I move: "That the Bill be now read a Second Time."
This year, the Government's fifth year in office, I am privileged to introduce our sixth Finance Bill. Together with five tax reform Bills it represents the culmination of a major programme of changing our tax system for the better.
The tax reliefs and fiscal incentives of the 1977 budget and Finance Bill have been made possible only because the Government persisted with their taxation reform programme despite the negative criticism of those who urged that the time was not ripe for change. Timidity seldom creates anything worthwhile. In the 1977 incentive budget and in this 1977 encouragement Finance Bill the nation as a whole is reaping the reward of the Government's firmness of purpose in building a more equitable tax system.
Not for one moment do we infer that there is not room for further improvement of the tax code. There is, but such improvement as may be desirable will now be feasible because we have greatly improved the tax base. As it forms the background to this year's Finance Bill, I will briefly sketch what has been achieved, lest eaten bread be forgotten.
The Government have created a structure of taxes on income, profits and capital which is much fairer than the regime which operated up to 1973 and in particular much fairer to the typical manager and worker whose performance is crucial for the future of the country.
It is a precept of our political beliefs, and a view which most reasonable people would accept, that people in similar circumstances should pay similar amounts of taxation. When we assumed office one could find groups of people in similar economic circumstances who paid enormously different amounts of taxation. An industrial manager, for instance, might have been paying income tax at a rate of 80 per cent. Another person with a similar income but operating through avoidance devices and tax havens might have paid no tax whatever. A large farmer with similar net income need have paid no tax whatsoever without resorting to tax havens. Yet a fourth person might have had similar income through capital gains and yet paid no tax. Indeed, the tax bills of many small and medium income-earners were greater than the tax burden of some people with substantial incomes and property.
Since 1973 that situation has been radically altered. While it cannot be said now, or probably can never be said in future, that people in the same circumstances pay precisely the same tax, nevertheless the differences in treatment are now much less extreme. The highest personal tax rate will now be 60 per cent. The farming profits of the larger farmers have been brought into the tax net and so have capital gains. The wealth tax has ensured that those who have large fortunes make an appropriate contribution to the Exchequer. Confiscatory death duties which ruined many farming and business families have been abolished and value-added taxes have been removed from foodstuffs, clothing, footwear and a number of other essential items.
To encourage business enterprise the Government are reducing corporate taxation by 10 per cent. This incentive disposition towards private enterprise contrasts extremely favourably with the hostile attitude of our predecessors who imposed a 58 per cent tax rate on companies. The new corporation tax rate of 45 per cent maximum will be most helpful to business.
Taking our whole period of Government it will be seen that the various tax changes which we have made form a logical pattern whose objective is to obtain a fair contribution from all classes in society to the cost of running the State while at the same time providing the maximum encouragement for enterprise. We pledge ourselves to maintain this objective.
One of the main features of the budget, and of this Bill, relates to the changes in the personal tax structure, which will benefit every individual taxpayer in the country. These changes are also, of course, one of the two major elements in the pay increase/tax cut package which is the basis of the national wage agreement now in operation. By allowing after-tax incomes to rise faster than pre-tax incomes during 1977, the package enables a balance to be struck between the need for industry to improve competitiveness and the entirely reasonable desire of people to maintain their standard of living. Thus, a combination of national agreement increases and tax cuts will in a typical case, increase after-tax earnings by about 10 per cent. This mix of wage increases and tax cuts in the agreement will contribute towards restricting the rate of price-inflation and thereby prove more beneficial to everybody in terms of purchasing power.
Our present economic position is very relevant to this debate. Statistical data which has become available since budget time confirm that the momentum of economic recovery is improving. Production, employment, exports, home sales and investment have been on the increase since last summer and the latest Confederation of Irish Industry and Economic and Social Research Institute surveys show an expectation of continuing growth on these fronts.
Demand for imported materials for further production and for producers' capital goods, such as machinery and equipment, continues at a very high level indicating a continuing recovery in investment activity.
While overall output is now well above pre-recession peak the level of employment in Ireland as elsewhere in Europe has not recovered to the same extent. In part, this reflects the customary lag between a recovery in output and increase in employment. But it is also symptomatic of the stubbornness with which unemployment in most countries is persisting even with the ending of the recession. This was one of the problems which concerned the eight leaders who met at last weekend's economic summit. I deliberately said "eight" as Europe, as such, was present even if our French friends preferred to pretend otherwise.
While Ireland's performance both last year and this year was and is above the average of both EEC countries and OECD countries, it still falls short of what is necessary to eradicate the waste of resources which unemployment represents. New grant-aided, export-oriented, tax-exempted, IDA-assisted industries have produced most of the growth in industrial employment and output in the past. In passing, it is fair to recall that the parties which comprise this Government, when in power at other times, took the policy initiative which made this industrial growth possible.
As my colleagues in Government and I have repeatedly pointed out, the most urgent task facing our nation is to create more jobs without fuelling inflation. It is noteworthy that last week-end's summit meeting of western industrial leaders gave first priority to this goal. A sensible world approach to the problem of unemployment will certainly help us but we will also have to implement uniquely Irish solutions as well.
Government and private businesses are allies with different but complementary functions, sharing a common interest in the welfare of society. The Government must be concerned to encourage developments anywhere which can increase employment and add to the produced wealth of the nation.
It has become clear that traditional long established businesses catering in the main for the home market and not hitherto enjoying tax reliefs commensurate with those enjoyed by modern manufacturing industries producing for the export market ought to be helped by an improved tax climate. As I emphasised in my budget statement, the Government recognise the need to make investment attractive by making it profitable. This is the way to encourage private investment. That is why the 50 per cent corporation tax rate will under this Bill fall to 45 per cent and the 40 per cent rate will fall to 35 per cent applicable to profits made after 1st January of this year.
To reward manufacturing firms which make a special effort to expand employment and production the Bill uniquely provides—in Chapter IV—for a special reduced corporation tax rate of 25 per cent for the three years 1977 to 1979 for manufacturing companies which increase by appropriate amounts their employment and production. This year the targets are 3 per cent for employment and 5 per cent for output. I will deal more fully with this matter when I come to the relevant sections but I would like to emphasise that any company which exceeds those targets this year will not be disadvantaged—for purposes of qualifying for the relief in 1978 and 1979—by reason of having surpassed the qualifying minimum targets prescribed for 1977. In other words, for firms which could press ahead in 1977 with expansion in excess of the 1977 targets, there would be no question of advantage arising from a policy of restricting 1977 growth to the minimum levels required to qualify for the special tax relief.
The question may be asked—why should building and construction not be eligible for the special relief to which I have been referring? The 25 per cent rate is intended to benefit primarily manufacturing industries catering for the home market, which have not benefited from the export tax relief, and also firms that have exhausted such relief. It is hoped that such manufacturing firms will be stimulated by the incentive to make extra efforts at expansion of output and employment. The beneficial effects of such stimulus of cause should have a general impact, including having an impact on the building and construction industry.
The building and construction industry will benefit from the stamp duty concession for office building, the reduction in the main rates of corporation tax and the large provision for this industry in the public capital programme. Building and construction takes place in response to the demands of and to meet the needs of other sectors. It will therefore benefit from the general stimulus to the economy from the Budget measures.
Throughout the recession more reliance than would be appropriate in normal times had to be put on public spending to maintain economic activity. With the recession behind us it is essential that we make a two-pronged attack from both the public and private sectors on our economic problems.
From April, 1973 to the end of 1976, total public spending increased by 143 per cent and public capital programme expenditure by 119 per cent over 1972-73 levels. Allowing for inflation, this meant a real increase of about 19 per cent in total expenditure and about 12 per cent in capital expenditure. If account is taken of increased finance provided in recent years from commercial sources for house-purchase as a result of Government initiatives, the increase in capital spending is about 15 per cent. The significant expansion of the public capital programme in recent years, and especially in 1974 and 1975, was a major factor in maintaining investment activity at a high level at a time when private sector capital formation actually declined.
The 1977 budget gave a further stimulus of 22 per cent—about 5 per cent in real terms—to the public capital programme which has immense spin-off benefits for the private sector. This stimulus, together with the taxation reductions and special incentives of the Finance Bill, will give private investment the best boost imaginable. Many firms have acknowledged that, as a consequence of the improved tax climate, they have increased or will soon increase their investment plans. It is clear therefore that the Government's policies have evoked a positive response and that great economic benefits will flow from them not merely in 1977 but at an even faster pace over the next few years.
The EEC as a whole expects unemployment to rise this year. There are only three exceptions to this discouraging picture—Ireland, Germany and Holland. With the growing momentum of our economy we anticipate that our unemployment figures will over the next few months fall below the 100,000 mark for the first time in two-and-a-half years. Our aim is to strive to reduce the number of unemployed even more dramatically.
We are still unfortunately influenced by imported inflation but domestic inflationary influences on incomes and fiscal fronts are now under better control. In two deliberate ways the Government are this year making a contribution to easing the rate of inflation. Not only have we eased personal and corporation taxes but we have avoided any indirect tax increases. Secondly, we have provided substantial additional subsidies on foodstuffs. As a consequence of the VAT reliefs and subsidies on essentials inflation is running 3½ percentage points less than it otherwise would be. By the year's end, provided all sectors act with prudence, we should have our inflation rate below 13 per cent and be moving towards single digit inflation next year. This is a development from which all will gain.
The annual loss in public revenues resulting from the income and corporation tax cuts is of the order of £100 million, a large amount of money by any test. If the path of lower taxation is to be followed with the beneficial result that personal initiative and business enterprise will be encouraged, it will be necessary to maintain control of public expenditure. The air is full nowadays of calls for more public expenditure for diverse purposes, some meritorious, others not. One common thread running through the demands of the would-be big spenders is the total absence of any indication as to where the money is to come from.
Taxpayers would be well advised in their own interests to be distrustful of those who would freely spend money which only the taxpayer can supply. If electors support grandiose expenditure proposals, they will have only themselves to blame if tax rates rise again to pay for them. This course does not commend itself to this Government who want to see the tax concessions of the 1977 budget retained and improved upon. A careful balance will therefore have to be maintained to preserve a sensible level of public expenditure and a tolerable level of taxation.
I now turn to some provisions in the Bill which appear to call for separate mention on this stage of the Bill. As Deputies are already in possession of an explanatory memorandum I will not weary them by unnecessary detail.
Section 1 provides, on a permanent basis, that the amount of the income tax allowance given to a taxpayer in respect of a dependent relative will not be reduced on account of budgetary increases in the relative's non-contributory old age pension. This will avoid the need to make specific provision to secure such result in future whenever the relative's pension may be increased.
Section 7 is designed to improve the financial situation of less well-off pensioners and of others over 65 on low incomes. Indeed, it provides greater relief than I indicated at budget time. It provides that an individual entitled to the income tax age allowance will not be subject to tax where his income is less than £1,000 if he is single, or £1,800 if married. These exemption limits are such as to ensure that a person entitled to the age allowance will be free of tax if his only income is a social welfare pension or income of the same amount from a source other than social welfare. Indeed, the levels at which the limits are fixed will also allow many pensioners to have some amount of other income without attracting a tax liability.
In the case of persons with incomes slightly greater than the limits mentioned there will be "marginal relief" so as to reduce the tax payable to one half of the excess of total income over the relevant exemption limit.
The introduction of the exemption limits should remove many pensioners from the tax net and the application of "marginal relief" should reduce the tax burden substantially for many more. In all, some 10,000 pensioners —those least well off—will benefit. I might also mention that the Government's intention is that these limits be revised in future in line with increases in the amounts of social welfare pensions.
Section 8 is designed to close a loophole which has come to notice in earlier legislation intended to prevent the abuse of the export tax reliefs provisions.
The Minister for Agriculture and I have had discussions with the farming organisations on measures relating to the taxation of farming profits. Having carefully considered their views, and bearing in mind the exhortations of the EEC that farming profits be taxed, the recommendations of the National Economic and Social Council and the interests of the general body of taxpayers, the Government decided that the main scheme announced in the budget should stand with certain modifications. These concern the dates for payment of tax, the deduction for wages and the method of assessing the tax liability of traders and professional people who own farm land. These modifications are in keeping with the Government's aim of collecting a fair share of tax from farm profits without inhibiting the development of farming.
The dates for payment of tax will be 1st September and 1st January— as for other Schedule D taxpayers. This means that tax on farming profits will be paid in respect of the income tax year in two instalments, instead of in one as earlier proposed. A deduction from notional income will be given, with a view to stimulating employment, in respect of wages paid to employees registered for PAYE and social welfare purposes. The farming profits of those landholders who have another trade or profession will be assessed to tax in the same way as their trading or professional income, that is, on the basis of accounts related to the preceding year.
As only half of the proposed tax on farming profits will not be collectable in the calendar year 1977 the yield in 1977 will be about £15 million to £16 million. As the balance will be payable in the income tax year 1977-78 the ultimate revenue yield less the £4 million cost of the labour concession previously mentioned will be comparable to that originally envisaged.
Section 10 removes the rateable valuation threshold of £50 which applied to landholders who also carry on a trade or profession. Landholders who carry on a trade or profession on a self-employed basis will now be liable for income tax on their farming profits, regardless of the rateable valuation of the land. Some confusion has arisen over this. I therefore want once again to emphasize that an employee who owns land will not be affected by this section.
Let me explain the distinction between the two categories. Apart from full-time farmers there are two other groups of farmers for tax purposes. One group comprises persons with land who are engaged in a trade or profession on a self-employed basis. In the second group are persons with farm land who do not have a trade or profession but have non-farming income, for example, from employment off the farm.
Persons in the first group will be liable for income tax on their farming profits regardless of the rateable valuation of the land. Persons in the second group will not be liable for income tax on their farming profits unless the rateable valuations of the land is £75 or more. However, since 1974, such persons have had their personal allowances reduced by up to one-half where the rateable valuation of the land exceeds £20. This provision, which applies only where the farming profits are exempt from income tax, remains unchanged.
Section 11 provides for marginal relief for farmers with rateable valuations between £75 and £84. A farmer who has a rateable valuation of £75 will pay only 1/10th of his full liability with £76 rateable valuation 2/10ths and so on up to 10/10ths at £84 rateable valuation. The effect of this section is that, of 170,000 farmers in the country, only some 12,500 will be liable to the full tax.
Section 12 provides that farmers— other than those who carry on another trade or profession—are to be charged to tax on the basis of a notional income calculated by applying a multiplier of 65 to each £1 of rateable valuation. The reasonableness of this multiplier can be judged by the fact that, allowing for the deductions from notional income, the full-value multiplier based on 1976 incomes would be about 88 and, based on 1977 incomes, would be in the region of 110. Furthermore, deductions will be allowed from notional income in respect of rates on land and wages paid to employees who are registered for PAYE and social welfare purposes. The normal personal reliefs, including that for interest payment up to £2,000 will also apply. Taxpayers who opt for actual accounts will, of course, be entitled in due course to the deductions for higher interest payments and other business expenses if incurred.
Section 12 also provides for appeals against the notional assessment. A farmer who appeals may present accounts related either to the preceding year or to the current year.
Section 13 outlines the procedure for appeals against the notional assessment. The amount payable on 1st September, 1977 will be one-half of the tax on farm profits as notionally assessed. However, if a taxpayer appeals against the notional assessment he may, in relation to the second instalment of tax payable on 1st January, 1978, specify the amount of tax he thinks should be payable on the basis of accounts and, pending determination of the appeal, pay only that amount. If the amount of tax paid in the two instalment is lower than the tax assessed but is 80 per cent or more of the amount determined on appeal, no interest charge will arise. If, on appeal, the taxpayer in question is shown to have paid too much tax, the excess will be refunded promptly with interest.
Section 14 provides for free depreciation of capital expenditure incurred on or after 6th April, 1977 on the construction of fences, roadways, holding yards or drains or on land reclamation. This provision applies where a farmer's income is determined on the basis of accounts.
Chapter III implements the budget proposals for a reduction of 5 percentage points in both the 50 per cent and 40 per cent rates of corporation tax and for an increase of £5,000 in the tax thresholds for small companies. In addition to the foregoing, I am providing in this Bill for a similar reduction in the 35 per cent rate of corporation tax which applies to building society income and also to the interest on housing loans made by banks under approved schemes as well as to income of the Agricultural Credit Corporation and certain public utility companies.
Sections 16 and 19 provide for certain consequential changes necessary as a result of the reduction in the rates of corporation tax. In order to maintain the effective rate of tax on companies' capital gains at 26 per cent, section 16 makes appropriate adjustments to the present formula, contained in section 13 of the Corporation Tax Act, 1976, for charging a portion of the chargeable gains at the main corporation tax rate, 45 per cent. Section 19 provides for the rate of relief which will be allowable in the new situation to companies in respect of certain losses and capital allowances carried forward for tax purposes from pre-corporation tax days.
I now return to Chapter IV which makes provision for the novel incentive for manufacturing industry, which I announced in the budget, of a special reduced rate of corporation tax of 25 per cent for the three years 1977 to 1979.
Detailed discussions have been held with representatives of manufacturing industry since the budget and the fullest consideration has been given to the many points raised. Because of the originality of the incentive, the Government have decided to outline the basic framework of the incentive and to fix the production and employment targets only for 1977 at this stage, leaving the targets and other details required for 1978 and 1979 to be fixed in due course in the light of experience in the interim and of actual and prospective developments in the economy.
For 1977, the required increase in production, to be measured in terms of the volume of goods sold, is 5 per cent above the 1976 level and the required increase in employment, to be measured by reference to changes in the number of employment contributions made under the Social Welfare Acts, is 3 per cent above the 1976 level. As I have already indicated, when the 1978 and 1979 conditions for the special relief are being framed, an appropriate provision will be included in respect of companies which will have not merely attained the 1977 qualifying targets but will have surpassed those levels.
We believe these are realistic targets which I am satisfied are attainable in present circumstances by manufacturers who are prepared to make the necessary efforts to earn this very substantial reduction in tax on their profits. We are very encouraged by the reception which manufacturers have given to these proposals. Indeed the Government's package of personal taxation reliefs and company tax incentives has generated a positive air of confidence in business circles. We feel sure that business generally is making new efforts to boost output and employment.
I might mention that provision is not being made in this Bill as regards the rate of tax credit which will apply to distributions made by companies which will have benefited from the reductions in corporation tax provided by these chapters; this matter will arise for attention and will be appropriately dealt with next year when distributions will fall to be made out of 1977 profits.
Chapter V which has some capital gains tax provisions gives special concessions to certain unit trusts and unit-holders in relation to their capital gains tax liability. The concessions take account of the particular conditions which apply to the operations of unit trusts and are designed to avoid any element of double taxation of such trusts.
The effect of sections 33 and 35 is to reduce from 26 per cent to 13 per cent the capital gains tax rate charged on gains made by a registered unit trust and to provide similarly for gains made by a unit-holder of that trust. The ultimate tax take will therefore be 26 per cent as intended. Section 34 exempts units held by an assurance company in a unit trust from capital gains tax, the tax being chargeable only on the gains made by the trust involved.
Section 43, and Part V of the First Schedule, provide for the grant of stock relief for a further year. As I mentioned in my budget statement, this relief will not be recoverable from beneficiaries except where stock values decrease or where a trade ceases to be liable to Irish tax. I also mentioned that as the scheme of stock relief is essentially of a simple nature it is necessary to provide certain safeguards against abuse. These safeguards which are contained in the First Schedule include a measure to prevent the creation of artificial repayment claims through the interaction of the provisions relating to stock relief, losses and capital allowances. They also counter the possibility of a trader claiming relief in respect of increased stock levels which have already been relieved.
Section 45 provides for the reduction of the rebate payable to brewers using home-roasted, home-flaked or home-malted cereals from £2 per standard barrel to £1 per standard barrel, while section 46 provides for a reduction in the rate of drawback on beer, with effect from 1st September, 1977. These adjustments arise out of our EEC Treaty obligations, but section 44 introduces a measure of compensatory relief for brewers and distillers. It substitutes a flat annual duty of £50 on their licences in lieu of the existing, and more onerous, scales of duty based on their output.
Section 47 provides for the refund of the stamp duty paid on certain office building contracts if the office building is completed by 31st December, 1978. This concession should provide a rapid boost to employment in this sector of the construction industry.
Section 48 is aimed at the promotion of the fine arts. It enables the Alfred Beit Foundation to receive transfers of property from Sir Alfred and Lady Beit without incurring a liability to pay stamp duty on the transfer. I should like to take this opportunity to pay tribute to Sir Alfred and Lady Beit and to thank them for the magnificent gift they propose to transfer to the foundation. The gift will consist of Russborough House, 250 acres of surrounding land and the proceeds of the sale of a further 240 acres of land. They will also make available to the foundation on loan the contents of the house with the exception of some small items. Included in the contents is the art collection which is world-renowned and is regarded as one of the most valuable in private hands anywhere in the world.
Section 50 exempts from wealth tax certain private non-trading companies which have control of trading companies. At present private non-trading companies are exempt when they are merely holding companies for a trading company, and the main purpose of section 50 is to make them exempt when they are holding companies for individuals who control trading companies. This provision is designed to exempt genuine commercial arrangements from the impact of wealth tax.
Section 51 enables unilateral relief from double wealth taxation to be given where double wealth taxation arrangements have not yet been concluded with other States.
Finally, I might refer to some provisions which relate to a number of taxes. Section 36 makes provision to ensure that a child adopted under the Adoption Acts, 1952 and 1976, will be regarded as a "child" for the purpose of tax legislation. No problem has arisen in this connection but I consider it better to put the matter beyond doubt. Section 53 relates to an individual who donates property to the State and leaves the State to become resident elsewhere. The section provides that visits to the State by such an individual to advise on the management of the property will be disregarded for tax purposes.
This covers the main provisions of the Bill. The various sections will, of course, be dealt with in detail on Committee Stage but if further information is required at this stage I shall endeavour to answer any queries raised when I am replying to the debate. I commend the Bill to the House.