Paul Gogarty (Dublin Mid West, Green Party)
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Question 117: To ask the Minister for Finance if his Department has conducted any thorough research on making personal tax credits refundable; the costs associated with making each personal tax credit refundable, based on Exchequer figures from a recent year; his views on whether making tax credits refundable would make the social welfare system more equitable; his further views on whether making them refundable would make the social welfare system more efficient; and if he will make a statement on the matter. [32941/05]

Brian Cowen (Laois-Offaly, Fianna Fail)
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The issue of making unused tax credits refundable was examined by a working group established under the Programme for Prosperity and Fairness to examine the role which refundable tax credits can play in the tax and welfare system. The group was made up of representatives of the social partners and was chaired by my Department. Among other things, it examined the issues which might arise if personal tax credits including the basic personal tax credit, the employee PAYE tax credit, the one-parent family tax credit, the home carer tax credit, the incapacitated child tax credit, the blind person's tax credit, the dependant relative tax credit and the widowed person tax credit were made refundable.

I am advised by the Revenue Commissioners that the most recent estimated cost of making the main personal tax credits refundable when they are unused is broadly in the region of €1.8 billion annually. The main category of refund would relate to the basic personal credit — single, married and widowed — where the annual cost of refunding the unused portion of the credit to income earners with insufficient income to fully absorb it would amount to €900 million approximately. The next categories of refund in order of scale would be the employee credit —€840 million approximately — and the homecarer credit —€32 million approximately.

The estimate of €1.8 billion relates only to the cost of extending refundable tax credits to all those on Revenue's tax files. If a refundable tax credit system were to be introduced, one would have to consider those who are not on the tax files, for example, those who are of employable age but not working, including those in social welfare. This would increase the cost hugely.

I assume that what the Deputy has in mind in his question is whether the provision of income support by means of refundable tax credits in the tax system would be more equitable and efficient than the present approach where it is provided through the social welfare system. That would depend on the nature of the arrangements put in place. However, on the question of equity, a refundable tax credits system would not necessarily mean that all would benefit equally from budget day tax changes. If rates of income tax are reduced or increased in a budget, only those paying tax benefit lose whereas the situation for those outside the tax net remains unchanged. In addition, such a system would not necessarily be more efficient. It could not operate on an automatic basis and potential beneficiaries, especially those outside the tax system, would be required to contact the Revenue Commissioners to secure their entitlements.

It should also be noted that a system of refundable tax credits could bring with it possible downside effects. A refundable tax credits system would have the characteristics of a partial basic income system. Such a system could impact adversely on enterprise and effort in the economy. A possible disincentive to work and adverse implications for competitiveness and output of the economy may also be among the main disadvantages. The system would also be very complicated to administer.