Ceisteanna—Questions. Oral Answers (Resumed). - Tax Reliefs.

Charlie McCreevy

Question:

12 Mr. McCreevy asked the Minister for Finance the plans, if any, he has to procure and publish a cost-benefit analysis of existing tax relief schemes. [8482/96]

All tax reliefs are kept under regular review. In the months preceding the 1992 budget there was a detailed review of virtually every tax relief. Since then the Tax Strategy Group has examined most reliefs in the context of the preparatory work for the 1994, 1995 and 1996 budgets. For the 1996 budget and Finance Bill, indepth studies were carried out into the section 35 relief for investment in film, the BES and the patent royalties relief. At present, a consultancy study is being carried out under the auspices of the Minister of State at the Department of the Environment in respect of the urban renewal scheme. In all these studies, the evaluation of the costs and benefits is the key aspect.

As regards the publication of these various studies, the consultancy study of the section 35 film relief has been published. Also the findings of other reviews are made public in response to parliamentary questions about tax reliefs and in the context of Finance Bills and budget proposals.

Does the Minister agree such studies should be published in booklet form? Does he also agree it is perceived that only ordinary PAYE earners pay the full rate of tax and the use of legal tax avoidance tax measures, such as the BES and urban renewal schemes, gives the somewhat correct impression that higher income earners can legitimately reduce their income to avoid paying tax?

Would he consider an amendment to a future Finance Bill to restrict the use of such tax avoidance measures and ensure that at least the ordinary level of PAYE tax is borne by everybody? Not to do so gives the impression that the rich can legally avoid most of their taxes. Some rich people foolishly proclaim they do not pay any income tax.

In principle I am open to publishing these kinds of studies because it helps to inform public debate. I will examine the level of publication of the existing study and I will certainly bear it in mind for future studies.

It would be misleading the House and the general public to refer to, for example, the urban relief scheme as a tax avoidance measure. Most cities and towns have been transformed by the urban relief taxation measures. At the same time people who have invested their income and received tax relief have, in some cases but not necessarily all, obtained some gain for themselves. However, the community at large has an overall benefit which it would not otherwise have experienced had we left it to market forces alone to rejuvenate and revitalise urban areas.

One could argue that the picture is not as clear with regards to the BES but there are many companies which would not have been able to raise the necessary capital to ensure either expansion or, in some cases, survival had it not been for the BES. That said, the impression some people are giving, to which the Deputy referred and on which he elaborated on Committee Stage of the Finance Bill, is counterproductive and does not lead to fiscal solidarity among all taxpayers. If that is the thrust of his comment, I agree with him wholeheartedly. In so far as the publication of any studies might reduce or eliminate that perception, it would be positive and I will certainly examine it.

I favour the use of tax breaks to encourage investment and have no dispute with it or anything the Minister has said about the benefit of such schemes to the economy in general. My point is that the use of them in any one tax year should not allow a person with a high income to write off his total income tax liability. Some restriction should be considered in the context of a Finance Bill to limit the use of such relief by the individual taxpayer so he would pay at least the standard level of PAYE.

As the Minister pointed out, the widespread legal use of such schemes enabling some taxpayers to reduce their total liability to nil, does not augur well for social solidarity among all workers. I advocate that the Minister consider a limiting measure in future Finance Bills.

I am open to looking at that and will consider it in the context of next year's Finance Bill.

Was there a cost benefit analysis of the scheme for certain resorts and tourist areas? If so, how was it done considering that the scheme was only brought into effect from 1 July 1995 and what was the result of any such analysis?

A specific cost benefit analysis was not undertaken. However, a certain use of the seaside resort scheme — taxation use of an aggressive kind which was perfectly legal — was brought to our attention. The level of taxation relief which could be levered using the scheme as legally enacted was in excess of anything that existed currently. The precedent for the seaside resort scheme was, by and large, the original section 23 and related urban renewal type schemes. The view was — and we will deal with it on Report Stage of the Finance Bill tomorrow — that the taxation code should be amended to bring it back to the level intended originally. A transitional relief was allowed for those projects which were in train and had properly and legally commenced. A cost benefit analysis in the normal sense was not undertaken because the scheme was not in operation for a sufficient period to enable such analysis to be undertaken.

Tax shelters and other such schemes, many of which are very worthy, have grown enormously in the past number of years. Would the Minister agree that in talking about serious tax reform, the removal of such special category reliefs will play a central part in achieving a much lower rate of taxation? We have created all of these tax shelters in response to the penal taxation system. Is it not time that we got down to real reform? It will admittedly affect many people who will not like to see many of the reliefs disappear but it is in the interest of an overall reform of the taxation system.

There is a coherent point of view behind the opinion expressed by the Deputy that would argue for the elimination of all tax breaks and the establishment of a flat rate, allowing people to spend their money if and where they wish. The presumption is that expenditure of that money will result by and large in a positive outcome for everybody involved. Our experience with regard to the urban renewal scheme would not lead us to have faith in market forces for urban renewal. Some form of balance must therefore be struck between the two.

As long as we have high rates of marginal taxation, tax investment schemes such as BES and urban renewal will be attractive for some people. However, there is probably an attitude or culture, certainly in some sectors, that if there is not a grant for an activity people will not engage in it, even if it is highly desirable from both personal and public economic points of view. We may very well be moving from a grant culture into a tax allowance culture. It is a question of trying to find a balance.

Would the Minister not agree that Deputy Cullen's point goes further? By allowing all these schemes and tax breaks to build up, we have taken the steam out of tax reform. Many people who would have to hand over their money in taxes find they can avail of these schemes, even to the extent mentioned by Deputy McCreevy and avoid any tax liability whatsoever. The attraction of these schemes is largely based on our high rate of taxation.

Deputy McCreevy's point is that a person availing of them should not be relieved to a greater extent than an ordinary PAYE worker, by which I presume he means such schemes should be standard rated rather than allowed against all tax. Would the Minister agree the reality is that these schemes are driven by an attempt to avoid high tax and the real problem is that many of the activities in which people invest are an indicator that the investors have more money than judgement and invest outside their own area of competence? Would he agree that what is really needed is a scheme to get people to invest in their own businesses? We should have a situation whereby if I make £50,000 from my business, I will put it into my business and not give it to somebody to make a film about which I could not give a tinker's curse.

Invest it in people and employment.

These are all matters which must be reviewed. I could give a long extensive reply but in deference to the other Deputies who tabled questions on the Order Paper I do not propose to give it. The combination of tax allowances and incentives is well tailored to meet the needs of the economy at present. Notwithstanding that, there clearly is a desire, as well as a commitment, to reduce the level of personal income tax. What people do with their disposable income is a matter for themselves.

With regard to the point made by Deputy McCreevy, as I understand it, for somebody to get the level of tax relief to which he is referring he would have to engage in substantial borrowing or live a very meagre lifestyle.

Or have great wealth.