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Dáil Éireann debate -
Thursday, 13 Feb 1997

Vol. 474 No. 8

Ceisteanna—Questions. Oral Answers. - Income Tax.

Michael McDowell

Question:

6 Mr. M. McDowell asked the Minister for Finance if he will make a statement on the percentage of total income in taxes and PRSI from a single person earning the average industrial wage, assuming a standard personal allowance; the amount of income subject to 48 per cent tax and PRSI; the difference for employed and self-employed persons with such earnings; and if he will make a statement on the Government's intentions on taxation at such income levels. [3967/97]

Peadar Clohessy

Question:

27 Mr. Clohessy asked the Minister for Finance if he will make a statement on the percentage of total income in taxes and PRSI from a single person earning the average industrial wage, assuming a standard personal allowance; the amount of income subject to 48 per cent tax and PRSI; the difference for employed and self-employed persons with such earnings; and if he will make a statement on the Government's intentions on taxation at such income levels. [3969/97]

I propose to take Questions Nos. 6 and 27 together.

In the current tax year 1996-97 it is estimated that a single employee, full rate PRSI contributor, earning the average industrial wage, will pay almost 29.3 per cent of his or her earnings in income tax, PRSI and levies. This is referred to as the average tax burden. Such a taxpayer will pay the 48 per cent income tax rate on £1,719 of his or her earnings and PRSI on £10,409.

A single self-employed taxpayer, on the same income level, will pay 32.6 per cent of his or her earnings in income tax, PRSI and levies. The self-employed taxpayer will pay the 48 per cent income tax rate on £2,519 of his or her earnings and PRSI on £13,529.

As a result of the improvements announced in this year's budget, it is estimated that the average tax burden for a single employee on the average industrial wage will fall to below 27.2 per cent in 1997-98, even after allowing for wage increases. The amount of his or her income subject to the 48 per cent income tax rate will decline to £1,406. For a single self-employed taxpayer the comparative figures are 31.1 per cent and £2,206.

The Government's policy in relation to taxation is set out in the programme for renewal. The programme stresses the need to reform the tax system, in particular to relieve the tax and PRSI burden of those on low incomes. Tax reform will favour the incentive to work, tackle the poverty trap, aim to reduce the tax wedge and encourage enterprise development. The Deputy will also be aware that section 3.9 of Partnership 2000 states: "The Government will introduce personal tax reductions to the cumulative value over the three years of £900 million on a full year cost basis".

The first steps towards implementing this undertaking were taken in my recent budget. The measures introduced include increasing personal allowances by £250 in the case of a single person and £500 for a married couple, the largest increase in personal allowances since 1984; increasing the general income exemption limits by £100 single and £200 married; reducing the standard income tax rate by 1 per cent to 26 per cent; widening the standard rate tax band by £500 single and £1,000 married; reducing by 1 per cent the employee full rate PRSI contribution, which is paid by slightly over 70 per cent of PRSI contributors; increasing the income threshold for payment of the health and employment and training levies by £500 to £10,250 or to £197 per week. These measures will continue to reduce the tax and PRSI burden on employment and the average tax wedge, thereby making employment more attractive.

Of course more needs to be done, and it is the Government's policy to continue, within responsible budgetary parameters, the process of reducing the tax and PRSI burden on earned income as an important element in overall strategy. The personal tax reductions introduced in this year's budget amount to £393 million on a full year cost basis. The remainder of the £900 million agreed for personal tax reductions under Partnership 2000 will be provided in the 1998 and 1999 budgets. The precise measures to be introduced in those two budgets are, of course, a matter for consideration by the Government in the run up to each of those two budgets.

I am grateful to the Minister for providing those figures and also for the unusually non-propagandistic way in which they were delivered on this occasion. I thought I would hear about what happened in 1989-1992, which normally happens when we discuss these matters.

I do not believe in kicking people when they are down.

I will reciprocate in coming months. Is the cost of the 1 per cent reduction in PRSI, which affects 70 per cent of PRSI payers, included in the £900 million tax package; in other words, is PRSI now considered to be a tax? If so, it amounts to a confirmation for the first time that it is a tax. In this context, is it not alarming that a self-employed person — we are supposed to be in favour of self-employment, although we sometimes forget this — earning the average industrial wage is asked to give one third of his or her income in taxes and that there is such a significant differential compared with an ordinary PAYE employee? While we are always told the self-employed person has the advantage in being able to put his or her money aside and pay his or her tax at the end of the year — this is not such a huge advantage — will the Minister agree that, in order to calculate their tax bill, many self-employed persons have to pay a significant amount of money to accountants? This is an additional cost.

This is subject to confirmation but I think the cost of the PRSI reductions is included in the £900 million tax package. I will communicate directly with the Deputy on that point. With the assistance of professional accountants, self-employed persons have much greater flexibility in offsetting——

They have to pay for it.

It may be deductible.

It has to be paid for.

In identifying their taxable income the accountant will seek offsets against their gross income. This is not a facility an employed person can avail of. Self-employment activities range across a wide spectrum of vocations and professions while the potential for offsets and imputed costs varies significantly. I am not a professional accountant and cannot offer an informed view but that may be one explanation for the differential.

I am not living on a different planet. I fully accept that self-employed status is generally considered to be more advantageous than PAYE employee status.

Provided one does not get sick.

That is the point. To take 30 to 33 per cent in taxes and PRSI from somebody earning the average industrial wage, be they self-employed or employed, is a huge reduction. Assuming the cost of the 1 per cent reduction in PRSI is included in the tax package, will the Minister agree the logic is to keep hacking away until PRSI is removed? If it does not amount to social welfare insurance, as the Minister for Social Welfare, Deputy De Rossa, argues it is, but a tax, it is the most regressive employment tax in the State.

That ought be the subject of a wider and deeper debate but a person on the average industrial wage, be he self-employed or otherwise, with no other source of income and availing of the array of facilities and benefits on offer, in contrast with any other OECD country, is getting a good deal. In the United States one has to impute local property taxes, local state taxes——

The average industrial wage in the United States is much higher.

That may well be the case but the quality of primary schools, primary health care, housing and a range of other items is not the same. I am aware one cannot factor in numbers and figures for quality of life considerations which are a matter of perception depending on where an individual lives and so on, but am I right in thinking the Progressive Democrats — the Deputy is their official spokesperson on Finance — would like to drive down the figure even more? The Deputy asked me earlier to drive down the level of corporation tax. That, presumably, implies a forfeiture of revenue, if not in the long-term, in the short-term. If one drives down the level of corporation tax and personal income tax rates, where would the consequences be felt in the provision of services?

I am flattered to be asked questions by the Minister for Finance at Question Time, I hope it is an augury of things to come.

I am exposing the bankruptcy of the Deputy's logic.

Will the Minister accept there must be reductions in both corporate and personal taxation? One is not the enemy of the other. Reductions in both are needed to bring about an enterprise economy.

Every time the Progressive Democrats look for more prison warders and more child care workers and every other item of expenditure, which they do consistently——

We have never demanded more prison warders.

——I will repeat to the various spokespersons, including their leader, the Deputy's reply.

Will the Minister accept that it is now almost beyond the capacity of young couples earning £13,000 to £14,000 — this is not a luxury income — who are paying the top rate of tax to provide for their health care and housing needs out of their own pockets and that the State is taking more responsibility? This is a move in the wrong direction and is unsustainable. Unless we begin to bring down the top rate of tax we will make it impossible for young couples to provide for their needs because of the high levels of tax they have to pay.

While I accept that all sectors of society are demanding that the State should do and pay more to those providing services, I do not accept that the State is trying to take on more responsibility.

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