There are two private notice questions to the Minister for Finance on the Government's intentions to tax unemployment benefit. I understand the Minister proposes to take them together. I call on the Members concerned to put their questions in the following order: Deputy Allen and Deputy De Rossa.
Private Notice Questions. - Taxing of Unemployment Benefit.
asked the Minister for Finance in view of the fact that taxation of short-term unemployment benefit becomes operational on 6 April 1994 if he will make a statement on the comments of the Minister of State at the Department of Social Welfare that the Government is reconsidering the matter.
asked the Minister for Finance the position regarding the proposal to tax unemployment benefit from next week in view of the reported statement of the Minister of State at the Department of Social Welfare that the matter was being reviewed; if it is intended to proceed with this measure from 6 April 1994; and if he will make a statement on the matter.
I propose to take these questions together. I thank the Deputies for giving me an opportunity to deal with this matter. Detailed arrangements are in course of finalisation for making unemployment benefit payments reckonable as income for tax purposes. A number of categories of persons are in receipt of unemployment benefit. While the principle of making such payments reckonable for tax purposes will apply equally to all concerned, the various groups will be affected in different ways in terms of the timing and the method of application. This aspect is under review in the finalisation of the arrangements so that no undue hardship arises.
Section 15 of the Finance Act, 1992, provided for the treatment as income for tax purposes of certain short-term social welfare benefits. These are disability benefit, injury benefit, unemployment benefit and pay-related benefit. The section can come into operation generally or in relation to specific benefits or categories of recipients of benefits on such day or days as may be fixed by the Minister for Finance by order. Prior to such an order being made it is required that a draft of the order be laid before Dáil Éireann and a resolution approving of the draft be passed by Dáil Éireann.
A commencement order of 10 March 1993, brought the section into operation with effect from 6 April 1993, in respect of disability benefit and injury benefit.
As I announced in the Budget Statement, I intend to bring the section into operation with effect from 6 April 1994, in respect of unemployment benefit and pay-related benefit. An order to this effect was approved in the Dáil on 2 February 1994.
Making these benefits reckonable as income for tax purposes is essentially a matter of equity. The reason for treating unemployment and pay-related benefit as income for tax purposes is merely to treat people in similar circumstances, with similar amounts of incomes in a tax year, in the same way. It is to ensure that for two people in similar circumstances having the same level of income, one does not pay less tax than the other simply because one person's income contains unemployment benefit and the other person's does not.
The extent to which taxation will actually arise in a given case as a result of this change will, of course, depend essentially on the amount of other income that the recipient of unemployment benefit or the recipient's spouse has in the same tax year. I again draw attention, in this context, to a paper entitled Income Tax and Welfare Reforms published by the ESRI in 1991. As I indicated when the commencement order on the taxation of disability benefit was being discussed last year, the ESRI paper demonstrated the flaw in the argument that taxation of short-term social welfare benefits would impact unfairly on those on low income. The study found that most of the benefit from the non-taxation of certain short term benefits, including unemployment benefit, went to those on higher incomes. In particular it found that 70 per cent of those tax units affected by the taxation of short-term benefits are in the upper half of the income distribution range and that in removing the exemption less than one in ten of those affected would be in the lower income ranges. These figures are based on a study carried out in 1987; the increases in the income tax exemption limits since then and the introduction of substantial child additions to them should mean that the effect on the lower income groups would be even less now.
The change to making short-term social welfare benefits, including unemployment benefit and pay-related benefit, reckonable as income for tax purposes has been recommended by a number of groups, including the Commission on Taxation, the Commission on Social Welfare, the National Economic and Social Council, and the Industrial Policy Review Group, that is Culliton. The change now being made should ensure that persons are not better off because a portion of their annual income arises from unemployment benefit than they would be if the same overall income arose from being employed.
A number of other PRSI benefits are already reckonable as income for tax purposes. These include, for example, invalidity pensions, disability benefit, injury benefit, retirement pensions, widows pensions and old age pensions.
An interim taxation arrangement will be operated by the Revenue Commissioners. The interim system will involve the Department of Social Welfare continuing to pay unemployment and pay-related benefit gross, that is, without deduction of income tax. Any tax due in respect of the benefit will be collected essentially through Revenue restricting tax refunds to take account of any unemployment and pay-related benefit received.
I will indicate how the proposed arrangements will operate in practice in some situations. Where a person ceases work during the tax year and goes on unemployment benefit, he or she will continue to claim refunds of tax previously paid in the tax year from Revenue at four-weekly intervals as at present. However, Revenue will take the same amount of unemployment and pay-related benefit which the person has received into account in computing the amount of any refund due. If the person's weekly receipt of benefit is less than the weekly tax free allowance, some tax refund, but at a reduced level, will still be due. If the benefit received is greater than the person's weekly tax free allowance, no tax refund would be due in future. If a person has paid no tax since the beginning of the tax year the question of a refund would not arise.
When a person resumes employment, or takes up employment for the first time during the tax year having been on unemployment benefit, the following arrangement will apply: where the person's unemployment and pay-related benefit is less than the weekly tax free allowance, Revenue will instruct that the cumulative basis of PAYE will be operated in the employment with the unemployment and pay-related benefit being taken into account. The operation of the cumulative basis will give the employee immediate benefit of any unused tax free allowances for the period of unemployment in the tax year which are not required to cover the unemployment and pay-related benefit. Where the person's unemployment and pay-related benefit is greater than the weekly tax free allowance, the benefit received will not be taken into account on resuming or taking up employment for the first time in the tax year. However, the employer will be instructed by Revenue to operate the non-cumulative basis of PAYE which is generally known to workers as the week one basis, in respect of the person's further taxation. Normal cumulative PAYE takes account of the employee's cumulative tax position from the beginning of the tax year to the pay week being dealt with. The week one non-cumulative PAYE, on the other hand, looks only at the employee's tax position in the week being dealt with. In this instance week one will, to prevent possible hardship to the employee, prevent collection of the undercharge which has arisen because the benefit was greater than the tax free allowance. It will also deny the person any access to the tax free allowances for the period of unemployment, thereby preserving such tax free allowances to be offset against any tax due on the unemployment and pay-related benefit received.
The arrangements I have outlined are those which will apply in the great majority of straightforward cases. In non-straightforward cases, where the employee does not permanently cease work with the employer but is in receipt of benefit, for example, where there are systematic short-time workers, alternative arrangements will be adopted and although the principle of making unemployment benefit payments reckonable for tax purposes will apply equally to all concerned, it will be appreciated in the light of the foregoing that the various groups will be affected in different ways in terms of the timing and method of application. This aspect is under review in the finalisation of the arrangements in this regard.
Will the Minister agree that this matter was clearly indicated by him over a year ago during the debate on the Finance Bill and that this provision was pushed through the House by a vote of Fianna Fáil and Labour just two months ago? Will the Minister explain why Minister Burton is at this late hour attempting to mislead the workers in Killarney and throughout the country on this issue? Will he also agree that this provision is a serious financial jolt to tens of thousands of families? Was it not the case that in addressing the workers in Pretty Polly in Killarney last night the Minister was getting herself out of a tight situation?
I was glad to give the House a detailed reply about what has been worked out since the order was passed in February. Deputy Allen is correct in saying that this matter was debated last year, that the order was passed in the budget and that the order to implement it was passed a few days after the budget in a separate debate. That was done to avoid confusion. Because this was such an important item it was taken in isolation from the budget and passed by resolution. The Deputy is not correct in saying it was pushed through. You will recall, a Leas-Cheann Comhairle, that I spoke at length because there were not enough speakers to keep the debate going.
There were Fine Gael speakers.
There were no Labour Party people in and they are not here today either.
The Minister is refusing to deal with the matter and is filibustering. He should answer the question.
I have answered it.
Let us hear the Minister without interruption from any side of the House.
The point is that people, regardless of whether they get their week's income from employment, a combination of welfare and employment, or from welfare alone, will pay equal tax. This equity measure has been recommended and has the full support of all parties in this House. At least three parties supported it on the last vote some weeks ago.
Will the Minister now make it clear that taxation on unemployment benefit and pay-related benefit remains in place and that the £30 million which the Minister expects to take in a full year will now still be taken from unemployment benefit and pay-related benefit? Will he agree it is unfair and unjust that the sick and the unemployed are now paying as much tax as the farming community — about £50 million a year?
The answer to Deputy De Rossa's first and second questions is yes, but the answer to his third question is no. Any anomalies will be carefully dealt with by the Department of Social Welfare. In the Revenue Commissioners what is under examination is how that will be done as the system is implemented. Deputy De Rossa would agree that it is unfair that a person who works a full week may be only marginally better off than a person on social welfare. That is a matter of equity.
Will the Minister agree he is selectively implementing one key provision of the report of the Commission on Social Welfare while ignoring other key provisions on minimum payment to the unemployed and the sick? Will he guarantee to address those issues soon because about 80,000 people will be affected by this measure on 6 April?
I cannot answer for the Minister for Social Welfare. However, I am sure the Deputy will agree that the Government has gone a long way towards implementing the minimum rates of social welfare outlined in the commission's report together with other innovative measures, such as payments to widowers.
Like the dirty dozen.
The Book of Estimates, published today, shows significant increases in social welfare.
In view of the Minister's replies, it is obvious why Minister Burton is in hiding; she does not want to face the music after her attempt to mislead people last night on the taxation of unemployment benefit and pay-related benefit. The Minister said that people will not be worse off. Will he explain in what respects they will not be worse off? Does he not agree that people who are unemployed, or who become unemployed, will now be paying tax on their unemployment benefit where they previously did not and, therefore, inevitably they will be worse off, and that the people Minister Burton attempted to mislead last night, who are, in the main, short-time or part-time workers, will be particularly worse off because they will now be paying tax?
People will not pay tax on their social welfare benefits if they or their spouses are not earning another income and the Deputy is well aware of that. He raised this matter on a number of occasions. In many cases people receiving welfare payments for three days and working for the remainder of the week earn a similar amount to those who work a full week. Regardless of how income is earned, people will be taxed on it.
Provided one is a PAYE worker, the rest get an amnesty.
If people are employed for five days a week they will pay tax under the PAYE system. If they are employed for three days and receive welfare payments for the remainder of the week or receive only welfare payments they will be treated equitably. This House has called for equity in that regard for many years.
As this matter is being debated as a result of comments by the Minister of State at the Department of Social Welfare, Deputy Burton, will the Minister accept it is a classic example of the partners in Government heading in different directions? The Labour Party vote one way in the House and speak in a different manner in Killarney and elsewhere. Has the Minister taken steps to clear up the confusion as a result of the remarks by the Minister of State, Deputy Burton? Did he speak to her since she made those remarks or endeavour to contact her today with a view to making a statement on the matter? Will the Minister admit that there has been no discussion at Government or Cabinet level regarding a change in focus on this matter and that taxation of short term benefits will proceed per the budget?
I neither saw nor read what Deputy Burton said last night.
The Minister should buy The Cork Examiner as the matter was reported on its front page.
The Minister of State, Deputy Burton, spoke in the debate passing this resolution and her views are on the record. I spoke to the Minister for Social Welfare this morning regarding this matter and the views of both Ministers are in line with what they stated in the House a few weeks ago.
The Government discussed this matter at length on a number of occasions and was careful to take into account the hardships that may be caused in some cases. Tax free allowances will be adjusted, refunds will be made and collection methods altered to avoid undue hardship. As in the case of disability benefit last year, in conjunction with various interest groups the Government will continue to monitor the anomalies which may lead to undue hardship in the early weeks of the new system. We will endeavour to deal with such anomalies, if they arise.
Is the Minister aware that this measure will have particular adverse effects in a county such as Kerry which depends so much on the tourism industry? More than 7,000 people are seasonally employed in that industry and more than 1,000 people are on short term work in two of the largest factories there, Pretty Polly and Stelrad in Listowel. Will the Minister agree this measure will be a major disincentive for people working in the tourism industry when their spouses are working in other jobs? It may lead to a scarcity of people to service the tourism industry next summer. That is the information I am receiving from tourist centres in County Kerry.
It is a case of Pretty Polly doing a twist.
I would be surprised if, with 280,000 people unemployed, there would be a shortage of people to take up jobs in County Kerry.
I am referring to experienced staff.
The person not working a full week is not penalised, the person working a full week is. All income will be taxable regardless of how it is obtained and the various anomalies that may arise were examined and outlined in detail today. Many part-time workers have been in contact with Revenue during the past number of weeks and have received their tax free allowances. This is a follow on to the number of changes which have been made in the past few years.
The Minister talked about treating everybody equally. This regulation will come into effect on 6 April and will take in revenue of £36 million while the concession in the budget in respect of the carer's allowance, which will cost only a few hundred thousand pounds to implement, will not come into effect until the end of July. Does the Minister consider it equitable to take in revenue but not to pay it out to a deserving area?
This measure will affect people differently throughout the year. Members will note from the Social Welfare Vote that in excess of £70 million will be paid out in additional expenditure this year, not to mention the £3 billion plus which will be paid out in the year as a whole.
The Minister is selectively implementing the recommendations of the report of the Commission on Social Welfare. Has he a conscience? In the same year he gave an amnesty to tax evaders and gangsters he is taxing the sick and unemployed. How can he reconcile that?
The Deputy will be aware that it was my pleasure in this year's budget to pay out the largest social welfare budget and to implement more new initiatives than has been the case in the past five years.
That is because more people are unemployed.
While this measure has upset some Members, it will ensure that in the case of two people earning a similar level of income one will not pay less tax than the other simply because one income comprises unemployment benefit. I fail to see why Members should object to that.
The Minister is talking utter nonsense. On the one hand, he is arguing for the treatment of all income in the same way, but all income is not treated in a similar fashion. The income I receive as a Deputy is not treated in the same way as a similar income earned by a person outside this House. Different allowances and rules apply to our tax. Also, the self-employed and farmers are treated in a different fashion. There is also the case of the tax amnesty, where income was earned but no tax paid. For the Minister to argue that he is being fair by being unfair to the unemployed is a gross distortion of reality. He already admits that at least 10 per cent——
The Deputy is making a speech, I understood he had a question.
Will the Minister confirm that at least 10 per cent of those on unemployment benefit — a short term benefit — will be hit unfairly?
I do not accept that people will be hit unfairly. Their income will be treated in the normal way regardless of whether it is earned income or welfare. They will not be disadvantaged and, as I said on numerous occasions, if there are cases——
If the Minister believes that, he is out of touch with reality.
It is unrealistic that a person who works only three days a week should receive a higher income than a person who works a full week. That may be a reason it is difficult to fill jobs here, perhaps the opposite is the position to that stated by the Deputy and his colleagues.