Tax cuts have only provided a limited incentive for people to move back into the workforce, according to a new study from the Economic and Social Research Institute (ESRI).
It shows that general tax reductions have had only a marginal impact in increasing labour supply, but that the process of individualising tax bands may have had the most impact in terms of encouraging married women to return to work.
The ESRI study, led by Prof Tim Callan and published today, provides detailed findings on the size and nature of the labour supply response to tax cuts. During the height of the boom, one reason given by the Government for tax reductions was to encourage people to work at a time when employers were complaining of a labour shortage.
The study - Taxes, Benefits and Labour Market Response: New Evidence for Ireland - shows that the overall response to general tax cuts may have been limited. A cut in the standard rate of income tax by almost 3 percentage points would lead to a rise in participation rates for married men and women of about half a percentage point, it estimated.
Other tax reductions, such as increases in allowances, widening tax bands or cutting the top tax rate were found to have a similarly limited impact.
The study does show that individualising the tax bands - a measure started by the Minister for Finance, Mr McCreevy in the 2000 Budget but not yet fully completed - had a greater impact in terms of encouraging married woman back to work. The ESRI report based its estimates on fully individualising the bands - in other words, stopping the transfer of bands from a non-working spouse to his or her working partner, so that a married couple where both worked had a band twice that of a single income couple.
Following changes in the 2000 and 2001 Budgets, only about one-third of the band is now transferrable from a non-working spouse. The ESRI assumed that the resulting extra revenue from restricting band transferability was used to cut tax rates. It found full individualisation and the accompanying tax cuts would increase married women's participation rates by 3 percentage points. This is a significant increase, but, as pointed out by Prof Callan, is still relatively small when compared with the 30 percentage points rise in married women's participation over the past 20 years. Overall, the research suggests that the increase in married women's participation in recent years has more to do with general social and economic trends - and issues such as high housing costs - than with lower taxes.
A separate part of the study examined the relationship between unemployment payments and duration of unemployment. It found that, in general, the higher the unemployment benefit payment, the longer the duration of unemployment, although the impact was quite small.
Dr Richard Layte of the ESRI said this suggested unemployed people used the PRSI-related unemployment benefit payments - which they can receive for up to 15 months - as a means of allowing them to search for the best possible job. However, the research found little connection between unemployment duration and the other main form of State support - the means-tested unemployment assistance payable generally to longer term unemployed.
