I thank the House for the many interesting contributions to the debate on the Finance Bill 2006. I look forward to a constructive and informed discussion on Committee Stage on the many matters raised.
Much of the debate on the Finance Bill has focused on the question of tax reliefs. Unfortunately, there is no shortage of misinformed comment on this issue. First, let us be clear about who benefits from tax reliefs. Some tax reliefs are specially designed as incentives to favour development in particular geographical areas or sectors and it is principally these that have been the subject of our discussion.
However, tax reliefs must be seen in a wider context. The cost of tax reliefs and the question of who benefits from such reliefs were raised by many Deputies, including Deputies Bruton, Burton and Ó Caoláin. The comments made by Deputy Burton suggested that tax equity was being compromised because of a two tier tax system, one for the wealthy and one for ordinary taxpayers. This is quite untrue. I refer the Deputies to page B.23 of the Budget 2006 booklet, which contains a table detailing where tax reliefs go. They will see that, of the €10.8 billion in relief for the tax year 2002, €5.6 billion or 52% went on personal tax credits and reliefs, €3.4 billion or 31% to help fund pensions and savings and well more than €1 billion or 10% on capital allowances for traders, including farmers, to ensure their viability and job creation capacity. The vast bulk of tax relief each year thus goes to ordinary taxpayers at all income levels and to sustain business investment and jobs.
Tax reliefs should be kept under review, most particularly those that are of benefit to particular sectors or groups within the economy. Deputy Devins quite rightly pointed out that policy makers must take account not only of economic measures but also of the sociological benefits that can accrue to regions from these schemes. When these are reviewed properly and carefully, the results must be treated with an open mind. I have had carried out a detailed and sophisticated analysis of a very wide range of tax reliefs and incentives. I have published those reports and have, in substance, accepted what they are telling me.
Deputies Burton, Ó Caoláin and others are happy to accept the conclusions of these reviews where they support their own views but not otherwise. The Deputies argue against a tapered run down of those of the reliefs that are being terminated. They want them stopped straight away. However, this is not what was advocated by the consultants, who are rightly concerned about the economic effects of a sudden change. I am happy to follow the consultants' views in doing away with reliefs but I, too, am determined not to damage our very successful economy in so doing. For this reason, subject to the relevant EU clearances, I intend that reliefs should be abolished on a tapering basis.
I am also criticised for "bringing in new reliefs" for psychiatric hospitals. What I am actually doing is extending a system in place for general hospitals which has just been reviewed in order that it can also apply to psychiatric health providers. I do not believe the current discrimination in this regard should be sustained but I will keep the extended relief under review.
Deputy Bruton and others have argued that I should put into the Finance Bill statutory provision for further reviews of tax reliefs and for prior assessments of new reliefs. I have told the Deputies concerned that I am committed to doing this where appropriate but that there seems to be no requirement to put this into legislation. It is suggested that I am somehow recalcitrant on this issue but I cannot see how, as the Minister who has just commissioned and published a very wide ranging review of such schemes, I can be tarred with that brush. I have proven mybona fides in this regard.
The Government is not afraid of properly conducted policy reviews or making changes when appropriate. Incidentally, while on the subject of reliefs, I note that Deputy Burton suggests that I have introduced a special roll over relief by virtue of the provisions of section 38. This is not at all the case and I will be happy to expand on the issue on Committee Stage but what is actually being done is some tightening up to close off a possible opportunity for abuse. I would also point out that I have extended the holding period generally for all health related facilities and child care facilities to 15 years for new facilities put in use from 1 August 2006. These provisions are included in sections 34 to 37.
As I mentioned yesterday in the House, I am addressing in the Bill the issue of a small number of individuals with very high incomes who, up to now, by aggressive use of tax reliefs, have been able to reduce their income tax liability to a very low level or zero. From 2007, such individuals will not be able to do so.
I have covered all the incentive type reliefs likely to be used in this way by those on high incomes. Accordingly, the specified list contained in section 17 covers a broad range of reliefs and incentives. The scheme has been tested by the Revenue Commissioners using real cases to ensure it will be effective and such taxpayers will have an average tax rate each year of not less than approximately 20%.
Contrary to what was asserted yesterday by Deputy Rabbitte and today by Deputy McManus, the new tax relief for investment in private mental hospitals is one of the specified reliefs covered by the new restriction. I refer the Deputies to pages 71 and 73. While Deputies Bruton and Burton may believe the new restriction on the use of reliefs does not go far enough, I consider it to be a significant step towards promoting tax equity and getting the balance right by ensuring those on high incomes pay their fair share, while at the same time maintaining the incentive effect of the various tax reliefs introduced to achieve a particular public benefit.
A number of Deputies referred to the new income disregard for childminders and whether such minders would have social insurance cover. As I indicated yesterday, the issue of PRSI is being examined by the Minister for Social and Family Affairs for the forthcoming Social Welfare Bill. The adequacy of the €10,000 threshold and the possibility of a tapering arrangement were also raised. A tapering arrangement would considerably complicate the scheme designed with simplicity as a priority. I consider the €10,000 threshold to be reasonable, considering the other child care measures included in the budget. It can, of course, be reviewed in future budgets.
I am satisfied that a straight cut-off from the scheme at an income in excess of €10,000 is the simplest and most practical option and will I hope encourage people to provide such services and also encourage existing minders out of the black economy. Where a childminder's income exceeds €10,000, the total amount will be taxable, as normal, under the self-assessment system. The income limit of €10,000 refers to gross income. In determining the individual's income level no deductions will be allowed for expenses, for example, whereas they would be allowable if the individual declared the income as normal under the self-assessment system.
Deputy Burton referred to the tax position of those earning the average industrial wage, approximately €32,000 in 2006. The reality is that since 1997 a single person on the average industrial wage will have seen his or her pay rise by over €12,600 and the tax bill cut by over €400 per annum as compared to that year. In the same period the person's average tax rate has dropped by 12 percentage points from 27% to 15%. In real terms, when the cost of living as measured by the CPI is taken into account, the person on the average industrial wage will have seen his or her take home pay rise by 44%, of which about half is due to tax reductions. Year after year, independent data from the OECD indicate that for those on average pay we have the lowest tax wedge in the European Union and one of the lowest in the entire OECD. The fact that our unemployment rate is half the EU average is no coincidence.
Those who earn more contribute more to the income tax yield than was the case in 1997 when we took office. It is estimated that in 2006 the top 1% of income earners will pay approximately 20% of all income tax collected, whereas in the 1997-98 tax year, they paid less than 15% of all income tax collected. In the same period the contribution of lower earners to the income tax yield has reduced significantly. Those earning at or under the average industrial wage will pay 6% of the expected income tax yield for 2006 as compared with over 14% in 1997 when the Government took office. It is a source of amazement to me that the Government is accused of favouring the wealthy when the facts speak for themselves.
In its recently published quarterly economic commentary the ESRI observed that "the direct tax and welfare provisions in budget 2006 — including the new early child care supplement — were strongly progressive". It also observed that "budget 2006 strongly favoured low-income groups, with smaller percentage gains for those on higher incomes". The provisions of section 17 will also ensure that from 2007 the small number of high income individuals who have been able to reduce or eliminate their income tax liability through the use of tax incentives and reliefs will generally have an average tax rate of not less than about 20% each year. As a higher percentage of the tax take is paid by high earners and a lesser percentage is paid by lower earners, this is a strongly progressive budget with limits on tax reliefs and their use for the wealthy. In the face of the evidence, how can the Opposition mantra retain any credibility? Political attacks are not facts.
I reject Deputy Bruton's assertion that no serious effort is made to give tax refunds to compliant taxpayers. The Revenue Commissioners make every effort possible to inform taxpayers of their entitlements using every available means at their disposal, including leaflets, the Internet and media campaigns. They have recently introduced a range of self-service facilities aimed at allowing PAYE workers claim certain reliefs on the Internet or telephone. This service is being extended further in 2006. A number of years ago the Revenue Commissioners introduced a tax relief at source system for items such as pension contributions, permanent health insurance, medical insurance and mortgage interest payments. The difficulty lies in areas where expenditure cannot be quantified until year end such as medical expenses. The taxpayer must submit a claim to the Revenue Commissioners telling them what was spent in the previous year. I remain open to suggestions that will improve the take-up of various relief schemes. Deputy Bruton has suggested the establishment of a tax ombudsman with the remit to take cases on behalf of ordinary taxpayers to the Revenue Commissioners in the event of overpayments. I do not agree with this approach as we should concentrate on making the system as effective as possible rather than inventing a new bureaucracy.
Many Deputies referred to pensions and I am glad to have the opportunity to clarify a number of points. The Government has been criticised because it is suggested an individual can take a large lump sum payment out of his or her pension fund without paying tax. This cannot be done as the Government has closed off that possibility since the budget. The Government reviewed the use of pensions by high earners, identified the issue and closed off the possibility for abuse.
I have been asked why individuals who have built up large pension funds can continue to hold them tax free. This is a misconception. We cannot tax a pension fund retrospectively but have ensured these moneys which are kept in approved retirement funds will be taxed at the individual's marginal rate as they are drawn down, or by reference to a notional rate of draw down. For the future the size of fund allowable has effectively been capped.
I have been asked why I have not prevented individuals who control companies from arranging to have those companies make unlimited payments into the fund. On the basis of evidence arising from the review which I commissioned, we have effectively placed a cap on the size of the fund which can be built up for an individual and any excess is taxable at prohibitive rates. An individual can no longer take enormous lump sums tax free, cannot use tax incentives to build up an unreasonably large fund, or indefinitely defer payment of tax on such funds. Deputy Burton suggests there is some way a person can take €250,000 in tax reliefs under the new capped arrangements and also an additional €250,000 in pensions relief but that is not the case. An earnings limit of €254,000 applies to tax relievable pension contributions. The tax benefit for pension contributions paid is limited to a percentage of €254,000, between 15% and 40% per year, depending on age, and relief is payable at the marginal rate. There is no question of an individual putting €250,000 into pension schemes, let alone getting a tax break of that value. Those who have build up pension contributions using tax reliefs will eventually have to draw down a pension and pay tax on it. Pension tax breaks are, to an extent, a deferral of tax, rather than an absolute exemption. Our recent analysis has shown that the use of approved retirement funds to defer tax and the taking of large lump sums tax free was capable of undermining that position, but we have taken steps to set this right.
Deputies Burton, Boyle and Ó Caoláin have criticised the scheme for incentivising the conversion of SSIAs into pension contributions. I seem to be in a no-win situation as I am criticised for not giving the benefit of this scheme to the 42% taxpayer, but the 42% taxpayer already has considerable incentives available to him or her. I am also criticised for not being more generous in regard to the scheme but this is the first time any Minister in any Government has taken a step to incentivise pension provision for lower earners. This is a good scheme and the cost will be determined by the take-up but I am hopeful large numbers of individuals will see that there is a real long-term benefit in continuing the savings habit developed under the SSIA scheme and that the availability of this once-off bonus will give an extra impetus. This will help with pension coverage and the take-up of PRSAs, as mentioned by Deputy Andrews.
The question of pensions provision in the longer term is a separate one. Deputy Bruton pretends that I do not believe in studies or analysis, never mind that the evidence——