Dáil Éireann debate -
Wednesday, 3 Jun 1987

Vol. 373 No. 2

Finance Bill, 1987: Second Stage.

Minister for Finance (Mr. MacSharry)

I move: "That the Bill be now read a Second Time". This Bill provides a statutory basis for the taxation provisions which were announced in the 1987 budget. It also contains a number of other taxation proposals, mostly of a technical nature, which will improve the operation of the system and eliminate some abuses. I would like, in the first instance, before discussing individual aspects of the Bill, to refer to developments since the budget and to outline the Government's general approach to taxation policy.

The essential strategy underlying the budget was to restore confidence in the economy, bring down interest rates, reverse the trend of outflows of capital and encourage investment. To achieve this we had to demonstrate clearly our determination to improve the public finances and we also had to focus special attention on opportunities for development in productive sectors of the economy. The budget strategy is working even at this early stage. Already interest rates have fallen significantly and further reductions are expected as the year progresses. Money is flowing back into the economy and this will be reflected in new investment and new job opportunities. There can be no doubt about our commitment to reaching the targets we have set for the public finances. While this policy has led to some cut backs in services, the reality is that there are no reasonable alternatives. Excessive borrowing would simply drag the economy into a downward spiral and the consequence of this would be intolerable reductions in services at a later stage.

We have recognised, however, that control of the public finances is not sufficient in itself to create the new sense of direction that the economy needs. There must also be specific initiatives to promote development and new openings for employment. We have wasted no time in taking these initiatives. To illustrate what we are doing, I would draw your attention to the provisions in the Bill before us today to promote the new financial services centre in the Custom House area and to encourage more investment in shipping, tourism and the food processing sector. This is by no means a comprehensive list; we are exploring specific possibilities in a whole range of sectors and the Government are regularly monitoring progress in each case.

Despite the adverse reaction to specific measures, the general response to the budget has been encouraging. There is a recognition among the public that something had to be done to stop the rot and that the Government have grasped the nettle. There is now hope again. It is early days to expect substantial results but I am confident that, as time progresses, people will come to see more and more the wisdom of what we are doing. We are not out of the wood by any means. I am already on record as saying that we will take whatever steps may be required as the year goes on to adhere to budget targets. So far the indicators are that we are firmly on course. The policy of correcting the public finances, however, will have to be continued into 1988 and later years, as necessary. Otherwise, we will not succeed.

The subject of today's debate is taxation. The Government have identified reform of the taxation system as a priority because this is an essential element in achieving the scale of economic progress that we need. There is, it seems, a general consensus on the need for reform. There would seem to be wide differences of opinion, however, about the appropriate thrust of any such reform.

I am very conscious of the reality that our tax levels are high, that they have a negative effect on economic activity and that they are a source of frustration to many people who feel overburdened. Too many people pay income tax above the standard rate and it is demoralising for the average worker to have such a high proportion of his earnings siphoned off through taxation. High indirect taxes push up retail prices unduly and we have experienced the huge distortion of trade that this can cause. The restriction of duty free allowances to genuine travellers has eased this situation to a significant extent but the underlying problems will remain if we continue to have high indirect taxation.

High taxes are the price we have to pay for continuing high public expenditure. In the short term, the poor state of the public finances does not allow us to make any substantial reductions in tax revenues. This does not mean, however, that tax reform must be put on the long finger. On the contrary, we can and we must make progress, however modest, within the constraint imposed by the budget.

It is a precondition for tax reform that the tax base should be widened and I think there is general agreement about this on all sides of the House. A wider base allows for a better and fairer distribution and a consequent lowering of rates. This can only be to the benefit of the economy and it will also remove much of the present frustration with the system. A wider base, however, requires new or increased taxes in some instances and an increasingly efficient collection process to ensure that all who are liable pay their due taxes.

I do not intend here to set down priorities for extending the tax base. This is a matter for Government decision in the context of preparations for the budgets of 1988 and later years. I would point out, however, that taxes on some activities and goods and services here are much lower than the public perception and that it is wrong to suggest that we have high taxes across the board. The contribution from the business sector is low by international standards. This is due in no small part to the very generous allowances that are available and I mentioned in the course of my Budget Statement that a review of corporation tax is being undertaken. The contribution from some other sectors is also decidedly low. These are just examples of areas where taxation cannot be presented as a problem. There are others but it is not my purpose to be comprehensive here or to identify priorities. Specific steps have been taken in the recent budget to widen the tax base. In particular, the steps taken to check unreasonable losses of trade through travellers' allowances, and the assignment of additional resources to the Office of the Revenue Commissioners will make a useful contribution in this respect.

In our Programme for National Recovery we have given a commitment to rapidly reach the stage where two-thirds of taxpayers pay tax only at the standard rate. It was not possible to fulfil this commitment in this year's budget because of the extremely difficult situation we inherited. Income tax reductions, however modest, are expensive in budget terms. We had to make choices between lower borrowing and lower taxation and the priority had to be to reduce borrowing. As the public finances and the economy improve, we will be in a better position to reduce the burden of income tax and to fulfil our commitment.

There has been much discussion in recent years about inadequacies in our collection system. The feeling is widespread that arrears are on an enormous scale and that too many people can avoid paying a fair share of tax. There is considerable misunderstanding about the true situation and some of the figures mentioned about arrears are wild exaggerations. It is a gross misrepresentation to suggest that problems can be solved and the tax burden reduced significantly for all if arrears are duly collected. At the same time, it must be acknowledged that uncollected tax is a serious problem and any tax reform package must incorporate measures to improve collection. Significant progress has been made in this respect in recent years. There must be further improvement and this will be a priority with the Government. It is not enough to have an equitable tax system; it must be demonstrably clear to the public that the system is operated efficiently and that it does not pay to evade tax.

We have now reached the point of diminishing returns on some taxes. Our budget problems will not be resolved by higher taxes or improved collection procedures. The emphasis must be on achieving better distribution of taxation in the interests of equity and a more efficient economy. I am confident that substantial progress will be made in this direction in the 1988 and subsequent budgets. In the months ahead taxation will be on the agenda for discussion with the social partners. The Government will be anxious in these discussions to focus attention on the scope for better distribution within the constraints of the budget. Any discussion on taxation that ignores or sidesteps the budget realities is futile.

I would now like to speak on individual sections of the Bill and to draw the attention of the House, in particular, to the more significant items. The earlier sections of the Bill are concerned with income tax. Section 1 provides for the renewal for a further year of the special PRSI tax allowance, which was first introduced in 1982. The exemption from income tax available to lessors of agricultural land, who are aged 55 or over or who are permanently incapacitated, is being raised from £2,000 to £2,800 in section 2.

I would like to draw the particular attention of the House to the arrangements in section 3 for the credit on farm tax. While the farm tax has been abolished, a small number of farmers are required to pay it in respect of 1986. To qualify for a credit against last year's income tax, however, the farm tax due should have been paid by 5 April 1987. The deadline for payment is now being extended to 30 June. There have been substantial payments of farm tax in recent weeks but there is still up to £3.5 million due for payment to local authorities. I expect that the extension of the deadline will now secure the early payment of farm tax still outstanding; there will be no further extensions.

Section 4 abolishes in relation to Irish people working abroad the "place of abode" test for residence in the State for tax purposes. Under that test people working abroad are deemed to be resident in Ireland for tax purposes, if they maintain a place of abode here and return, even for a short period, during the tax year. In consequence, as residents, they are liable to Irish tax on their remittances home. This is unfair and the change now being made will enable people to visit home and transfer savings without being subject to Irish tax simply because they maintain a place of abode and made short visits home.

In section 5 the ceiling for relief on dividend income from an Irish manufacturing company is being increased from £7,000 to £9,000 where the company has an approved profit-sharing scheme for its employees. This is intended as an incentive to companies to introduce profit-sharing schemes which are of benefit both to the companies and the employees and do much to improve industrial relations. There is also a provision that this relief is to apply only in respect of bona fide ordinary shares.

Section 6 implements the restriction on mortgage interest relief announced in the budget. It provides that the relief will be restricted to 90 per cent of mortgage interest actually paid or 90 per cent of the tax limits of £4,000, £2,900 and £2,000 for married couples, widowed persons and single individuals respectively, whichever is the lesser.

This restriction is necessary in view of the high cost of this relief. Mortgage interest relief would cost about £160 million in the current tax year if we had not taken action. The restriction will claw back a small proportion — £10 million in 1987 — of this cost. This clawback has been designed very carefully, so as to ensure that the biggest clawback comes from those who have the biggest benefit from the relief.

The new restriction must, of course, be seen in the context of the recently announced cut in the mortgage interest rate. This cut alone goes a long way towards compensating mortgage holders for the reduction in tax relief. A primary objective of the budget strategy is to force down interest rates and the success of this strategy in the home loans area will continue to be of substantial benefit to mortgage holders generally.

The requirements for payover of retention tax by financial institutions are being altered in section 7. The arrangements for crediting interest adopted by some financial institutions meant that they paid over to the Revenue Commissioners tax on less than 12 months' interest for the year 1986-87. If this situation were not remedied, the 1987 yield from retention tax would be reduced significantly. The section provides that these institutions will have to make up any shortfall in their 1987 payment by an extra payment and it also protects the yield for future years.

I should say that the section does not alter either the level or timing of deduction of retention tax from interest on deposits. That remains as it was. It is concerned solely with the timing of the payover of retention tax to the Revenue Commissioners by some financial institutions. The retention tax is deducted at source, at the rate of 35 per cent, on interest. There are refund arrangements for companies and persons over 65 years of age and charitable institutions are exempted from the tax. There still appears to be some confusion about the impact of the tax on confidentiality and I would like to make the position clear once more. In so far as resident depositors are concerned, there is no disclosure of information following the introduction of retention tax. For non-residents there never has been disclosure and there is no disclosure now. Genuine non-residents can rest assured that their deposits are held in strictest confidence and are not liable for retention tax.

Chapter II of the Bill contains important amendments to the scheme of relief for investment in corporate trades — otherwise known as the business expansion scheme. The scheme provides for relief on certain conditions for an individual who subscribes for unquoted ordinary shares in an Irish resident company engaged in manufacture or in certain service activities.

This scheme has been successful to date in generating additional investment for the activities to which it applies. Since the relief was introduced in January 1985, over 120 companies and investments of about £12 million have been approved.

Up to now, the business expansion scheme has been confined to the manufacturing and international services sectors. The Government propose to extend it on a selective basis to certain other areas which we have identified as offering significant potential for increasing output and employment. The areas in question are shipping, trading houses and export tourism.

I do not need to outline to the House the difficulties which have beset the shipping industry in recent years. Positive action is required to enable the industry to recover from these difficulties. In order to revitalise the industry, shipping will now come within the ambit of the business expansion scheme and, furthermore, the 10 per cent rate of corporation tax will apply to shipping activities.

Deputies will note the provision that the acquisition of a ship will qualify under the scheme only where such acquisition would be eligible for a grant under a grants scheme administered by the Department of the Marine. This provision will ensure that all proposals to raise money under the BES to buy ships will be vetted in accordance with strict criteria by the Department of the Marine. This approach will also guarantee that revenue foregone under the scheme will be subject to the same level of scrutiny as the direct expenditure of Exchequer funds in the form of grants.

The business expansion scheme is also being extended to trading houses and to export tourism. I will return to the trading houses at a later stage. The Government have already highlighted the importance which they attach to tourism and they have demonstrated their commitment to the industry with the package of measures announced recently by my colleague, the Minister for Transport and Tourism.

The qualifying activities under the heading of tourism are set out in section 11. The term tourist traffic undertaking has been defined in very broad terms to ensure that a wide range of tourist activities can be covered. There is a requirement that in order to qualify for the benefits of the business expansion scheme a company must obtain approval from Bord Fáilte for a three year development and marketing plan which is primarily designed to increase tourist traffic and revenue from abroad. The purpose of this is to ensure that qualifying companies are committed to the essential purpose for which the scheme is being extended to the tourist sector, namely to bring in more tourists from abroad. It will also mean that the expertise of Bord Fáilte in the tourism area will be availed of in deciding on applications for relief under the scheme.

I am confident that this new incentive for tourism will give a major boost to the industry in its efforts to attract more foreign visitors to Ireland and that this in turn will have a significant impact on the economy generally.

Chapter III of the Bill gives effect to the scheme of tax deduction at source on professional fees paid by certain public sector agencies. These fees are paid normally to either individuals who are taxed as self-employed or to companies who are liable for corporation tax. Under the system of tax assessment for the self-employed current tax payments use as a basis for calculation earnings generated in a period which can date back over two years in some instances. Under corporation tax, payments are due six months after the end of the accounting period to which they relate. This contrasts with the deduction at source on current earnings under PAYE. The new system provides for deduction of tax on account, at source, on the publicly funded professional fee payments to which it applies. Accordingly, from 6 June tax on account will be deducted at source at the rate of 35 per cent from all payments for professional services made by the bodies specified in section 13 of the Bill. The new system is estimated to yield £25 million in 1987 and it is an important element of the budget for this year.

There was initially a considerable amount of misunderstanding about the new system and some exaggerated comment as to its effects. I would like to stress the following points in relation to the scheme. First, no additional tax liability whatsoever is laid on the persons or companies affected. Tax deducted at source will be fully offset against tax liability based on the period of account in which the deductions occur. Secondly, there are provisions for the payment of interim refunds of tax. These have been included to mitigate refunds of tax. These have been included to mitigate some of the adverse cash flow effects which would otherwise arise from the new arrangements. Deputies can rest assured that the Revenue Commissioners will process applications for interim refunds with all possible speed, and, thirdly, while the position will vary from case to case it must be borne in mind that the cash flow gain to the Exchequer of £25 million will be spread across some thousands of individuals and companies so that the average charge will be small.

Notwithstanding the provisions for refunds and the fact that no additional tax liability is involved, some professional groups remain convinced that the tax will have serious adverse effects. I have met with most of these groups and am fully aware of their views on the matter. I am confident however that as the tax becomes operational it will be seen as a reasonable imposition. Claims that it will force people out of business and that it is discouraging professional people from accepting work on behalf of the State are without foundation.

Deputies will note that section 13 enables the list of accountable persons who will operate the tax to be extended by regulation. While the major public sector bodies paying significant amounts of professional fees are already included, I have arranged for a study of fees payable across the public sector with a view to possibly adding to this list at a future date.

I would now like to move on to Chapters IV and V of the Bill and to draw specific attention to the principal items under these headings. Section 24 provides that the restriction whereby capital allowances are determined on a net of grant' basis will not apply to companies in the food processing sector which purchase their own plant and machinery. This reflects the special priority which the Government attach to investment in the food processing sector. This is an area where, for export purposes especially, we have significant potential to achieve a higher added value content and large-scale investment is necessary for this purpose.

I referred earlier to the extension of the 10 per cent rate of corporation tax to shipping and this provision is incorporated in section 26. This concession is being accompanied by measures designed to curtail certain tax avoidance activities in the sector. These measures impose restrictions on relief for trading losses of shipping companies and capital allowances in respect of ships used in a 10 per cent shipping trade.

The intention underlying the anti-avoidance measures is to confine the tax benefit of capital allowances on ships and any accumulated trading losses within the shipping trade. It has been possible up to now to set these allowances and losses against income other than shipping income by means of group relief and, in the case of capital allowances only, leasing arrangements. The result is that other companies or individuals can reduce their tax liability artificially and the profits of shipping companies for tax purposes have been artificially increased.

The extension of the 10 per cent rate of corporation tax to the income of trading houses is proposed in section 27. Trading houses are defined as companies carrying on a trade which consists exclusively of the sale by wholesale on the export market of Irish manufactured goods. It is envisaged that these will be private sector companies with no State participation.

The aim of the Government in promoting the establishment of trading houses is to develop a co-ordinated marketing function for Irish manufacturing companies. Many such companies, although their products have strong export potential, lack the resources and often the capability to exploit this potential. This is largely a function of size, but the result is that smaller companies are put at a serious competitive disadvantage. Trading houses will act as conduits for goods manufactured by such companies.

I now turn to section 28 which relates to the establishment of an international financial services centre in the Custom House Docks site. The special needs of the Custom House docks site were recognised and provided for in the package of tax incentives contained in the Finance Act, 1986. These incentives were designed to foster the physical redevelopment of the site. In order to promote this redevelopment, however, it has been necessary to identify and target specific economic activity which can be attracted into a portion at least of the accommodation being provided on the site. It is obviously desirable that this activity should be incremental rather than that the site should attract operations already established elsewhere in Dublin or elsewhere in Ireland which might be willing to relocate. The Government believe that the establishment of an international financial services centre offers the best potential for development of the site.

A low rate of corporation tax is recognised to be a necessary prerequisite for the successful operation of such a development. Accordingly, provision is being made for the extension of the 10 per cent rate of corporation tax to income derived from certified international financial services to be carried on in the Custom House docks site. In defining the services to be permitted, certain services for Irish residents and certain dealings in Irish currency are not included. Furthermore, in so far as banking functions may be located in the Custom House docks site, they will be subject to the licensing and regulatory authority of the Central Bank on the same basis as banks located elsewhere in the State. The requirements of the relevant European Communities banking directives will be fully met.

The Government have notified the European Commission of the initiatives contained in sections 26, 27 and 28 and the normal procedures involved in such notification are being applied.

Section 31 proposes a new rate of taxation of 45 per cent on the income of banks from home loan business granted after the publication of the Bill. Incomes from existing home loan business will continue to be taxed at 35 per cent as heretofore and costs on all home loan business will continue to be available to be offset against income from other banking activities subject to the normal corporation tax rate of 50 per cent. There is, therefore, no reason why those who already have home loans from banks should pay more, and a tax concession is still available in regard to new loans.

The existing arrangements result from section 28 of the Finance Act, 1976 which was introduced to bring the banks into the housing finance market at a time when they were reluctant to become involved. Over the years, however, the banks have expanded their share of this market and this year both the AIB and the Bank of Ireland have substantially increased their allocations for home loan schemes. Continuation of the section 28 concession is simply not justified in the present situation where the banks are setting out to be the major lenders in the home loan market and can use the favourable tax arrangement resulting from this concession to achieve this objective.

Under the heading of customs and excise, some relief is provided from excise duty on imported waste oil which is subject to processing to make it suitable for use as industrial fuel oil. This change corrects an anomaly and it also encourages processing of oil which otherwise would be dumped. The Bill also confirms excise duty increases on tobacco and certain fuels which were imposed by Order last January.

Part III of the Bill deals with value-added tax. As well as giving effect to the changes announced in the budget, the Bill contains a number of technical provisions. There is a reduction from 25 per cent to 10 per cent in the rate on photographic services, waste disposal services and driving instruction as announced in the budget. In addition, I am extending the benefit of the reduction to admissions to cultural, historical, artistic and scientific exhibitions. These reductions will have effect from 1 July and are intended as a further stimulus to the important services sector of the economy where, I believe, there is significant potential for job creation. I am confident that this will improve the competitiveness of this sector and help combat black economy activity, as well as contribute to employment growth in the economy.

The Bill also confirms the reduction in the farmer's flat rate VAT addition to prices from 2.4 per cent to 1.7 per cent which I announced in the budget. This change, which has had effect from 1 May, is being introduced in order to compensate the Exchequer for the revenue foregone on the abolition of the farm tax. As I indicated in the Budget Statement, farmers retain the right to register for VAT and recover in full any VAT paid by them on their farm inputs. I also mentioned in the budget statement that greater use will be made of the farm profile form in assessing smaller farmers for income tax. The existing form is being revised and the new arrangements will be put into operation shortly. The intention is that all farmers likely to have a taxable income should be assessed. The profile form will enable an inspector of taxes to determine in many cases that no tax liability will arise. For most other smaller farmers, the inspector will be in a position to assess the amount of tax due, without the need for accounts. This simplification of procedures should remove the need for smaller farmers generally to seek specialist accounting advice in relation to their tax affairs.

The main technical VAT provision in the Bill involves an amendment to the rules for deducting input VAT by taxable persons. Sections 37 and 40 recast the existing provisions along the lines adopted by the European Community in the Sixth EC VAT Directive and these more precise definitions will facilitate both the Revenue Commissioners and taxpayers in operating the tax. The remaining provisions are of a minor definitional or technical nature.

Under the heading of stamp duties, provision is made for the continuation of the bank levy to yield £25 million and for an increase in the levy on life assurance premiums from 1? per cent to 3 per cent. The contribution from the financial institutions to corporation tax yield is decidedly small and, while this situation prevails, there is no room for any diminution of levies.

I propose to introduce an amendment on Committee Stage of the Bill enabling the making of regulations to allow VAT-registered garages a VAT credit in respect of their purchases from unregistered persons of secondhand motor vehicles for resale. This will eliminate a competitive disadvantage suffered at present by registered garages compared to transactions between unregistered persons which do not attract any liability to VAT.

There is one further item to which I would like to refer before concluding. The Government will be doing everything possible to increase industrial investment here by foreign-owned companies. Foreign companies already established here have surplus funds which they are, of course, free to repatriate to their parent companies. I am anxious, however, to increase the range of investment possibilities for these firms so that they may have the choice and the opportunity of putting their surplus cash to work in Ireland.

An enabling provision was made in section 69 of the Finance Act, 1985, for the issue of securities on a tax-exempt basis to eligible foreign-owned firms, thus matching what these firms can already do offshore. The Government have now completed the scheme for implementing that provision. Formal documentation is being finalised with the agent banks and I expect the first issue of the securities will take place in a few weeks' time.

In this opening address on the Finance Bill, I have sought to outline the Government's general approach to taxation policy and to explain, in brief terms, the more significant items in the Bill. There will be further opportunity, on Committee stage in particular, to discuss these items in more detail. I look forward to listening to Deputies' contributions to the debate and I commend the Bill to the House.

Mr. Noonan

(Limerick East): On 6 March 1987, the outgoing Fine Gael Government issued the following statement:

The Fine Gael Parliamentary Party considered the political and budgetary situation at their meeting today and noted the failure of Fianna Fáil to obtain a majority in the Dáil but recognised the likelihood that it would be forming the Government in the incoming Dáil. It is Fine Gael's objective to use its parliamentary strength in the national interest to achieve a position in the public finances which will create conditions for increased employment and for a lasting cut in the tax burden without adding to debt service cost in future years. In so far as the incoming Government introduces a budget which corresponds with the above objective, Fine Gael will not oppose it, or the legislative measures required to implement it.

The implication of the last sentence of that statement is that not only would Fine Gael not oppose a budget which met certain targets but they would not oppose the legislation to implement that budget, namely the Social Welfare Bill and the Finance Bill. We said that our support would be conditional on the Government achieving the position in the public finances which would create conditions for increased employment and for a lasting cut in the tax burden without adding to debt service costs in future years. Our attitude to this Finance Bill has to be measured against that statement. In the course of my speech I will assess this Bill on that basis.

We have seen in the last few months a series of U-turns of dizzying proportions by Fianna Fáil. After 4 years of totally irresponsible opposition, and having fought an election campaign of astounding dishonesty, they arrived in Government without a shot in their locker and having no policy of their own. They have now, it appears, adopted the policy on which we in Fine Gael fought the election. Fianna Fáil and the Government are entitled to do this as no party have a monopoly of any policy position. In the national interest I welcome the conversion of Fianna Fáil to our policies. This volte face by Fianna Fáil has dealt a stunning blow to the credibility of politicians and to this House. The policies we put before the electorate were rejected by the people who voted for a softer option and returned Fianna Fáil to office. They on their return to office reneged on all they had promised and implemented a modified version of what had been rejected by the electorate. Our democracy is not so refined that there is a direct ongoing input by the electorate to Government policy during the life of a Government, but there is a reasonable expectation that immediately on election a Government will not do the direct opposite of what their supporters thought they would do. This is why this Government find it difficult to get the public to accept what they are doing. While the Government have the general mandate to govern they have not a particular mandate to follow the policies they are seeking to pursue. I raise this not to make a debating point but to emphasise one of the oldest principles of democracy, that democratic Government depends on the consent of the people. A party who set out to mislead the electorate, as Fianna Fáil have done, need not be surprised at the anger of the people at having to endure what they did not vote for and had no reason to expect.

The question immediately arises, do the Government have an economic policy? Did they not pursue power rather like the dog who ran after the car and did not know what to do with it when he caught up with it? If there is an underlying policy there is little evidence of it in either the budget speech or in today's speech by the Minister. This is a most disappointing Bill. It is small, mean and unimaginative, a Bill of little content and with no underlying economic policy. We have been told time and again since budget day that the Government rest their initial impetus on the economy on the prospect of reduced interest rates. I would like to examine that proposition. We argued probably stronger than anybody else that we should break out of the vicious circle of high expenditure leading to high deficits, leading to high interest rates and to unemployment. The way to break out of that was to cut current spending so that interest rates would come down. What are the benefits of declining interest rates? First, there should be an immediate benefit to the Exchequer. If money costs less on the home market than abroad there is less expenditure on debt servicing. Secondly, there is a direct benefit to the consumer. Any individual or businessman who has a loan or mortgage should be paying less to service it. A consequence of that is an increase in disposable income which should lead to some boost of consumer spending thus giving some impetus to the economy.

All of those are not the primary purposes of declining interest rates. The real effect of a decline in interest rates is that people will no longer be tempted to buy Government paper because of the high return on it and will invest in the risk areas of the economy which will create wealth and employment. To achieve that the people with money must be convinced that the regime will last, that the targets will be systematically met and that only the long term prospect of reducing interest rates which, when reduced stay down will give the impetus for the investment, wealth creation and job creation the economy needs.

We have a significant date coming up shortly — 30 June when the half year returns are published. I hope the Government are on line on revenue and on expenditure. I have reason to suspect they are not. I hope that if they are not they will immediately take corrective action by further cutting public expenditure. It is only after 15 or 18 months that people or institutions will be tempted to risk capital in that area which will create wealth and jobs. They will not do it on the basis of interest rates being down today and up tomorrow. Last year's budget was welcomed in January by the business sector and financial institutions. Interest rates fell rapidly between budget day and 1 July. They were a lot lower than they are now, certainly by mid June, but in the Autumn of the year they went back up again. Investment decisions cannot be taken in an atmosphere of uncertainty. Local uncertainty is within the control of the Minister but there is also international uncertainty and any of us could name four or five factors over which an Irish Minister or Government have no control, or the most marginal control, which can keep interest rates up despite the best efforts of the Minister and the Government. We are told at the moment that there is a break on the decline in interest rates because we are awaiting the result of the British election. As soon as that is over, we can be sure that there will be a break on the decline in interest rates because we are awaiting the half year returns. We have the situation in the Gulf, where there was an incident and continuing problems in trade between the US and Japan and so on. I am just enumerating these things as factors which tend to create the international uncertainty which keeps interest rates up. It is not possible to base an economic policy on the prospect of declining interest rates if that is the only plank of economic policy. That is why I am most disappointed in this budget.

A factor in Irish life which is a bigger disincentive than high interest rates is the high level of taxation and that position is being maintained in the Finance Bill. I am disappointed that the Minister has not taken the opportunity to at least put together the legislative structure which would lead to a reforming package to reduce taxation. The most disappointing aspect of the Finance Bill is that it again increases taxes. I object to the reduction of the mortgage interest relief. I object to the abolition of farm tax. I object to the proposals on withholding tax on professional fees. I object to the proposal to increase the tax on bank profits on their home loan business from 35 to 45 per cent with consequent increases in mortgage interest rates.

We are already overtaxed. In a budget where the Government had not the scope, and I accept they had not the scope, to reduce taxation, where they had not the scope to index income tax allowances, where an extra £300 million is being taken in income tax this year from the PAYE sector, it is intolerable that they should now take steps to make home loans dearer and to abolish the farm tax. We know the perception PAYE people have of that move.

A person on a maximum home loan would as a result of this reduction have to pay up to £25 a month more in income tax. In addition, there is the proposal regarding home loans from the banks. There is pressure to increase interest rates there. Nothing, except repetition of it today as in the budget speech, has happened to the promise to reduce income tax to standard rate for two thirds of all taxpayers. If the Government have not the financial scope to reduce tax this year, surely they could have availed of the opportunity to establish the legislative framework for widesprad tax reform commencing with a movement to self assessment, as promised by the previous Government and as endorsed by Fianna Fáil in Opposition. We have reached a stage where lower interest rates would help companies but would not necessarily help the individuals who work in those companies. A look at the financial pages of the newspapers in the past two years will reveal all the publicly quoted companies making very large profits and doing extremely well. They have a very good return on investment. Day after day we see the returns in the papers. They are doing very well indeed, but the people who take the decisions which bring about these profits are not doing well because their marginal rate of tax is 65 or 66 per cent when you put PRSI and income tax together. An executive who has a notional salary of £35,000 a year has take home pay of half that amount. The difference between being on £25,000 and £35,000 now is about £4,500. If something is not done quickly to restore the incentive to work and to give benefits to people for the hard work they put into companies who are very successful and profitable, people will no longer accept their positions and take the risks. Consequently we will all be at a loss. It is not possible to operate simply on the prospect of declining interest rates, with all its uncertainty. I say in all sincerity to the Minister that he will have to move quickly to reduce selectively the higher tax rates or in widening the bands. He has given no legislative indication in this Bill that he is doing that. He has missed such an opportunity. I know he has refirmed the commitment to have two thirds of all taxpayers on the standard rate. That does not cost a great deal of money. I know that outlandish promises are being made about tax which cannot be fulfilled, but there is a real problem when those who work the hardest, who produce the results for their companies and whose companies are extremely successful, have no personal benefit from their success. The Minister has moved again to enhance the tax regime for companies, the ship building sector, the tourist industry, the trading houses, the financial services and the Custom House Docks site development.

An Ceann Comhairle

I intervene to advise Deputy Noonan that of the time allotted to him five minutes remain.

Mr. Noonan

(Limerick East): I was under the impression that we had an open debate.

An Ceann Comhairle

I am sorry. It was a misapprehension. I apologise.

Mr. Noonan

(Limerick East): I thought I had misunderstood.

Mr. MacSharry

I am delighted because I know the Deputy has a great deal more to say.

Mr. Noonan

(Limerick East): A strategy which works on the basis that declining interest rates bring about investment in the short term but which will create wealth and employment while ignoring the people who will be working in those positions will not be successful. This policy cannot run on the legs that are under it at the moment. I mentioned previously that competitively we are out of line with many of our neighbours in the EC. I get various figures for the difference, but in the energy process alone the normal figure given now is that on average our rates on electricity are 30 per cent higher than those of our main competitors. The same applies to telecommunications and to interest rates. Then we have the high tax rates. In addition, we are on the periphery and far from the market. The Minister has missed an opportunity here to give a very strong indication that he intends to move to reform income tax. It is a pity that that is so.

I welcome the Minister's indication that he is reviewing corporation tax. That is important. There are so many allowances, so many breaks, so many differences and so many attempts to extend the 10 per cent regime that it is time the whole structure of company taxation was examined. I suggest that the principle should be to see if some of the allowances could be abolished on a trade off for much lower rates. So far as I can see the effective rate of 50 per cent is being paid at the moment by only a small group of people in the service sector. It is time all that was looked at. I welcome the commitment in that regard.

The Minister is aware that we are opposed to his proposals on withholding tax on professional fees. First, we consider this to be inequitable and secondly, it will cause major disruption on employment and firms in the areas affected. The Minister is probably aware that a number of employees have been put on protective notice. It is genuine protective notice, not a lobbying ploy by the employers concerned. Third, the tax will not produce the revenue gain anticipated by the Government if the hardship and rebate clauses are to be operated honestly and effectively, as the Minister said they would be, and with expedition by the Revenue Commissioners. If that happens I do not think that revenue of £25 million will accrue. The tax is inequitable because it aims to take from firms on a current basis sums which would amount to a great many times their tax liability in relation to either directors' or partners' incomes or corporation profits. For many of the firms concerned final tax liability amounts to maybe 6 per cent of turnover or less. The abstraction of 35 per cent of turnover before VAT would constitute a major reduction in cash flow. If this were to be dealt with by increasing overdraft accommodation the inevitable result would be a substantial increase in interest charges, assuming that the lending institutions were prepared to increase overdrafts to the level required. In many cases overdraft accommodation requirements would be multiplied by a factor of three and the increase in costs associated with higher overdrafts together with the drastic reduction in cash flow would lead firms to reduce substantially their levels of employment. It is likely that, given a substantial contraction in the ability of firms in this country to trade successfully and in the provision of professional services, a substantial volume of work currently available would be undertaken by foreign firms with no employment effects in this country.

The system as proposed by the Government includes a provision for interim refunds. It has been explained that where the withholding tax deducted is disproportionate to the final tax liability for the firm in their previous accounting year, interim refunds will be made. The vast majority of firms concerned would be in a position which would justify interim refunds and would, therefore, be seeking them. Inevitably it would take some time for claims for interim refunds to be processed and paid. During that period the firms concerned will be at the loss of cash flow and suffer inconvenience and disruption. Equally, unless the Government envisage excessive delays in the processing of such claims, the cash flow benefits to the Exchequer will be correspondingly reduced. Thus, the system will create extra paper work, substantial inconvenience to the firms involved and a much smaller than expected cash flow benefit to the Exchequer.

Taking all of those factors into account Fine Gael are opposed to withholding tax. If the Government believe, notwithstanding all of those drawbacks in the scheme, that there is any basis for it in terms of suspected tax evasion, they might consider a system of exemption from withholding tax for firms which can show they have discharged their tax liabilities for their previous accounting period and, perhaps, that their current liabilities in terms of PAYE, PRSI and VAT are paid up to date. Such a system would very substantially reduce the inconvenience caused to firms by the proposal. I would ask the Minister to propose an amendment along those lines on Committee Stage.

I fail to understand why a Minister who has met the professional bodies involved, cannot see the sense of introducing an appropriate amendment. Many professions are affected. Those professions associated with the building industry are affected very severely. I do not know what the building industry did to draw the wrath of the present Government on them but it is certainly a long way from an extra £200 million being invested, the VAT rate being reduced from 10 per cent to 5 per cent or the capital programme being implemented in full. Here again it is the professions associated with the building industry, architects, consultant engineers, design teams, who are most affected because of the depression in the building industry where there is little private work. The larger firms are involved to the tune of 75 to 80 per cent in public work.

I was glad to hear the Minister's commitment that the Revenue Commissioners will process claims with all possible speed and rebate moneys to anybody who experiences difficulty. Frankly, I do not accept that commitment. I have never seen it happen to date. There are two ways in which one can get a rebate of money on withholding tax. First, if one pays in excess — and many firms will pay in excess of their liability — one can claim the excess back when agreed audited accounts have been submitted to the Revenue Commissioners. It has been my experience that they will not be in a position to make a claim in respect of what they have been paying in excess since 6 June this year until this time next year. By this time next year they will have paid a substantial amount of their 1988 withholding tax. I am sure the Minister has looked at facsimile balance sheets, putative balance sheets, but I wonder has he been examining them on a one-year basis. Take a company with a turnover of £1 million, employing a lot of people, all of whom pay their PAYE and PRSI contributions, whose partners are paid a monthly salary on which they pay PAYE and PRSI. Their profit at present will be between 6 per cent and 8 per cent and 35 per cent of their turnover is being confiscated. The Minister informs the House that they will get back the difference if they have a very good accountant and provided everything is agreed with the Revenue Commissioners this time next year. I know firms who experience difficulty in submitting their accounts by the end of the year. We all know companies with vast resources in the State and private sectors which are not in a position to publish their accounts until very late in the year and sometimes not in the calendar year at all. Therefore, to tell people that they will have their money refunded if there is any excess payment is a bit of a joke and one that is not going down very well at present.

To revert to the point I was making — if one examines over three years rather than one year a balance sheet of a putative company with a turnover of £1 million, one will find that that company is permanently out of pocket to the tune of approximately £200,000, if they are a firm engaging in 75 per cent to 80 per cent State business. That is the kind of firm about which we are talking at present in the professions associated with the building industry. It constitutes a devastating imposition. I do not believe they will be able to carry the overdraft. Indeed I do not think they will get the overdraft. They will not get the money back; they will be on permanent loan of approximately £200,000 to the Revenue Commissioners if they have the kind of turnover about which I am speaking. That is why their staff are already on protective notice.

The other provision for rebate is what could be described as the hardship clause, because that is the phrase used in the Bill. That is extraordinarily loosely drawn. Everything must be to the satisfaction of the Revenue Commissioners. One does not reach first base at all unless a major proportion of one's business is in the public sector. The terms used are very loose. There is no attempt to closely define the type of company or person who can claim rebates on a current basis under the hardship provisions of the Bill. I hope I am not stretching the patience of the Minister or the House but I believe some of these sections were inserted to avoid a legal challenge. I have had some experience of legislation. I know how a Bill is begotten, born and eventually delivered into the House. I believe some of the concessions in this Bill are not provided to relieve hardship. Rather they are inserted deliberately to avoid a successful challenge in the courts.

If that is the thinking, the Minister would need to re-examine the matter. On the one hand there is a list of professions and on the other a list of State bodies who are paymasters, paymasters being instructed to deduct 35 per cent of any amount due to any of the professions listed. It is a crude enough instrument, its very crudity and simplicity probably protecting it from challenge to a large degree. In any measure such as this where assets are confiscated, where tax is deliberately taken which is not due, then certainly rebate clauses have to be introduced. Clauses to avoid companies closing down have to be introduced and be effective. I am also of the view that a very strong claim for compensation could be made that a minimum in respect of the interest on the amount of excess withheld should be paid to the professions involved. I would ask the Minister to have another look at this because, as at present constituted, it is a very crude tax and does not hold the possibility of working well.

There are other professions which will be affected, for example, doctors and dentists whose main work is in the public area. In many cases service will be diminished by this tax. For example, I cannot see what would substantially be a public health dental practice surviving when 35 per cent of its turnover is taken in this way. The tendency will be for many professions to concentrate in so far as they can on the private sector where there is no withholding tax and to pick up public sector work only when in need or in the absence of other work. The danger is that professionals working for the State will not get work elsewhere. In present economic circumstances it could mean that the State would have very good professionals but if economic circumstances were to improve these people would not be available to the State.

It has been openly stated by people in the legal profession that top-flight legal professionals will not be available for State work as a result of the withholding tax. I say to the Minister that Fine Gael have a commitment not only to the implementation of a budget which means they have certain targets but to the passing of the Social Welfare Bill and the Finance Bill but that was not an unconditional commitment. I ask the Minister to move amendments on Committee Stage which would remove the inequity and the injustice from this tax. Otherwise we will be forced to vote against the section.

I have already dealt briefly with the question of home loans. It is ironic that a budget and a Finance Bill which, in the Minister's own words, is the vehicle which delivers the budget propositions, should have included in it a number of sections which drive interest rates up while the economic strategy is to get interest rates down. You can argue that in the case of somebody who loses 10 per cent of his mortgage interest relief while his interest will not rise but his income tax will and he will end up worse off with less disposable income. To couple that with the proposal to increase taxation on the profits on home loans which the banks lend is very unfair, very shortsighted and is a mistake. The Minister, like any other Minister, said today that what we have here is the Bill which implements the proposals of the budget. However, the proposal to increase the tax on banks was not included in the budget and, therefore, it cannot be included in the Finance Bill for revenue reasons because it is not in the calculations. The Minister did not introduce this tax to get more money——

Mr. McDowell

To satisfy building societies.

Mr. Noonan

(Limerick East): If he had introduced it, it would have been in the budget; it would have been announced here and it would be a slightly different story. Between the day of the budget and last week the lobbying was very strong. There is now a tilt on the pitch and there is a team who are expected to play uphill again. If we are to use the imagery of level pitches, I do not mind whether the banks play uphill or downhill or whether the building societies play uphill or downhill. I am only interested in the person who takes out a loan. If the Minister wanted to do something for the building societies, why did he not give them a break in the Finance Bill? Why did he not let them apply a credit at 50 per cent rather than 35 per cent if that was the intent? Instead of that, the banks are putatively disadvantaged but, of course, they will pass it on.

I would like to put another proposition to the Minister and it is important in the context of what I already said about interest rates. I do not believe the banks will pass all of this on to people who have mortgages. If they were simply to apply this to new loans they would go out of business. It is difficult to get a figure on this but if banks were to apply the whole economic cost to new loans it would mean an increase in interest rates of between 3 per cent and 4 per cent. If they were to apply it across their portfolio of loans in the home loan sector obviously that figure would be reduced to 2 per cent or 2.2 per cent. The banks will either increase mortgage rates slightly, as the Bank of Ireland have already done by increasing their rates by three-quarters of 1 per cent or, alternatively, they will hold their rate on the basis that interest rates will drop anyway. To hold rates at a time of dropping interest rates is as good as an increase. The banks will go beyond that and spread their losses over the sector. The Minister will find that the measure which he has introduced to help the building societies will act as a brake on interest rates on loans in the very area where he wants a reduction, in the area of investment, wealth creation and job creation. The banking sector will not give up the lucrative home loan market. They will not put themselves out of business. They will spread the penalty across their whole portfolio of loans. The Minister has cut a stick with which to beat himself.

I would like to examine the area of corporation tax. I welcome very much the Minister's statement that corporation tax will be subject to a general review. That is very important. There are notional rates which apply at present and, as I said already, only a small number of companies in the service sector actually pay the rates. I am concerned about the piecemeal extension of the 10 per cent corporation tax which applies to manufacturing companies, to new areas of activity.

The Minister knows the normal rate of corporation tax is 50 per cent and the effective rates are much lower than that. On average the actual corporation tax paid in Ireland represents only about 15 per cent of gross taxable profits. Why should we have a 50 per cent rate of corporation tax with a mass of reliefs if the effective rate is 15 per cent? That should be examined. There is also the 10 per cent rate which is the most significant special rate and which applies to a corporate income by and large with regard to manufacturing companies and to a range of other activities. The Minister and many Members of the House are aware of the full range of these activities. They include certain service activities in Shannon Airport and certain computer services — for example, data processing and software development. It also applies to fish farming, mushroom cultivation, repairs carried out within the State to a ship wholly owned by persons not ordinarily resident in the State and also to certain design and planning services carried out in the State in connection with chemicals, electrical works and civil and mechanical engineering works executed outside the territories of the member states of the European Communities. We also know there is a commitment that the rate will apply up to the year 2000. Under section 39(a) of the Finance Act, 1980, the Minister can designate certain firms in the Shannon region to qualify for this percentage rate also. What the Minister has done here is to simply extend the Shannon régime to the Custom House Docks.

I would like to put down another marker here. The piecemeal extension of the 10 per cent rate is going to cause difficulties with our partners in the EC, and particularly with the Commission. When I was in the Department of Industry and Commerce there was a debate emerging in Europe on aids to industry. The general theory was that the centre was wealthy, that the golden triangle could resist the winds of market forces and that wealth could be created in the centre of the Community without State intervention. The notional policy was that you help the periphery by low tax régimes and grants because of the disadvantages of being on the periphery — the west of Ireland, Ireland as a whole, or Sicily — but that is not happening any longer. Now, the Mezzogiorno has been defined to extend into the more fashionable suburbs of Rome. Because of the decline in traditional industries, places like the Ruhr Valley, which we learned in school was the hub of European industry, are getting significant grants of 26 per cent or 27 per cent. They do not work on averages in Europe. If we worked on averages the grant rate might be 50 per cent or even 32 or 33 per cent, but they work on the maximum.

What has happened is that the system of a State spending taxpayers' money to attract industry to a deprived area of the Community is beginning not to work because as much, if not more, is being put into developed areas of the wealthy countries. I believe the debate which has already started will hot up in 1987 and 1988. In that context Ireland can gain certain advantages but there are problems as well. It is very difficult to argue that as an economic region the capital city is the disadvantaged part of the country.

Under this proposal the Customs House dock site will have the lowest tax régime in the country — the 10 per cent rate on manufacturing industry extended to the services, and the rates remission which was introduced in last year's Finance Bill. This means that through a combination of local taxes and corporate tax it will have the lowest tax régime in the country. That is fair enough in one sense, but another principle of the encouragement of industry is this: one should help communities rather than regions. The EC schemes are to help the people living in the region, not the region itself. The people living in Gardiner Street and Sheriff Street flats are not the people who will benefit from a financial service industry in the Custom House docks. Therefore, it will be very difficult for the Minister and his officials to go to Brussels and argue it is the people in the inner city of Dublin who are being helped because obviously they are not. I think it is dangerous to continue to extend the 10 per cent régime. We risk losing not only the level of grants which we apply to industry but also the tax régime for the better off parts of the country, and especially the Dublin area as a whole, if we push this too far.

I have no objection to the individual elements of what the Minister has done. I believe the 10 per cent régime for financial services can be justified and the 10 per cent régime for the new trading houses is a good idea. I will come back to that in more detail on Committee Stage because, as drafted, it is extraordinarily loose and it would be possible to drive a coach and four through it. I wonder what regulations will prevent somebody with a warehouse, having appropriate documentation, repackaging imported products and re-exporting them, claiming the 10 per cent régime? It will be extremely difficult to administer this. As a concept it is a good idea and is in line with what many of us have been saying, including the Minister, this is, that we are weak in the marketing area and if we had specific trading firms they might enter the marketplace, purchase Irish goods wholesale and use their expertise to sell them all over the world, and particularly in the Community.

To return to the financial services, a second difficulty arises, and the Minister is probably aware of it. In my time as Minister for Industry and Commerce a significant American finance house was interested in setting up a financial service enterprise in Dublin. It was possible, by Government decision, to indicate that the 10 per cent régime would apply, even though the enterprise was in Dublin city, but they had problems with the cost of telephone calls to England because they were competing with a British location which could provide domestic calls over the same distance at about 10 per cent of what it would cost out of Dublin. The Dublin call was an international one while the British call was domestic.

When it comes to the transmission of voice rather than data, our telecommunication costs are completely out of line with what is going on in western Europe and particularly in the United Kingdom. The negotiations were coming along nicely and the IDA were doing a good job, but it was put on the back burner, and it took us two weeks to find out why. The 1986 United States Tax Reform Act had become law. It changed corporate tax and individual personal taxation and also changed the treatment of taxation of finance houses with offshore subsidiaries. The new code would require the United States parent company to pay tax at the standard rate of United States corporation tax of 34 per cent. There is something called the sub-part F provisions and overseas subsidiaries would have their earnings subject to the 34 per cent tax rate, whether those earnings were remitted and then credit would be given for any tax paid in the country of location. Up to now the 10 per cent tax régime worked well for manufacturing industry and attracted many offshore companies, a significant number from the United States, but it was not possible for these companies to repatriate their profits directly. Frequently they repatriated through plant in another country which was not profitable or which had very significant start up costs.

Maybe I am taking the long way round but what I am getting at is this: the proposals in the Bill is that we apply the 10 per cent régime to financial services which would set up in the Custom House Docks. As I understand it, the target market to a large extent would be American banks, American financial institutions and American stockbroking firms. They would locate there and use our excellent telecommunications, even though the costs are high, to trade on the London market. The problem with that proposition is that the 10 per cent is no longer an advantage because regardless of whether it is in Chicago, New York, Boston or Dublin, if the American unit makes a profit it will have to pay tax at 34 per cent. An American bank, located in the Custom House Docks site will pay tax at 34 per cent as if it were at home. Therefore, the carrot of low taxation does not apply to American companies. If an American bank or stock-broking firm want to avoid the high rents charged for accommodation in London and high salary rates, I cannot understand why they would not locate in Edinburgh or Bristol. The British rate of tax is 35 per cent but they would pay 34 per cent here. If they paid 10 per cent to the Irish Government they would get that as a credit.

The proposal for financial services in the Custom House docks site has gone off at half cock. It will be extremely difficult to recover it unless the Minister moves very quickly. It will be very difficult both in law and in practice to have a 10 per cent rate for the docks site while companies providing the same services located elsewhere will be subject to a 50 per cent rate. For example, how do we tell someone located in Dame Street who is trading in futures that he will have to pay at the rate of 50 per cent while a person located in the dock site will only pay 10 per cent?

It was thought that only manufacturing industry engaged in export was subject to the 10 per cent rate. That was the original intention but it was impossible to confine it to one section of the industry. All manufacturing industry is now taxed at the 10 per cent rate. The Minister should look at the whole proposal again because we cannot become involved in promoting the Custom House docks site internationally as a financial centre unless we have the full package in place. I fear the risk of a major failure to attract appropriate investors to the docks site.

We have double taxation agreements with 19 other countries. There is increasing pressure in negotiating double taxation agreements to include obligations regarding exchange of information. We need not look any further than the agreement we have with the UK to verify what I am saying. The Minister will have to look at the areas of secrecy and confidentiality. He will have to legislate before the State agencies launch forth to sell this concept internationally. I do not believe that the 10 per cent tax rate is a sufficient magnet any longer to attract in US companies. It may be argued that it might be possible to attract in financial services companies and banks from Europe. The main concern will be to prevent people who trade in the docks site from becoming involved in the domestic market. A symbolic fence will have to be erected to prevent them from taking deposits, making loans or carrying on many transactions in IR£. There will be difficulties with exchange control and with the Central Bank's licensing system. The Minister said that the banks have the power, by means of licence, to provide a regulatory environment. I question whether they have the power to apply one set of criteria in one instance and a different set in another. At the end of 1988, the Central Bank will find it impossible to discriminate against a Luxembourg bank or a German bank setting up in the Custom House docks site. There will be enormous difficulty in trying to confine their activities to the areas of trading we wish to confine them to.

As politicians, we pick up bits of information about finance, industry, law and so on. I do not have any qualifications but as I understand it the whole basis of banking confidentiality is based on contract law. If the bank breaks its confidentiality with you, you can sue them for breach of contract. However, there is no specific legislation, such as a banks secrecy Act, which protects the secrecy or confidentiality which exists between banks and account holders. In the absence of such legislation, I doubt if Dublin will be a serious competitor with Switzerland, Luxembourg or New York. I would like the venture to be successful because it would be a great boon to Dublin.

Shannon enjoys a 10 per cent tax regime already. Companies which satisfy the Minister for Finance can be licensed to operate in Shannon and enjoy the benefits of the regime. I hope we will not see an example of displacement economics as a result of the new centre. There are certain attractions in any capital city and I hope the intention of those who are pushing the scheme the hardest is not to displace economic activity from one part of the city to another or to displace it from Shannon to the Custom House Docks Site. I do not want to read in the newspapers that GPA are thinking of moving to Dublin. There will be no benefit to the economy as a whole if we become involved in that kind of displacement economics. I do not believe that the Minister intends that this should happen. I will return to that on Committee Stage because I am not clear how the regulatory scheme will operate and what holds are on the Minister or will be on his successors in the licensing and sanctioning of companies which operate on the docks.

I dealt at length with the provisions of the Finance Bill and I will be elaborating on many of the points I made on Committee Stage. Fine Gael, obviously, would like to see a Finance Bill passed. We gave a commitment and we have fulfilled it in trying circumstances since the change of Government. The Government's economic policies, in so far as they exist, are too narrowly based. A combination of activity and aspiration to reduce interest rates coupled with a strategy in a number of sectors will not move the economy. It will contribute to the movement but as things stand I predict that the Minister will be a disappointed man this time next year.

In my view the Minister will have to widen his focus and look immediately at personal tax rates. If that requires bringing in another Finance Bill in the autumn he should do so because if the Minister leaves this until next year's Finance Bill he will not have matters in place soon enough to inspire confidence. If a structure was in place now which pointed towards serious tax reform with its consequent tax reductions for the over-burdened sectors it would inspire confidence even if no immediate benefit accrued. I appreciate, as much as any Member, the constraints that were on the Minister and the lack of scope available to him but he has missed an opportunity.

I welcome the Minister's commitment on corporate taxation and I hope that the report on that will be issued soon. I welcome the initiatives taken in the Bill in regard to trading houses, financial services, the extension of the business expansion scheme, in regard to the tourist industry and, as we had committed ourselves, the 10 per cent rate of corporation tax to shipping activities. That proposal was put forward by Deputy Jim Mitchell when in office. I deplore what the Minister is doing to mortgages. It is running counter to his overall strategy. To put it bluntly, a commitment to a particular group, the building societies, has brought about an inherent contradiction of policy in the Finance Bill. The whole basis of the Minister's budget was to get interest rates down but he has brought in a proposal which at a minimum will act as a brake on their reduction and at a maximum will tend to force rates up.

I should now like to deal with the question of farm tax. In my view that was a good tax which helped people in intensive activity. It gave a great incentive to work hard and to produce and it is a pity that the Minister is abolishing it. The last Minister for Finance, Deputy John Bruton, in November announced a relief for farmers who were hard pressed and liable for that tax but the Minister appears to have dropped it and I appeal to him to reintroduce it. There is little or no cost involved and the relief was welcomed in the wake of two very bad summers. The liability still exists for farmers. The relief was committed by the previous Minister.

I am not going to advise my party to oppose the Bill on Second Stage but I will be proposing amendments for Committee Stage and I will expect the Minister to accept some of them. I do not believe the Minister is stubborn for the sake of stubbornness.

Mr. MacSharry

I am not stubborn; I am realistic.

Mr. Noonan

(Limerick East): The signals the Minister gives on occasions indicate the contrary. I do not think the Minister is stubborn by nature or conviction. There are two styles in handling legislation in the House. There is the open accepting style where Ministers will accept amendments if they improve the Bill. There is also the other style where the individual thinks he has dropped one of the tablets of stone even when he defies logic by standing ground on the one spot and making no concession whatever. In my view the Bill can be improved, particularly in regard to the withholding tax. I expect the Minister to reflect on the debate between now and Committee Stage and introduce appropriate amendments. If he does not do so I will be proposing amendments on Committee Stage and if they are not accepted by the Minister Fine Gael will oppose certain sections of the Bill.

Mr. McDowell

I move amendment No. 2:

To delete all words after "That" and substitute the following:

"Dáil Éireann notes the contents of the Finance Bill, 1987 as presented, but conscious of the failure of the Bill:

(a) to provide for reforms in the system of taxation;

(b) to alleviate the tax burden on workers;

(c) to halt the growth in the burden of income tax;

(d) to amend the provisions of the recent financial resolution providing for a withholding tax on professional fees paid by the State;

declines to give the Bill a Second Reading.".

This Bill, as the House is aware, gives the House an opportunity to review, alter, amend or improve the structure of our taxation system in each financial year. It is, therefore, an occasion when the House should pause to reflect about the system of taxation we have. I do not accept that the Bill is the mirror image of the Minister's speech on the occasion of the budget. It is more than that; it is the opportunity given to the House each year to effect major reform in the taxation system. It is on the latter basis that I am addressing it and moving my amendment. It has been said about the party of which I am a member that it was founded to challenge the existing fiscal arrangements which obtain here. I have no shame in saying that on this occasion I am judging the Finance Bill not simply as the vehicle for the Minister's budgetary policy in the short term but as the occasion on which I as the spokesman on finance for my party, am asked to say yea or nay to the existing taxation system and to vote "yes" or "no" to conserve it in its present form. On that basis I have no hesitation in saying that the Bill is gravely deficient.

It is not so long ago that 500,000 people marched through the streets of Dublin — hundreds of thousands of others marched through the other cities and towns — to clamour and protest for tax reform. It is not so long ago that they were given a commission in order to stop the clamour and to assure them that the House was at least in principle ready to contemplate fundamental reform of our fiscal arrangements. It is not so long ago that the last report of the commission, the fifth report, was made available to the House. However, it is manifestly clear that the five reports issued by the commission made not the slightest impression on the will of the Legislature to initiate change in our fiscal arrangements. Our taxation laws have not become simpler but more complex; have not become fair but more unfair; have not become less of a disincentive but more of a disincentive; have not become more socially just but more socially unjust since that agitation and the promises of reform. Without being over-dramatic, I say that is a scandal. It shows that this House was willing to buy off popular feeling in the area of tax reform by a gesture but was never really willing to address the issues raised and the issues acknowledged to be valid when the commission was established.

I fully appreciate that anyone in the position of the Minister today is in effect fighting a battle of containment. In many respects because the country is in financial crisis he is involved — without any disrespect to his office — in a ministry of crisis management. I appreciate that it is difficult, especially in the context of changes of Government, for the necessary head of steam to be built up in any political organisation or Government to initiate the thought, debate and the will to act for radical tax reform. However, taking all those factors and mitigating circumstances into account, I look on the Bill as simply a statement in relation to the tax regime operating in this country. It seems, on the face of it, to be a statement that there is no need for radical reform. The acceptance of the need for reform is not implicit in the Bill and nothing said by the Minister — with the exception, as Deputy Noonan pointed out, of the corporation tax related remarks — suggests that there is any strategy, philosophy or overall view as to how our taxation system should be reformed in future.

The Minister pointed out that there were many conflicting views as to how tax reform could be brought about. He also indicated that it was his intention to include the whole area of tax reform in a process of negotiation and consultation with the groups which he terms as the social partners. I have a deep dislike of the phrase "social partners" because on many occasions meetings of social partners are meetings of unrepresentative sections of economic and social life without the clout they purport to have, without the representational value they accord themselves and without any real partnership except a partnership to conserve and to further their own sectional interests. I have grave misgivings about meetings with the social partners to evolve a tax philosophy because it comes back to the point which Deputy Noonan made that it betokens a lack of direction, a lack of philosophy and a lack of commitment to taking any particular road in the area of tax reform. If you have to go to the social partners to get their acceptance of any tax reform programme, I can promise the Minister that his tax reform proposals will not be radical or what is required; they will be another mish-mash of consensus, compromise politics with very little to offer this country in terms of breaking out of what Deputy Noonan and his party referred to as the vicious circle we are in.

What is missing in this debate is an indication from a new Government, who had been kept out of power for four years, with plenty of time to think about their attitude to taxation, that they have possible solutions but this Bill does not reflect any thought, merely crisis management. Although it is dogged in pursuit — the Minister is to be given some grudging admiration on this account — of his budgetary goals, he has not lifted his eyes to see where the country will be going in five, ten or 15 years, and what the tax implications of today's policies will be in the future.

Things are occurring in the context of the European Community and the Single European Act so recently ratified which will have such a profound effect on the taxation climate in this country that we will do very badly by ourselves, younger people and children growing up if we ignore the implications of what we have agreed to. The co-ordination of indirect tax rates implicit in the Single European Act will have profound consequences for this country. In the Minister's speech there is not even a hint that these thoughts are in the back of his mind in planning the short, medium or long term taxation strategies of the Government. Whereas I have already conceded that this Finance Bill was born in the early days of a Government, no Government introduces more than three or four budgets, the average is less. Recent experience suggests that it is far less and political pundits are far less optimistic than to suggest that this Government will introduce three or four budgets. It is relevant, therefore, to ask when the process of clearly spelling out a direction on tax reform will commence. That is the Minister's duty and he should not shirk it. It is one which will not be well started if he hopes that it will emerge from the meeting to which I referred earlier between himself and the social partners with a view to attempting a national consensus.

There are dramatic implications for this country in the co-ordination of indirect taxation in terms of the tax yield, the goods and services which will be subject to indirect taxation and in terms of the budgetary implications of that co-ordination. It is worth while stating that no serious political thought has gone into the direct taxation implications of the Single European Act precisely because, in the context of the recent referendum, there was so much misrepresentation of the subject that eventually everybody decided not to discuss it or to think about it. However, it is a real issue which we will have to face up to in the long term.

Our system of direct taxation in terms of income tax is fundamentally unjust, anti-incentive and geared against people taking an active part in the economy. It is anti-participative and that is my objection to the present system. I do not fall into the ideological school of believing that low taxation must be ruthlessly pursued for its own sake regardless of the consequences but the Minister's speech grudgingly admits that the rates of taxation in this country have reached, in many areas, the point of diminishing returns. I believe that we have long since passed that point in relation to direct taxation of personal income. The combination of PRSI and PAYE is a major disincentive to participation in the economy by the great majority of the people. The time has come to stop talking about PRSI as a social insurance system and to admit that it is taxation, nothing more and nothing less, because it has no distinguishing features to set it apart from a direct system of taxation. It is not, in any real sense, a system of insurance as it originally purported to be. Combining PAYE and PRSI, seeing how they work and how they discourage people's willingness to work, to take risks and to work harder and longer have such a huge disincentive effect that they cry out for radical reform.

I also believe that the report commissioned from the Commission on Taxation was one which sought for the first time to radically reappraise how we tax ourselves. There are two schools of thought. There is a significant school of thought which says the solution offered by the Commission on Taxation was simple, easy to understand and attractive but was fundamentally unrealistic. There are many people who contend that the report of the Commission on Taxation should not be accepted and never implemented and that the wide variety of tax breaks, allowances and incentives which exist in the present patchwork quilt taxation system is preferable, more socially flexible and economically adaptable than what was proposed by the Commission on Taxation.

I disagree with those views. The thrust of the report of the Commission on Taxation is correct, that simplication of the tax system and the system of allowances, the removal of anomalies and the general thrust towards a proportionate system of taxation rather than a progressive one is correct, manageable and achieveable with radical political will. It is on that basis that I find the Finance Bill so disappointing. It contains nothing in terms of adding extra simplicity or fairness to our system of taxation. In fact, as Deputy Noonan has pointed out, this is a very short Finance Bill and a rather bare one. He classified it as "mean minded" and I have to agree with him that there is an element of meanness in it. There is nothing in it to unravel the injustices of the present taxation system as they affect ordinary people. This Finance Bill is presented at a time when taxation remains an issue. Of course people are aware that taxation and public spending are linked and they are aware that you cannot offer tax bonanzas which cannot be financed but there is a growing conviction that we will never have economic progress until taxation is faced up to and tackled and until radical reforms are introduced.

I agree with Deputy Noonan entirely when he says that a strategy based on interest rates and which totally ignores the need for tax reform, tax incentives and economic participation is walking on the thinnest of international financial ice. There is no sense in which it is safe to assume that none of the circumstances which Deputy Noonan referred to will not eventuate and thus cause this policy to fall down in a shambles. Deputy Noonan pointed out correctly that all these factors lie outside the province of any Irish Government because we are a small open economy but what does lie within our grasp is taxation reform. It is sad that this annual occasion on which we are supposed to review, amend and reform the taxation system seems to be one where there is nothing in terms of taxation reform.

Vague promises were put in the Fianna Fáil manifesto before the general election and they have been repeated here in an even more vague way by the Minister, that it is his strategy to go as quickly as he can to the stage where two-thirds of taxpayers will pay tax at the standard rate but that means one-third of taxpayers will pay above the standard rate. At present, about 43 per cent of taxpayers pay above the standard rate. Therefore, Fianna Fáil's plan is to change the status of 10 per cent of taxpayers from being above the standard rate to being standard rate taxpayers. There are echoes of grandeur in saying "let us bring two-thirds of taxpayers on to the standard rate" but I put the reverse side of the coin. The Minister in talking about changing the status of 10 per cent of taxpayers as his ultimate long-term goal is setting himself a very low and unacceptable target and one which no wide section of the public would regard as a worthy aim in terms of radical taxation reform. To say that his long-term goal in relation to tax reform is to change the status of 10 per cent of taxpayers is a laughably small target.

I will go one step further to say that the Minister's budget by failing to change the tax rates or to index them in any way has meant that the number of taxpayers paying above the standard rate rose from either 42 per cent or 43 per cent to 45 per cent or 47 per cent. Far from going from the situation where one-third of taxpayers will be paying above the standard rate, the effect of the budget is to bring us inexorably closer to the stage where one-half of taxpayers will be paying super tax or surtax. This country cannot afford to suppress its enterprise, its will to work and its incentives to participate in the economy by having such a vicious system of taxation, where half the people are paying super tax by any other country's standards, not to mention the burden PRSI is putting on employment and on those participating in the economy. We cannot afford to continue in this way.

We live in a world of mobile capital and, unfortunately for so many young Irish people today, mobile labour, mobile resources and investment. We are entering into a completed European internal market in which all of these factors of production will be as free to move, with the exception of land which is increasingly becoming unimportant in the development of the European Community, to where they are best remunerated. This country will be putting its head in the sand if it believes we can have as a long-term tax target the one adumbrated by the Minister which is to change the status of 10 per cent of taxpayers or to allow by fiscal drift the number of surtax payers to increase to 50 per cent. Truly, we have come to the stage, and I am not speaking on a partisan basis, where in successive Finance Bills — long before I was in the Dáil and that is not to exonerate myself from the blame — this House, the political system and all the political parties have imposed surtax on the people and have done so in a way which destroys incentives. On the occasion of any Finance Bill nobody has stood up to protest against that process, to say it is wrong, that we are going in the wrong direction and that our taxation system is unfair and needs radical change. I am doing so now and that is why I tabled the amendment which I moved.

The Bill contains a number of features of which I approve and of which it would be hard to disapprove. In so far as it is possible within the European framework to extend the 10 per cent taxation regime to areas of the economy where growth is likely and where revenue loss is unlikely that should be done. I accept Deputy Noonan's reservations and the marker he is putting down that this process cannot be undertaken without regard to its consequences. It is entirely logical to extend the 10 per cent rate of taxation to the trading houses as provided for in section 27 of the Bill.

Although it sensibly puts private export promotion into a favourable category, I share Deputy Noonan's misgivings about the phraseology of the section. On my reading — and I am glad that Deputy Noonan takes the same view — one could import things tomorrow and re-export them the day after and stay perfectly within the meaning of the section. I do not know what the economic benefit to this country would be if goods were piled up here and sent out with little shamrock stickers and people could pay 10 per cent on the profits that they undoubtedly would seek to engender in their warehouses in Ireland. It is a badly drafted section but the principle is a good and acceptable one. I do not have any argument with that, as long as we do not push the principle so far as to end up exhausting the patience of the European Community and find ourselves in trouble.

It is worth while saying that the provisions of the Bill which extend the 10 per cent taxation regime to tourism on the same basis and subject to the same qualifications are desirable, supportable and good in themselves. Tourism needs a tax break but it does so in the sense that everybody needs a tax break. I do not believe that the principles which apply to the tourist industry are so radically different from those which should apply to, say, the service industry. The service industry seems to be the only one now subject to 50 per cent corporation tax and in diminishing proportions as all these exceptions creep in. On that basis there is wide need for a radical reappraisal of the corporation tax system to scrap many of the allowances, to introduce as low as possible a standard rate and by that means to extend to all areas of the economy the great advantages which these sections want to focus on smaller areas of the economy.

I go to the provisions that the Minister has introduced in this Bill in relation to the Custom House docks. When first I heard of this scheme I was a little cynical, on the basis that I could not see why Ireland was to be considered a more suitable place to locate these service industries than other places in Europe. It seemed to have natural disadvantages. Subject to what has been rightly said about the distortion of the European market which these measures constitute and their lack of local and regional effect, which I concede must be acknowledged here, it seems to be legitimate to try to place in a city a critical mass of services with the requisite buildings, telecommunications and communication facilities and the available labour force. There should not be the displacement effect which Deputy Noonan talked about in relation to industries such as GPA located at Shannon. There need not necessarily be that effect. If Shannon was a proper place for more of these industries to locate, I should imagine they would have done so and there would not be any huge attraction to move to Dublin, especially since the particular company mentioned have an immense local commitment to the area. I ask him not to feel that this represents a threat to the Limerick area.

The most controversial feature of this Finance Bill is undoubtedly the one on which I have spoken in public on several occasions, which relates to withholding tax being placed on professional fees paid by various State and semi-State bodies to people providing professional services. I want to follow a fashion in this House and lay down a particular form of marker which the Taoiseach specialised in when Leader of the Opposition. I believe that the tax is unconstitutional. I shall tell you why. It is worth while stating today because it corresponds to one of my objections to it. For the first time in Irish fiscal history, a system of taxation of an extremely brutal kind is being put in place. It is not unfair to call it brutal. The effect of the withholding tax bears no relation to the circumstances of the individuals, companies or businesses which it affects. It is very similar in effect to the status of an individual who starts his first PAYE job and is taxed with emergency tax. That is done solely for the purpose of getting him to come to grips with the taxation system and become involved in the ordinary way.

This taxation system, for the very first time, constitutes a deliberate effort to take tax from people without any reference to their likely tax liability. I ask the Minister rhetorically why did he not choose 25 per cent, 20, 10, 40 or 60 per cent or whatever figure came into his mind? The 35 per cent rate bears no relation to any tax amount except the standard rate of income tax. The standard rate of income tax has never been applied on any occasion to turnover or gross income, except in the case of gross income of PAYE workers who are debited with emergency tax. To hold out the fact that PAYE workers pay tax each week as a justification for imposing this withholding tax in totally different circumstances at the 35 per cent rate is utterly devoid of rational content.

The Supreme Court will not strike down the tax on the basis that it is irrational. If that were the basis on which taxes were struck down, we would have no taxes in this country because our tax system is entirely irrational. The court will pay particular attention to section 18 of this Bill which on two separate grounds permits interim rebates of this withholding tax to be made. I have no doubt that the challenge to this system of taxation will focus in on section 18 as at present drafted. What the court will be told — and I think correctly — is that there is a two-tier system of hardship rebates; first, the inspector is entitled to rebate, remit, or refund on an interim basis tax withheld where certain criteria apply, one of which is the fact that the majority of a person's taxable income has to come from withholding sources and his tax affairs also have to be in order. Then there is this added ingredient that the inspector has to arrive at the view that the withholding of tax without interim rebate would create undue hardship for the individual or company concerned. Unlike Deputy Noonan, I believe that is not a fair system of taxation and it will be interesting to see which of us is right.

Although the hardship provisions may have been intended to copperfasten this tax and make it safe from constitutional challenge, they would be the weakness in this taxation system. The Minister is proposing to introduce here for the first time a discretionary tax which depends for its effects on the individual view of an inspector of taxation. For the first time an inspector can alleviate the effects of a system of taxation solely based on subjective considerations. Doubtless the Revenue Commissioners in their wisdom will lay down guidelines as to what constitutes hardship but if they do they are running into another legal problem, in that, in effect they are legislating for how the tax system is to work. If the Revenue Commissioners lay down criteria which are to apply as between for instance Deputy MeDowell and Deputy Desmond and if I am entitled to a refund on one basis, is Deputy Desmond to be entitled to a refund on the same basis and are they to have legal effect? Are these criteria to be available to everybody as a right, and if they are, have we not allowed the Revenue Commissioners to make up the law as they go along, to vary it as they wish and to apply it where they will. The Supreme Court will strike down that Bill on that basis.

Later on in section 18 (5) of the Bill, we have the extraordinary situation that even when the criteria which an inspector is required to find present before he can exercise his prerogative of mercy, are absent, the Revenue Commissioners can override the whole thing completely and can excuse somebody completely from the tax on the basis of hardship. According to section 18 (5) the Revenue Commissioners are entitled:

(5) In circumstances where the specified person claims and proves the presence of particular hardship, the Revenue Commissioners may waive (in whole or in part) one or more of the conditions for the making of a refund specified in this section and, where the Revenue Commissioners so waive such condition or conditions, they shall determine, having regard to all the circumstances and taking into account the objects and intentions of the previous provisons of this section, an amount of a refund or a further refund which they consider to be just and reasonable.

On the matter of discretion and subjective considerations it is open to the Revenue Commissioners to fully waive the entire amount of the withholding tax and to make 100 per cent rebates as they wish based on their view of hardship. The Supreme Court will say that that offends the Constitution on the basis that it is not open to the Government to delegate the imposition of taxation or to delegate extensively the manner in which it affects individuals or to permit a body of people such as the board of the Revenue Commissioners to determine how a tax will take effect.

That is a fundamental flaw of this tax. I suspect that Deputy Noonan is right in saying that this was put in to try to save the measure from being regarded as arbitrary and confiscatory. It will now open the tax not merely to the charge of being arbitrary and confiscatory but to the charge of being repugnant to the basis of our Constitution in that this House is the House which decides who will pay tax. This House is entitled to legislate for taxation, but it is not entitled to give to somebody else a discretion as to how tax will fall on one set of shoulders as against another.

The reason that that has happened in this Bill is that it is fully conceded that this is an unfair tax and that it will cause hardship. Section 18 would not be there if this tax were not going to cause hardship, it would not permit the inspector to make rebates in these circumstances if this tax was not going to cause hardship, and it would not allow the Revenue Commissioners to effectively waive the whole of the tax in cases of hardship unless that hardship were a real factor. The effect of section 18 is to damage this withholding tax below the waterline in a way that will cause it to sink, because it is to admit that it is harsh in its effects, crude in confiscatory powers and it is to attempt to get around that situation by providing for a discretionary rebate system. By the very token of a discretionary rebate system, it means an unequal and arbitrary power given to uncontrollable people in relation to the manner in which this tax will take effect. That will be held to be unconstitutional.

The Taoiseach as Leader of the Opposition laid down constitutional warnings. I am laying down a very specific constitutional warning today. It will be interesting to see whether or not I am right. This is not only unconstitutional, but a wrong form of taxation. This House should never delegate to the Revenue Commissioners the functions which this Bill in this section proposes to delegate. It is wrong in principle.

Mr. Noonan

(Limerick East): It is your legal reputation you are putting on the line now.

Mr. McDowell

It is wrong that we will not take responsibility for the harsh measures we are enacting. It is wrong to delegate on a subjective basis, to remedy what we consciously accept is likely to be an injustice. There has never been a taxation system which permitted taxation of this kind to operate in this way.

Tomás Mac Giolla

Water charges.

Mr. McDowell

Local taxation is an entirely different matter. Legislation permitted discretionary waivers in local taxation. The waiver system was always seen as a concession, but on this occasion it is an intrinsic part of the Bill and it will be the undoing of this section. I may be wrong and perhaps Deputy Mac Giolla is right, but we will see.

It is wrong also on the grounds set out by Deputy Noonan. It is quite clear that it was conceived by people who did not take into account when they originally framed it the effect it was likely to have and the vast variety of different effects it would have on different classes of people. I know that the effect it will have on lawyers is not likely to be as serious as that on architects, engineers, people associated with the building industry and people who have a corporate existence and who as Deputy Noonan pointed out are paying tax already on a weekly or monthly basis through the PAYE system. I know it will have an unfair and detrimental effect on them and that it is not conceived of as a withholding tax for the purposes of the Fifth Commission on Taxation report. If one read that report superficially one might get the impression that the Commission on Taxation suggested that withholding tax should be applied as much as possible, but they gave special reasons why it should be done — to counter evasion, to minimise cost of collection and things like that. This tax regime is not being imposed for any of those purposes but only to bring forward into this year's Government's accounts a cash flow effect of £25 million. It is not there to prevent people fiddling the tax system, because no professional person or company could possibly hope to evade tax in relation to moneys paid by the State to them. Neither a barrister nor a solicitor could hope to hide from the tax authorities the fact that they have been paid a sum by the State in any given year. Those things are impossible to achieve even by the most skilled evaders. This tax was devised to have a cash flow effect which was to be achieved by plundering the working capital of professional bodies and bringing it into the hands of the Exchequer on an entirely arbitrary basis. That is the purpose of it. If the Supreme Court wear it, so be it, but it is not an attempt to improve the tax system but an attempt to plunder working capital because in the eyes of the Minister and presumably of the Department of Finance the working capital of professional firms constituted a fund of money which was open and vulnerable to this form of plunder. In the last analysis it will not turn out to be a fair tax.

It is curious that when you offer as an excuse that this affects the professions and that they are better off in some intangible way than, say, the PAYE sector you ignore the fundamental fact that they are better off in another way. They are people whose skills and services are easily made mobile and it is the professional people and people who are skilled in providing these services to the State who will have the greatest incentive now to move their location elsewhere, to join the great migration of talent, to go to England and set up there where no government would be foolish enough to introduce a tax regime as cruel and arbitrary as this. The Minister will be paying the dole for the cleaning ladies, the typists, the porters, the canteen and the tea ladies in the offices when all the professionals — the yuppies as they are termed — have gone abroad. When they are all in London the Minister will be looking at the mess they have left behind them, because an arbitrary and capricious tax system that is so unfair, unjust and so savage in its approach, has driven them out. The feeling of hopelessness, of being ground down by a Government who do not understand the effect of what they are doing in this plunder in pursuit of their working capital will drive these people abroad. I will be interested to see the effects.

I agree with Deputy Noonan that in other areas the services which some of these people provide to ordinary people will just deteriorate. I also agree with him that the services which they will give to the State will be diminished as a result and the price of services will go up. Ordinary people with their hard earned money will have to make up deficiencies in the working capital of these individuals if the Government are intent on plundering it. Is that a step in the right direction? Is that building a new and confident economy? Of course it is not. It is going in the wrong direction. It is easy when you see things entirely from a budgetary point of view and see this £25 million like Bugs Bunny with $ signs for eyes. It is easy to disregard what the ordinary laws of economics determine will be the effect of this tax, that is migration of talent, increasing costs and diminution in services. Those are the effects of plundering the working capital of companies. Any fool in a sixth year economics class in school can tell you that, but that point seems to be lost and people seem to think that this can be done without effect. The attitude is, "Just give me the quick fix of £25 million to bridge a gap in this year's budget."

If you bring forward taxation from next year to this year, then to achieve the same bridging effort next year you will have to bring forward more tax. You will have to extend this system further and further so that it becomes like a chain letter running wild in every direction in order to maintain its fiscal effect in the books of the economy. It is a temporary thing. It is a cash flow matter and it will not have an ongoing, beneficial effect for the State unless it is extended, and I notice the Minister is talking about extending it. I have no doubt it will be extended far and wide in various areas, but it will amount to putting the whole of the service sector on emergency tax and on that basis it is indefensible. It will have devastating effects in the short and long term on our economic life.

It is naive to think that people like me, barristers who are supposed to be the butt of all envy and so on and evoke no sympathy, are to be treated financially in the same way as a large company with 200 employees all of whom are on PAYE from directors down to the cleaning lady, and that the tax will have the same effect. Maybe some people will just take this and bear it, but the effects of all taxation are there to be seen and the iron laws of economics, of supply, demand and mobility, apply as much in this benighted country as they do anywhere else. Other governments do not do this kind of silly thing and why we decide to do it in the middle of a crisis defies belief. However, it is going to be done unless my colleagues on the left lift their fingers to stop it, and the damage done will be seen as a momument to inflexibility.

I agree with what Deputy Noonan said regarding the effect of increasing the tax rate on mortgage interest in relation to house loans. I have no doubt that when the history comes to be written it win transpire that the building societies in exchange for a quick reduction in interest rates were told, as Deputy Noonan so graphically put it, that the pitch would be tilted against the banks, and this all at the behest of the building societies, because this measure did not appear in the budget. It was not there for its revenue effect and is there now as a pay-off to the building societies for co-operation in what is generally seen to be a downward trend in interest rates.

I believe the consequences of this would be a matter of entire indifference to everybody in this House because in a sense the tax régime applying to deposits in building societies and banks and the tax régime applying to banks' home loans is so artificial it is difficult to work up any moral indignation one way or another on the matter. However, I share the moral indignation expressed by Deputy Noonan that when a change is made and when the tilt occurs the poor punter in the street has to make up the difference. It is never tilted the other way where the man in the street ends up better off. We always equalise things upwards, never downwards and against the ordinary man in the interest of the building societies. At the very least, the building societies as a group require, close scrutiny and reform and huge controls imposed on the way they operate internally. The have pulled the wool slightly over the Government's eyes and achieved a marginal advantage in their ongoing war with the banks for deposits and the like.

I was interested in what was stated here about confidentiality. I can see the reasons for confidentiality in relation to deposits. I wish somebody some day would have the moral courage to say what they are. Largely it is that people opt to pay tax at 35 per cent because they know they owe more tax than that. They do not want to disclose where the money came from or how they got it or whether it is subject to taxation at a higher rate either in interest or as a capital sum accrued for something else. Generally one must take the view in the long run that the confidentiality arrangements we apply to deposit interest reflect an institutionalised form of tax evasion and the practical consequences prevent any Minister from interfering with it. However, one lesson to be drawn from it is the fact that our taxes are too high and people are now involved in playing a little intellectual footsie with the Government which allows them to have total confidence and to be immune from discovery by the taxman when they pay deposit interest at the standard rate. It is another example of the exorbitant level of taxes and the Government's acknowledgment of that state.

This Bill represents the occasion when this House faces up to its annual responsibility for the system of taxation. The PDs oppose radically our present system of taxation. We disagree with it and disapprove of it. Therefore, it would be impossible for us, unless some huge national interest were to be served, to offer support for a Bill which even in its own terms does nothing to commence the process of tax reform but further worsens the taxation régime. It would be impossible for us to offer support in the absence of a clearly stated philosophy and programme for tax reform by this Minister and we have neither here today. We have no reform and no promise of reform. We have this bauble of 35 per cent tax for two-thirds of the people, but we are going in the opposite direction. It means little. It means a change in the tax status of 10 per cent for the taxpayers. It does not add up to a programme of tax reform. What the Minister has stated here as his intended process to proceed with tax reform — that is, involvement of the social partners — is so devoid of a chance or prospect of success as almost to make you want to weep with despair when you think how unlikely it is to be fruitful in terms of reform.

For all those reasons we propose the amendment tendered in my name, which is, to decline to give this Bill a Second Reading on the basis that it does not provide for reform of the system of taxation, does not alleviate the tax burden on workers, does not halt the burden of income tax which goes up 12 per cent this year, a 12 per cent increase in an already over-taxed economy. It does not make any effort to amend the draconian, harsh and indefensible aspects of the withholding tax which were set out in the resolution passed on Budget day. It makes no attempt to alleviate them or to take into account any of the representations made to the Minister. I say to the Minister that he can be obdurate he can be stone-like in his refusal to turn on this issue but I believe that the laws of economics, of supply, demand and mobility, of capital, labour and everything else will finally make the Minister into a King Canute, that he is attempting to direct back a tide, to order back the sea on this occasion. That is not possible in terms of taxation. The Minister should live up to the real implications of what the provisions of this Bill are likely to bring about. The Minister is not doing that. Therefore, regretfully we must move our amendment to decline to give this Bill a Second Reading.

Mr. Desmond

I shall confine myself to one broad comment, which is that slowly but surely, arising from the provisions of this Bill, particularly out of the budget strategy of the Minister for Finance — and it is very much that of the Minister for Finance and of the Taoiseach; I doubt if it is really of the rest of the Cabinet; it certainly is not of the rest of the Fianna Fáil Party — there has been a fundamental shift in public perceptions relating to taxation, public expenditure and the provision of resources for essential public services in our community. Slowly, and ever so slowly, we are undergoing a bit of political hygiene in this House and outside it, whereby the exalted promises of recent years and notably those of the last general election, are being shed. If I may borrow a phrase from Deputy John Kelly, the carbolic soap is being applied to the body politic. Some of the hypocrisy which the political parties attempted to foist on the electorate in relation to taxation, public expenditure and the provision of vital public services is being washed away. That is a very good thing. My wish is that the Minister for Finance will succeed in that exercise. I may differ profoundly with him as to how we should go about that exercise but my wish is that he succeed in it.

I found it excruciatingly depressing in the last general election going from door to door where Deputy McDowell's coligagues had been immediately before me, where the Minister's colleagues would follow me immediately——

Mr. MacSharry

Mine would not be let in there at all, they were away down the west.

Mr. Desmond

Those canvassers were saying income tax was going to be reduced, à la the PDs — what was the famous formula — from 53 per cent to 41 per cent to 31 per cent, a rolling-over manifesto the likes of which had never been seen before. People bought it. Deputy McDowell in Dublin South-East, Deputy Kennedy, and our fellow candidates in Dún Laoghaire convinced the people. I was assailed at the doorsteps by people saying: give us back our money, it is our money you have, we want our tax reduction. By God they have got a tax reduction. When the nurses were fired in Loughlinstown Hospital last week they knew what a tax reduction was, as five of them, PAYE workers, were exited out the door, temporary staff following them, when Monkstown Hospital closes — as apparently now it will.

That is the bitter harvest of that kind of politics, if one wants to be savage about the politics of the PDs which produced 14 per cent, a comfortable seat in my constituency, sophisticated and all as it is allegedly. It should be said that the Fianna Fáil Party went for the soft option as well. The Minister, on assuming the Finance portfolio, did not just put his foot down, he put his two feet down, his head as well, and he will have to keep it down for about three years to save his party from the kind of political cop-out in which they engaged in the course of the election. For the first week they said nothing, for the second they began to promise a reduction to the standard rate of taxation, by the third week they discovered that was untenable as a general thesis and, by the fourth week, they had an overall majority with which to bring the proposition through. That is what happened. In that sense — and this is of great importance nationally — there is a new climate slowly building up. Although some of us got a miserable 7 per cent national support, if one adds up the rest of the support on the part of those who would espouse us — although my colleagues in The Workers Party are very soft option people altogether, comfortable options, no such thing as a hard option there — one will see there was overall approximately 10 per cent support. Deputy Kemmy in his campaign in his constituency on the taxation front received about 10 per cent support, from people who said they were quite prepared to pay a reasonable level of taxation, which incidentally is not all that high despite all the comments of Deputy McDowell this evening. It is not true to say that half the taxpayers of Ireland are paying the surcharge rate. That is barrack room, High Court rhetoric of the worst kind and should not be visited on the officials of the Department of Finance, and certainly not on Deputies in this House. That is the kind of rhetoric that would have a judge promptly excusing a Deputy from the case. Slowly but surely we will boil down this debate to having a necessary level of taxation, a broadening of the taxation base, to provide sufficient resources for basic, essential public services whether they be in health, education or local government.

Mr. MacSharry

Hear, hear.

Mr. Desmond

I am quite critical of the Minister's speech. I rarely wish to be critical of public servants who draft speeches but this was a pretty banal effort. It was the first draft and it should have been sent back. Admittedly, two additional pages were included in an effort to justify the general approach. I will come to the detailed aspects of the Minister's speech tomorrow morning. I have no doubt that the Minister at this stage is probably relieved that we have come to the end of this section of the debate.

Mr. MacSharry

I am looking forward to it tomorrow.

Debate adjourned.