At this stage of the budget debate I do not intend to go through all the features of the budget. I should like to concentrate on two issues, one in the area of taxation, and the other in the area of manpower policy and employment policy in particular. I welcome the fact that the Minister for Finance has requested the planning board, when they report in the middle of this year, to include detailed recommendations on tax reform. Over the past number of years our tax system has become more and more unworkable. We have run into problems in the area of collection and enforcement. We have run into high marginal tax rates. I am not alone in saying that, nor are politicians.
I should like to quote what the Comptroller and Auditor General said when he reported in 1981 on the issue of enforcement. Regarding the effectiveness of the sheriff and county registrar collection system, he noted that they did not represent the full contribution which such enforcement procedures should make towards safeguarding the collection of the far greater amounts under each tax head due on a current basis. He went on to say that, without the threat of enforcement, receipts from current collections would drop. That is a clear statement from a man with authority on this issue.
On the enforcement side, our tax system is grinding to a halt. When he reported in 1982 he entered into another sphere of the tax code, namely, the appeals system. Having first drawn attention to the very considerable delays which can occur in the appeals system, he said it appeared that the appeals system was also resorted to in cases where the primary objective of the taxpayer was to delay or try to avoid paying tax. He said in such cases because of lack of co-operation on the part of the taxpayer, and because of the backlog of appeals on hand, a number of estimated assessments covering successive years could remain undetermined, leaving virtually no tax collectable during that period.
The Comptroller and Auditor General has pointed out the details of the defects in our tax code on the administration side. Added to that are his reports year on year on the volume of outstanding tax. If you compare the two reports you can see how much tax was outstanding after 12 months had elapsed from the end of the tax year. In May 1981 the outstanding taxes from the previous tax year and all years previously came to £967 million from the two key taxes, income tax from the self-employed and corporation tax. In 1982 that had gone up by 22 per cent to £1,178 million. That is a clear indication to me that, although we are making some headway in tightening up on our collection procedures, we still have not solved the problem. A growth of 22 per cent in the outstanding tax level is of concern to anyone dealing with the tax code.
As we all know, all the balance outstanding is not likely to be collected. This year for the first time the Comptroller and Auditor General made figures available on what he expected would be collectable. He suggested that a figure of £456 million of the £1,200 million odd outstanding and not in dispute. This came under categories such as not disputed, under demand, awaiting enforcement, under enforcement, or in the arrears branch. When he went on to say how much would actually be realised, the figure dropped from £456 million not in dispute to £150 million.
We must question a collection system which allows such mythical figures to be generated in our system. We do not know what the situation is. Initially we have a figure of £1,200 million outstanding. Nearly £500 million of that is not disputed but, at the end of the day, we expect to recover only £150 million. This is because we have evolved a system of tax collection that is completely inappropriate. It is the system whereby the Revenue Commissioners make assessments and send them out to the taxpayer and then enter into lengthy appeals procedures and enforcements and so on, being all the time out of pocket.
I make a strong appeal to the Minister in the context of this review of taxation to look seriously at the system of self-assessment as an alternative. The virtues of self-assessment are self-evident. Firstly, they free the tax administration from persuing every tax return that comes to them. At present every tax return must be examined by an inspector. Under the self-assessment system very many of them would not be examined. In the US this system has been in operation for many years and I understand that they examine in detail only 1 per cent of tax returns, yet they have a very effective collection system because the penalties for failure to co-operate are very high.
Another obvious advantage that I perceive is that the self-assessment system lowers compliance costs not only for the Revenue Commissioners thus freeing their administration, but equally for the honest-to-God self-employed person who is trying to do things properly. If he is allowed to carry out a single assessment of his tax liability, provide the information and the cheque and not get into these lengthy wrangles with the Revenue Commissioners about matters that to him often are very obscure and delaying tactics, that would be better for business as well as for efficient tax collection. The final advantage of the self-assessment system that I will mention is that it gets in the tax revenue on the day appointed. The day is named, the Government declare tax returns, payment must be in on 5 April and the money will be in the Exchequer on the day appointed. Under the present system, although returns are supposed to be in on 5 April, it is obvious from figures I have quoted that huge sums of tax do not come in even 20 months after the day appointed. The Government are out of pocket all of that time and the Revenue Commissioners do not pursue interest on tax outstanding.
No small part of our tax code problem is the enormous complexity that has grown in it. I will run briefly through some elements of our tax code which will illustrate the senselessness of it. If the present code had been put to the Department of Finance ten years ago and they were told that we proposed introducing that code I am convinced that the Department would have said that it was totally unworkable and unrealistic. I doubt some of the rejections of schemes being put forward in the tax reform area on either collection or tax reform on the grounds that they are unworkable considering the unworkable system we have already. Most members know the details of the tax code but I will run through a few of them briefly. We have five systems of income tax; the PRSI system, the health levy, PAYE, the special income levy and the youth levy, all based on different thresholds, different ceilings and different rates. In the case of the special income levy there is now a new cut-off point different from any other codes, that is people earning less than £5,000 pay no special income levy. That code is enormously complex for anyone trying to administer it particularly since the PAYE system is administered by employers and much of its complexity falls directly on them and therefore, it is a disincentive to employment. The PRSI area has 12 classes of contribution and within each of those 12 classes are three categories, making a total of about 35 different categories which must be administered. That is extremely complex for employers to administer. The indirect tax area embraces six rates of VAT and numerous specific excise duties on top of all that. A few years ago the objection to introducing low rates of VAT on certain goods was the unworkability of bringing in new tax rates. In the last few years we have succeeded in creating quite a number of new rates and that argument has not been presented against them. Therefore in indirect tax we have evolved a hopelessly complex tax system.
In the income tax code we have a whole web of different tax allowances and small income exemptions. If a man from Mars or a Department of Finance official who had been out of circulation for the last 20 years were to look into our tax code he would say that it is hopelessly unworkable and that any Government suggesting such a code would be laughed out of court. Through piecemeal reform and amendments over the years we have developed such an unworkable system. One of its worst features is the very irrational structure of marginal tax rates that have grown up in our code. For example, under the small income exemption limit people on very small incomes can face marginal tax rates of 60 per cent. That represents a huge disincentive to people in that part of the code to increase effort or take on work. As stated by Donal de Buitléir, Secretary of the Taxation Commission, we have seen in the last few years quite a dramatic growth in the marginal tax rates. He pointed out that, although the percentage of income retained by workers in Ireland was the average of that of all European countries at 70 per cent, we are unique in having 40 per cent of our taxpayers paying above the standard rate of tax and in having almost 10 per cent of them paying 60 per cent or over tax rates. In short, by having a tax system with a number of allowances we have forced up the marginal tax rates so that people at the most moderate income levels are brought into the marginal high tax rates. In a paper which he gave recently Donal de Buitléir showed the change in the last six years from 1968-79 to 1984-85. The top of the basic 35 per cent band in 1978-79 was reached if your taxable income was £10,200 in present money terms. The top of that band has come down by a full £6,000 to only £4,000. The same applies to higher rates in the structure of the tax code. People on very moderate incomes are pushed up into facing tax rates of 45 per cent, 55 per cent and 60 per cent basic, not to talk of PRSI contributions and other levies on top of that.
A start must be made now at the task of reducing firstly the complexity of the system, and, secondly, reducing the mechanisms that have diluted our tax base and created such high marginal rates with all that goes with them.
I turn now to what I perceive as very significant inequities in the tax system that are of concern to me. Those inequities affect the position of married people with large families. Secondly, I should like to deal with the discrimination which applies to people with different types of housing costs. To illustrate the point about large families it is worth considering what has happened to the child tax allowance over the past ten years. In current money terms the tax allowance in 1970 was £800 and in 1984, in current money terms, it has gone down £100. What that means in practical terms, if one takes the money in the pocket of the person on the standard tax rate, is that in 1970 the State gave to that taxpayer with a child £5.40 into his pocket but 14 years later, in 1984, the State gives 70p. That is a dramatic erosion in the position of large families and it is an indictment of us all that it has happened in the last 14 years. I grant that there have been increases in the universal childrens allowances over the period but those allowances have been far short of what is required to compensate taxpayers for the deterioration in the child tax allowance. If one adds the child tax allowance to the universal childrens allowance paid through the post office one will see that the situation has deteriorated since 1970 from a current value of £6.10 into one's pocket to less than £3.50 now.
That is a serious inequity in our system. I do not believe it is fair that the family man at work should be given only £3.50, or thereabouts, from the State to support his child while, for example, a man who is sick or unemployed will be given £11.60 by the State. I cannot see that the cost of supporting a child changes when one leaves work or that people on a low income who are at work should be treated in that way by the tax code. The other insidious side effect is that in some cases persons who are out of work can gain no benefit from taking up employment if they have large families. I should like to quote some examples I calculated. A married man with four children taking up work because of the low benefit given to him under the tax code and the childrens benefit system for having children faces an effective tax rate of 85 per cent if he takes up a job at the average industrial wage, an effective tax rate of 101 per cent if he takes up a job at three-quarters the average industrial wage and a massive effective tax rate of 134 per cent if he takes up the job at half the average industrial wage. In practical terms that means if a man is considering a job at anything significantly under the average industrial wage and he has a family of four he would be better off staying unemployed. That is an invidious situation to have in our tax code.
The housing cost issue is one I am concerned about. It is the old catch 22, people who are in private tenancies cannot get any allowance against their tax liability for the rents they pay. That is in stark contrast to people who are either buying out their homes or have the benefit of a local authority tenancy and can get on the differential rents systems. Under this system people are left in an effective poverty trap. As the tax code does to a person with a large family this treatment of housing costs does to people who are unfortunate enough not to be in a position to buy a house for themselves or to get on to the council or corporation tenancy lists.
Those observations about the inequity in our tax code must add extra impetus to the Government's scheme for family income support for those at work and of the gradual extension of the tax relief for rents, which I am glad to say has been brought down where it is now available to those over 60. Last year it was only available to those over 65.
I should like to deal with the question of tax reform and the proposals of the Commission on Taxation. One of the things about tax reform that is too easy to forget is that there will always be gainers and losers. With the present massive tax burden the gainers will look at any concession as only getting their due while those who lose on their tax reform will feel deeply aggrieved. That is a problem that causes tax reform to be difficult to embark upon, that the political perception of tax reform in any sort of radical way is not favourable, that unfortunately the gainers will not congratulate one for tax reform while the losers will be loud in their complaints. However, I do not think that should deter us from tax reform. What it means is that we have to do our tax reform on a phased basis. We should set clear objectives to be achieved over a number of years and pursue them systematically annually trying to minimise sudden changes that would affect some people adversely and, at the same time, be gradually dismantling an unduly complex and unworkable tax code.
The commission have highlighted the major problems we must confront. Among those I mentioned they referred to the high marginal tax rates, the need to bring in tax credits, the need to reduce what they call tax expenditures that have leaked away our tax base, reform of the PRSI system and the whole question of indexation. In other words, the regrettable way inflation has allowed the tax burden to surreptitiously creep up and that has been availed of by Governments in the last ten or 15 years.
There is another aspect which we must consider in tax reform, reform in the context of the employment scenario that will face us for the next ten or 15 years. The lesson I draw from that is that we must question the whole basis of the PRSI system which faces the employer with a tax bill of more than 12 per cent directly paid and the employee with a tax bill of 5½ per cent plus the 3 per cent levy. In all it amounts to more than 20 per cent tax. That is a straight payroll tax — in effect, a tax on employment. When one couples that with the fact that they have leaned over backwards to subsidise capital through various tax concessions and subsidies one will see that we have built into our system a perverse incentive structure. We are encouraging employers to employ capital and discouraging them from employing labour. Looking at our tax codes one would swear that we were a capital abundant economy with scarce manpower. The reality is that we have ample manpower and a lot of it not fully occupied.
We must examine the whole basis of the PRSI system not only from the fact that it is a straight tax on employment but also on the equity side. It has always been said that the PRSI system is a funding system, that people are funding benefits from which they gain. However, we have now introduced means-tested basic rates of social payments on the premium of the benefit rates and the rates which are paid out of the PRSI code are only tiny. They are marginally over the basic rates available to anyone. Equally, the pay-related benefit is only a marginal sum. If one looks at those two together one can reckon that about one-third of all contributions to the fund are paid out as payments over and above basic rates of social welfare payments. I question on that basis whether the Social Insurance Fund is in any sense an insurance fund at all. Equally, there is no allowance for what one might call in the car insurance area no claims. There is no such thing in the Social Insurance Fund. Your entitlements are always the same no matter how good your employment record. We must question the PRSI system on these two bases and also on the basis that there is no distinction in the PRSI code for family commitments. We have reached the stage where this code is a significant burden on families. There is no allowance for the number of children, mortgages or any of the other charges the income tax code generally allows in order to achieve equity. For all those reasons we must question the PRSI system but particularly on the grounds that it is a straight tax on employment.
The second issue we must look at is the proposal made a number of years ago in an NESC report, that was a proposal of a negative income tax, a system that would consolidate social welfare and the tax code into one system. When that report issued calculations were made as to what it would cost. Quite detailed calculations showed it was a workable proposal. It is high time to have another look at this. Unfortunately, the taxation commission did not address themselves to that issue; they dismissed it in a few lines. It is important that the planning board and the Minister address that question once again.
By consolidating the social welfare code and the tax code into a simple tax and payments system, we can achieve not only administrative economies in the social welfare area but, at one stroke, we can achieve what is being attempted piecemeal by many other schemes, that is to try to allow people who are unemployed to avail of whatever opportunities present themselves. The kind of schemes I have in mind which were trying to do that are the enterprise allowance scheme, a very sensible scheme; the family supplement scheme, which will allow people to take up work opportunities and not be disadvantaged; training allowances and the new proposals mentioned by the Minister, Deputy Quinn, to allow the unemployed to engage in work and the many schemes envisaged by the Youth Employment Agency to allow young people to engage in community work.
Many of these schemes are expensively administered and have created administrative nightmares, particularly the danger of displacement effects, unfair competition and so on, and the many other problems which have grown up around these schemes. The simple measure of a negative income tax would be an advantage because if people did only a few hours work each week they would still get their social welfare payments and get some advantage from the hours worked. That type of tax code cum social welfare system would allow us to avoid a lot of the administrative expense in devising schemes to do just that and we have been doing our best to find such schemes. In my view it is time to have another look at this proposal which was made in 1977. This could become the vehicle for simplifying the tax code and making it fairer in many areas, including those I mentioned earlier—the disadvantaged, large families and people with housing commitments. It can have another advantage because it could stop the drift into the black economy. That has occurred because of the high tax rates and the fact that people cannot get welfare payments if they take up even the smallest part-time job as they would be regarded as unavailable for work. As I said, it is time we took a serious look at this proposal. The attractiveness I see in that proposal is that it would mean equality in the treatment of men and women by the tax and payments systems. This is something which we are committed to achieving by the end of this year under EEC rules.
I hope the publication of the planning board's report will be the start of a very realistic attempt to change our tax code and to remove the hopeless complexities which have grown into the code over the years.
I would like to deal now with the strategy pursued in this year's budget. Fianna Fáil have been at sixes and sevens in their response to this budget. At one stage they advocated the classic pump prime. Earlier in the year when we had an economic debate the Leader of the Opposition spoke of the need to sink more money into public spending and the need to reduce tax rates selectively in areas that would generate more tax revenue. Unfortunately, that is in conflict with his criticism of the Government for failing to make greater inroads into the Exchequer borrowing requirements. You cannot advocate more borrowing, more spending and lower taxation at the same time and that basic confusion appears to be in the Opposition's approach to this budget.
They forget we are a small open economy with 55 per cent of all domestic demand going on imports. We are an economy with a massive Government sector. As a share of GNP Government spending is up to 75 per cent, if we include social welfare contributions. That is a huge burden. The analysis behind what Deputy Haughey said, where a bucket of Government spending would prime the pump and the well would gush forth, does not hold in this economy, as we learned to our cost in 1977.
We have to examine Government which is the dominant absorber of resources in the economy, the cause of high tax rates and many of the problems which have grown up in our economy. The need is not for a little more public spending but for an overwhelming review of the programmes we are taking on. Last year's publication of the comprehensive review of public spending is a very welcome change.
Despite the commitment by many Ministers for Finance that we are on the road to fundamental review of various programmes and that from now on we will examine programmes root and branch, successive Ministers believed that this was what they were trying to achieve, and that this was the way forward. Yet, every year we are back to the same situation in which when Estimates are published they do not seem to fulfil the hopes that Ministers expressed a year earlier; that next year would be significantly different in the way we approach spending. I am afraid that 1984 has been of the same ilk. The Estimates did not fulfil the promise in the review published in that little blue book during the course of last year — Comprehensive Public Expenditure Programmes. I do not believe the Estimates fulfil the hopes that raised. In many areas that book — in particular I can recall the fisheries area and the manpower training area — raised fundamental questions about the way in which public spending was being conducted. Without making recommendations it clearly pointed the way in which economies could be effected. Yet when the Estimates are published we tend to be back in the same system of trying to contain the level of public spending on a global basis without examining the fundamentals of different types of expenditure. I do not know where the fault lies. I would hope that during 1984 we would be able to make greater strides in that area. Perhaps the problem lies in our system of Cabinet responsibility in which there are Ministers trying to defend the interests of specific Government Departments, not acting, if you like, in unison, trying to ascertain where is money being used less fruitfully and where is it being used more fruitfully.
Another common cry from the Opposition in criticising this budget was the claim that not enough was being done for employment. The last speaker, the Minister of State at the Department of the Taoiseach, pointed to the very considerable number of things being done for employment. I believe the criticism that not enough is being done for employment is far too simplistic. Just to cite some of the schemes at present available, there is the employment incentive scheme to encourage manufacturers to take on extra employees. There are 50 per cent grants for feasibility studies of people who are considering taking on new employment schemes. There are capital grants and the most favourable tax regime in Europe for manufacturing industry. We have 100 per cent training grants for people considering taking on new employment. We have a national placement service and a national training board. Between those two agencies about £200 million of State money is being expended. We have a new enterprise allowances scheme, the new community youth programme administered by the Youth Employment Agency and the new scheme for capitalising pay-related benefits. We have Córas Tráchtála, the IDA and all the other bevy of State agencies. It is far too simplistic to say that the Government are not trying to do enough for employment. The response should not be that we should pile up more and more schemes but rather that we ask ourselves what is going wrong: why are we not getting the sort of response from the huge number of schemes we are now administering?
I believe the greatest single weakness in this country is our failure to evaluate and formulate policy in Government Departments. Indeed, I sometimes wonder do Government Departments have the capacity to think in policy terms at all. I should like to deal with a specific one that is under the aegis of the Department of Labour. In the manpower policy area — and that would include employment schemes, training schemes, the National Manpower Service and so on — we do not have any coherent set of policies at all. It has grown very rapidly over the years and has now reached the stage at which our manpower policy is a massive State industry expending approximately £200 million of taxpayer's money. It has grown particularly rapidly in the last five years or so. Yet we do not have any clear policy statement. As far as I know the last White Paper on manpower policy dates back to the sixties. Just to cite one example in the United Kingdom — and I do not claim that the United Kingdom is a shining light in this respect — they have had two White Papers in the last five years on the issue of manpower policy.
There is enormous need to think through what we are trying to achieve in this manpower area. Over the last five years there have been piecemeal additions on an enormous scale — for example the work experience programme, the enterprise allowance scheme, the Youth Employment Agency, all desirable in their own right and all having a place in a proper manpower policy. But what has happened, as we all know, is that various schemes and agencies have got into a hopeless mess with an overlap in the area of training and courses. Equally there is duplication in assessing young people leaving school. The National Manpower Service do it, there are the Civil Service Commission and Local Appointments Commission doing it, as are AnCO.
Another problem is that there are young people hopping from one scheme to another, they engage in a work experience programme, they engage in a training course, perhaps they then get back onto another training course. The reason for that is that we have not set out a clear direction from the Department of Labour as to where the different agencies should be going to prevent people availing of the services of a whole lot of different ones while others may go unhelped altogether.
The independent agencies, particularly AnCO, have become autonomous from the Department of Labour. I do not believe that the Department have the capacity to direct policy in the case of AnCO. Perhaps part of the reason is that the Act setting up AnCO was too generally framed. It appeared to give AnCO a very general remit in the training area, stretching right back into the educational area, which has caused a lot of the problems in the sort of operation in which they have become involved. Another agency set up recently is the Youth Employment Agency. I question whether they are in a position to co-ordinate a series of other independent State agencies. After all, ultimately it is the Minister who must declare policy for those State agencies. We are bound to have problems if the Youth Employment Agency is trying to co-ordinate agencies answerable to the Minister. We have seen that sort of problem emerge in the course of the year, that the Youth Employment Agency is frustrated to some degree.
The time is clearly opportune for the Minister for Labour to declare that he is the person who dictates policy, and to do so through the publication of a White Paper in order to try to clear up the whole of this manpower area. There are fundamental questions that must be faced urgently in that area. The first is to draw a clear distinction between two types of training. One is what people have described as the demand-type versus the supply-type. In simple terms what it means is that the demand-type trains people for specific vacancies, equips people to take up a specific employment opportunity. That is a very different type of training from one aimed primarily at young people who have been disadvantaged by the educational system, who are in need of special help and remedial training. We do not have that sort of distinction in our policy at present. Even within the Department of Labour there is some confusion.
A few weeks ago I had a question down to the Minister for Labour when those two courses were lumped together as if there were no distinction to be drawn between them. There must be a distinction drawn between the way one chooses people for those two different courses and between the tests of success for them. For example, one could not expect a remedial course to have the same success rate as, say, a hard technological course. There must be a clear distinction drawn between the content of those courses. Therefore, there is need for a White Paper to distinguish clearly between those two training areas, to ascertain who we want to go into the different areas and what priorities we want to achieve in those areas.
