but rather bottlenecks in labour supply and skill problems.
The bottleneck in the labour supply is matched by an unusually low participation of women in the labour market.
In the August issue of Tax Monitor I pointed out that tax reliefs introduced in the Finance Act 1999 in relation to creches were not working. Solving the creche problem will not be enough in itself to encourage married women into the labour market.
Working Spouses
Where one spouse is already working, in many cases the additional income which the second spouse would earn would be taxed at the higher rate of tax (currently 46 per cent). That is because the existing working spouse would be utilising both his own tax allowances and lower rate band, but also that of his spouse. In principle each individual has their own personal allowances and standard tax rate band. But a married couple are entitled to pool these. The result is to significantly reduce the tax burden on a married couple where only one is earning significant income. A further consequence is that this generous relief becomes a trap if the second spouse wants to take up employment, or start a trade. A married couple, having enjoyed the benefits of two persons allowances and rate bands being applied against a single income, will find it difficult to revert to the situation which is commonplace with single persons, ie that each income has only a single set of personal allowances and rate band to be applied to it.
Solutions
Of course one way of solving this would be to end the particularly generous treatment given to married couples, and follow the pattern in the UK, where each spouse has their own personal allowances and standard rate band, to use or not to use as they please. That would certainly remove the obstacle to both spouses working simultaneously, but it would do it only by imposing significant additional tax burdens on those married couples where both spouses do not earn income. Politically, it would be an impossibility.
An alternate approach would be to adapt some of the measures already provided for encouraging the long term unemployed into the labour force. Thus where a spouse wished to enter the labour force for the first time (or after a substantial period of absence) they might be offered an additional tax allowance to be phased out over a five year period.
An alternative to the additional allowance would be to grant the spouse wishing to return to the labour market an additional standard rate band, without withdrawing from the existing working spouse, any part of the double rate band he now enjoys. Once again, this would be
only for a transitional period of (say) five years.
Objections?
It could be objected that such measures would have tax costs. The objection is not valid. There is no tax cost but rather a tax windfall. The second spouse who would benefit from the relief is not at present earning any employment or trading income, nor paying any tax on such. If they are encouraged by this measure to return to the labour force, they will in all probability be paying some additional tax as a result, and that additional tax is a net windfall to the exchequer. There would additionally be indirect tax benefits in terms of added expenditure with its impact
on VAT receipts, and in the promotion of economic activity and business, with its impact on corporation tax receipts.
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| Article appeared in the October 1999 issue.
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