“Danish-style”
Policy in Ireland
If the Danish style system were to be financed entirely from within the income tax/transfer system substantial tax increases would be required. Our estimates suggest that an 11 percentage point rise in both standard and top rate taxes (i.e., from 24 to 35 per
SOCIAL PROTECTION SYSTEMS AND RELATIVE INCOME POVERTY 49
cent, and from 46 to 57 per cent) would be required. These are included in our specification of the Danish-style system examined below. Clearly, such substantial changes in tax rates would have significant implications for labour market behaviour (see Callan et al. (2003) for estimates of likely behavioural responses to tax/transfer policy changes). We look first, however, at the potential impact on relative income poverty in the absence of any behavioural changes. Table 6.6 below shows the potential impact of this expenditure on relative income poverty, when measured in relation to mean income.
Table 6.6: Incidence of Income Poverty Relative to Mean Income: Simulations for Ireland under Irish Tax/Transfer System (1998) and under Danish Welfare Payment Rates (1998) Financed by Higher Income Tax Rates
Poverty Line Cut- off as Per Cent of Mean Income Head Count: Irish Policy Head Count: Danish Policy Poverty Gap: Irish Policy Poverty Gap: Danish Policy Weighted Poverty Gap: Irish Policy Weighted Poverty Gap: Danish Policy 40 per cent 4.45 4.09 0.61 0.65 0.16 0.17 50 per cent 17.83 11.64 2.70 2.10 0.64 0.58 60 per cent 30.71 18.97 6.27 4.21 1.80 1.37
Note: Relative income poverty lines based on mean household disposable income per adult equivalent: €194.91 under baseline Irish policy, €194.19 under alternative “Danish” policy.
Looking first at the head count measures, we see that a shift to a “Danish-style” social security policy is associated with a reduction of 6 percentage points in the head count of poverty at half of mean income, and a fall of almost 12 percentage points in the head count of poverty at 60 per cent of average income. These are substantial falls, representing declines of more than one-third in the level of poverty on this measure. There is little impact on relative income poverty at 40 per cent of average income under any measure, as many of those below this line are outside of both the tax and benefit systems.
There are also substantial impacts on the poverty gap (which takes account of how far individuals fall below the poverty line income) at the 50 per cent line (a fall of over 20 per cent of its initial level) and the 60 per cent line (a fall of about one-third). The impact on the “weighted poverty gap”, which gives greatest weight to those furthest below the line, is attenuated, because, as we have seen, many of those falling below the lowest poverty line do not gain from welfare increases. Nevertheless, there is a fall of about one-tenth in the level of the weighted poverty gap at 50 per cent of average income, and a fall of about 25 per cent in the weighted poverty gap at 60 per cent of average income.
50 WHY IS RELATIVE INCOME POVERTY SO HIGH IN IRELAND?
Table 6.7: Incidence of Income Poverty Relative to Median Income: Simulations for Ireland under Irish Tax/Transfer System (1998) and Under Danish Welfare Payment Rates (1998) Financed by Higher Income Tax Rates
Poverty Line Cut-off as Per Cent of Median Income Head Count: Irish Policy Head Count: Danish Policy Poverty Gap: Irish Policy Poverty Gap: Danish Policy Weighted Poverty Gap: Irish Policy Weighted Poverty Gap: Danish Policy 50 5.14 6.93 0.74 1.10 0.19 0.29 60 17.47 12.97 2.53 2.63 0.59 0.76 70 27.69 20.73 5.34 4.59 1.47 1.51
Note: Relative income poverty lines based on median household disposable income per adult equivalent: €160.58 under baseline Irish policy, €170.63 under alternative “Danish” policy.
Table 6.7 shows corresponding results for poverty lines based on median income. Again, there are sharp falls in the head count of poverty at the higher two poverty lines (60 per cent and 70 per cent of the median equivalised income). But results for the poverty gap show little change, while there is a slight rise in the weighted poverty gap measure. The key difference between the mean- and median- based results is that mean income is approximately the same under the Irish or “Danish” policy, but median income rises quite sharply under the “Danish-style” policy.