asked the Minister for Finance if his attention has been drawn to the anomaly arising from the budget whereby some 40,000 taxpayers who currently pay tax at 35 per cent will be facing marginal tax rates of 56 per cent; if, in view of the impact that this would have, especially on overtime payments, he intends to examine this anomaly; and if he will make a statement on the matter.
Ceisteanna — Questions. Oral Answers. - Tax Anomaly.
4.
As I announced in the budget there is to be an increase in the basic exemption limits for income tax, with a further increase for persons with dependent children. Persons with income not exceeding the new limits will not be liable to income tax. The new basic exemption limits will be:
|
Under 65 years |
65 to 74 years |
75 years and over |
|
|
£ |
£ |
£ |
|
|
Single-Widowed |
3,000 |
3,400 |
4,000 |
|
Married |
6,000 |
6,800 |
8,000 |
In addition, the basic exemption limit will be increased by £200 per child for each qualifying child of the claimant.
Obviously, it would be unfair to subject a person whose income is only a little more than the exemption limits to the normal taxation rules. Accordingly, an easement from tax is given by way of what is commonly called the marginal relief system.
Basically, marginal relief means that if a taxpayer's income is in excess of the appropriate exemption limit for his circumstances, his maximum liability to income tax will be set at 60 per cent of the difference between his income and the appropriate exemption limit. Application of the marginal relief system is not an anomaly; it is a relief. All taxpayers on marginal relief pay less tax overall than they would under the normal taxation provisions. Marginal relief can be quite significant depending on the taxpayer's circumstances. For example, a married employee with two children who earns £7,000 per year will be some £220 better off in the year as a result of the application of the marginal relief system.
Would the Minister agree that a system of allowances and reliefs for low income earners, age relief and a similar patchwork of reliefs is bound to give rise to an anomaly of this kind and that what is needed is a simplified system of tax credits and a low marginal rate of tax such as 25 per cent?
There is a question later on the Order Paper about the implications of tax credits with which we will deal when we come to it. I cannot accept that this is an anomaly; it is a relief.
It is a relief caused by the anomaly.
What is important to the taxpayer is whether he must pay more or less. In these circumstances taxpayers who have little income over their exemption limit will pay an awful lot less. It is that which interests the taxpayer. Take the example of a person earning £7,000 under the normal taxation system. After allowances of £5,186 he will be taxable on £1,814 at 32 per cent and will be paying £580.48. If we apply the marginal relief to his circumstances, on earnings of £7,000, with an exemption limit of £6,400 applying, he will be taxable on £600 at 60 per cent amounting to £360. It will readily be seen that that taxpayer's liability is at the lowest figure of £360 so that the saving to him, by way of application of the marginal relief system, is £220.48. Is that a relief or an anomaly? Which is it?
Would the Minister not agree that this system of reliefs is grotesquely complicated? Would he accept that most Members of this House are receiving letters from old age pensioners, in particular, who are totally confused as to whether they are liable to more or less tax? They cannot understand the system.
It might be complicated to those who do not want to understand it. If the Deputy were faced with the position in which I found myself of endeavouring to target to low income earners — which is precisely what this innovation was about — could he suggest how one could arrive at a more appropriate decision? This was the only way we could target to low income taxpayers, which, I am sure, everybody would commend. We will come to the question of tax credits later.
(Limerick East): Would the Minister not agree that Deputy McCartan's suggestion that, at certain levels of income, a marginal rate of income tax of 56 per cent will apply is correct? Does this not constitute a further accentuation of poverty traps in so far as somebody whose take home pay consists of a fixed rate, plus overtime, henceforth will be paying 56 per cent on the overtime if it is to the overtime the marginal relief applies?
No, the Deputy does not have the accurate picture. First, I should say that the marginal relief is at 60 per cent, not 58 per cent or 56 per cent.
(Limerick East): Fifty six per cent is what the question says.
That is what the question says but I am saying there is no marginal relief at 56 per cent. It is 60 per cent and was never 58 per cent or 56 per cent; it is 60 per cent. Second, I should make the point that marginal relief is temporary. Marginal relief applies where it is of benefit to the taxpayer. As soon as it is no longer of benefit to the taxpayer, to the people with low incomes, they are switched over to the normal taxation rate. That is the reality.