Amendment No. 16 is out of order. Amendment No. 17 is in the name of Deputy Yates. Amendments Nos. 18, 19 and 20 are related and by agreement, may be taken together.
SECTION 2.
I move amendment No. 17:
In page 11, subsection (1), in the first entry in column (1) of Part I of the Table, to delete "£7,675" and substitute "£9,000".
This amendment seeks to extend the standard tax rate band of 27 per cent. One of the complaints we all have is the early point in the income scale in which single people go on to the top rate of tax. Figures conclusively show that relative to the UK and Northern Ireland, Ireland has experienced what we call the graduate "brain drain" because of the tax code. The Taoiseach has said that his objective is £20,000 and £40,000 but I deliberately proposed very low figures. Deputy Cox, and others, have proposed much higher figures. I hope the Minister will accept my amendment as it is less than £1,400 of an increase on the amount of income that would be taxed at the standard rate and not the top rate. I hope that my modesty in this will be rewarded by the Minister's acceptance of the amendment.
On this issue there is a point of substance. I have tabled an amendment in regard to this and, in common with the other amendments in this regard, I do not think the Minister will even consider accepting it. I tabled it for a specific reason, and that is as a yard stick to measure the Government's commitment and progress on the Culliton report which it says it intellectually accepts. I do not want to go over all the arguments in the Culliton report except to quote one of its aims which is that here should be no more than 20 per cent of taxpayers above the standard rate band. I do not suppose this can be done this year but I tabled my amendment as a yardstick. I asked the Minister in a parliamentary question last week that if the Culliton report's targets were incorporated into the tax bands today, by how much would the bands need to change?
The Minister would need to increase last year's figure by £4,150 for a single worker on a band of £11,625 at the standard rate, to meet Culliton's recommendation but he increased it by £200. for married people the Minister would need to increase it by £8,300 to meet the Culliton target and he increased it by £400. In year one, the Government has gone less than one-twentieth of the way towards what it accepts as its tax targets. That is a measure of its indifference and its unwillingness to confront what is a core issue. In my opinion, far from intellectually accepting the Culliton report, the Government is ineffectual and has no interest in implementing its recommendations.
Deputy Cox is assuming a 20 year term of office.
I presume my amendment No. 16 has been ruled out because it represents a charge on the people.
The poor middle income people.
I regret that because this is the first contentious amendment between Opposition and Government and between the Opposition parties. It requires debate if we are to tackle the question of reform of the income tax code.
I support Deputy Yates' amendment. It seemed that the Fianna Fáil-Progressive Democrats Government had an obsession with achieving income tax rates of 25 per cent and 40 per cent as if these in themselves were meaningful or constituted tax reform. I do not believe they did.
They were not meaningless.
They were not meaningless but the period of time that one is subject to tax at the standard rate and how soon one is liable for tax at the marginal rate are more important. They are the critical issues and Deputy Yates' amendment addresses the first of these to some extent. We have discussed how quickly one finds oneself in the tax net. The next stage is how long one is in the tax net or what portion of one's income is liable at the rate of 27 per cent. Very quickly one finds oneself in the top rate of tax. It is interesting to compare current statistics with the situation ten years ago after the tax marches. There are now more people paying tax at the marginal rate than was the case then. There is a necessity to address this question and I support Deputy Yates' amendment.
I will be brief. This is the area where the arguments of Fine Gael and the Progressive Democrats are exposed. There is a dreadful imbalance in taxation and many relatively poor people are paying tax at the rate of 48 per cent, which is totally unacceptable. I would ask the Minister, as the preparations may be beginning for next year's Finance Bill, to amend this. We need a realignment of the tax burden to ensure that the self-employed and the farmers, many of whom currently pay little tax, will pay their share.
As it is now 1.30 p.m. I am required to put the following question in accordance with the Order of the Dáil of 20 May: "That the amendment set down by the Minister for Finance to Chapter 1 of Part 1 of the Bill and not disposed of is hereby made to the Bill and in respect of each of the sections undisposed of in the said Chapter that the section is hereby agreed to."
I wish to withdraw any amendments in my name which have not been reached.
I also wish to withdraw any amendments in my name which have not been reached.
I think that is important because otherwise the amendments are debarred from Report Stage.
I also wish to withdraw any amendments in my name which have not been reached.
It means they can never be debated.
Question put.
Votáil.
As there are fewer than 31 members present, Standing Orders require that when a division is demanded the division be taken after the lapse of minutes or as soon as all Members of the Committee are present.
The Select Committee divided: Tá, 19; Níl, 10.
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Tá |
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Ahern, Bertie. |
Briscoe, Ben. |
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Ahern, Michael. |
Nolan, M. J. |
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Ahern, Noel. |
O'Keeffe, Batt |
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Broughan, Tommy. |
O'Keeffe, Ned. |
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Connolly, Ger. |
O'Leary, John. |
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Ellis, John. |
Penrose, Willie. |
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Ferris, Michael. |
Smith, Brendan. |
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Ryan, Eoin. |
Gallagher, Pat. |
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Kenny, Sean. |
(Laoighis-Offaly) |
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Kenneally, Brendan. |
Walsh, Eamonn. |
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Níl |
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Boylan, Andrew. |
Doyle, Avril. |
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Connaughton, Paul. |
Keogh, Helen. |
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Cox, Pat. |
McGrath, Paul. |
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Currie, Austin. |
Nealon, Ted. |
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Rabbitte, Pat. |
Yates, Ivan. |
Question declared carried.
Sitting suspended at 1.45 p.m. and resumed at 2.30 p.m.
SECTION 7.
Amendment No. 44 is in the name of Deputy Cox. Members should try to adhere to the time schedule as much as possible, as this might give more time to Opposition members to debate their amendments.
Amendments Nos. 44 and 45 are related and may be discussed together.
I move amendment No. 44:
In page 15, lines 6 and 7, to delete subsection (1), and substitute the following:
"(1) The income levy shall apply as a temporary levy in respect only of the contribution year 1993-94, or the lifetime of the Government, whichever is the lesser.".
I concur with the chairman's remarks. I will not make a meal of the point but simply say the time is so short and we will be able to cover so little that Members are necessarily constrained by the Order of the House. It would be useful to try to run as close to schedule as possible.
The 1 per cent income levy must be acknowledged in terms of a piece of knee-jerk economic policy as one of the worst aspects of this year's budget. One or two other items, such as the probate tax are also of that order. The 1 per cent income levy is indicative of a badly thought out approach to revenue raising and to fiscal policy generally. It is badly thought out in terms of its equity effects and because it complicates the existing tax structure.
Some of the points made about it bear repeating. This morning the Minister with some pride, quite rightly, pointed out the achievements in reducing the basic standard tax rate. As a tax this levy has the effect of wiping out 2 per cent of those reductions at a stroke — it is a retrograde step. The lowering of tax rates as part of a tax reform process is of real benefit especially standard rate reductions for people on relatively low levels of pay. This however, is a regressive tax, because it starts to bite at low incomes. Anyone earning £173 or more per week is hit and there are no allowances to moderate its effects.
It is also an inefficient tax because, unlike the standard system, it complicates the accounts of companies of all sizes. Above all as a smash and grab attempt to get revenue quickly, it shows contempt for the philosophy of tax reform in the Culliton report to which the Minister says he is committed. It even shows contempt in the way it affects incomes as low as £173 a week, for some of the principles which appeared to be enshrined in the Programme for a Partnership Government.
What exactly does the Minister mean when he tells us as he did on more than one occasion in the House — that this was a temporary levy? Nowhere in Chapter II on pages 15 and 16 of the Bill — is the word "temporary" mentioned. Of course the levy is temporary if the Minister chooses to remove it but he has not chosen to define it as temporary in this legislation. Other levies which even the Minister introducing them understood to be temporary are still with us; hence, the need for this amendment.
I asked the Minister on Second Stage why this levy is temporary and will not be invoked again next year, apart, of course, from the Minister's attitude and the deserved public drubbing which this fiscal confiscation received. I am asking the Minister that question again because in his response to the Second Stage debate, he did not say what temporary phenomenon was being considered. I will remind the Minister of some would be temporary considerations for which he argued in his Budget Statement, but which do not add up.
One temporary factor is the negative impact of devoluation on the Exchequer and the arguments is that, if we just get over the hump this year, we will be grand in future. The Minister explained to me and other Deputies in response to parliamentary questions that the net cost of devaluation to the Exchequer was £15 million, so the levy is not temporary by virtue of devaluation: the Minister does not need £176 million in tax to pay a £15 million bill.
It could be argued that the levy is a temporary provision because of the loss in DIRT. There is a clear loss of revenue to the Exchequer in the reduction in DIRT from 27 per cent to 10 per cent. Perhaps in the context of that loss the Minister could say that because the Government is suffering this grievous loss of revenue this year he wants to, temporary, boost the kitty. That argument does not work, because DIRT is, I presume intended to remain at the lower rate perpetual or at least until the Minister decides otherwise. The change in DIRT is not a temporary phenomenon.
It could be argued that doing away with VAT at the point of entry on imports coming from the EC involves a significant loss of revenue to the Exchequer and that, on a temporary basis, we need to plug the gap. However, sections 83 and 84 of the Bill allow the Minister to conjure up a fiscal illusion by bringing forward tax owned next year to cover that gap. In so far as he is doing that VAT cannot explain this temporary phenomenon.
I do not believe that the temporary reason for this levy has been thought out any more throughly that the tax itself. The levy is a knee-jerk taxation policy to fill a revenue gap as the Minister said on Second Stage and I quote: It is confirming the revenue dimension of the strategy of fiscal responsibility". In other words, the Government policy is to grap this tax while the going is good and to get away with it for as long as it can. It is a bad precedent, at the outset of this new partnership Government, introducing such an irresponsible tax policy which complicates the system and sets it back, rather than improving it. The way it is being conceived, introduced and explained to the public does not stand to scrutiny and it should be removed as quickly as possible.
I have put down two amendments in relation to the proposed 1 per cent levy. The first is to delete it and we will insist on voting on that question. The second amendment demands, at a minimum, that the levy be defined as temporary, applying only for the tax year 1993-94. My strong first preference is that it be deleted and if not, that it should last only for whichever is the lesser of the two; 1993-94 or the lifetime of this partnership Government.
May I suggest Chairman that we take Amendments Nos. 44 to 48 together and the entire section 7.
Is that agreed? Agreed.
This section represents the most obnoxious feature of the 1993 budget. It is a reprehensible measure that flies in the face of all advice to Government in relation to tax reform. It is a penal treatment of those who are at work. It is the fifth tax on work. In addition to PAYE and PRSI, we have three levies, namely the health levy, the youth employment levy and now the one per cent income levy.
Work is now being treated as something to be actively discouraged. Under this budget, investment income is being treated at 10 per cent, or no higher than 27 per cent, and someone on £200 per week has to pay tax at 57p in the pound and his or her employer has to remit that amount every month.
It is disappointing the Minister has not tabled any amendments to this section. In the amendments the Opposition tabled, we have pointed out a clear number of injustices in the section. I do not know how Deputy Ferris can justify a situation where, for example, a seasonal worker, working for three months or three weeks of the year whose pay happens to be over £173 a week, is not entitled to any refund of the levy if unemployed for the remainder of the year. In other words, one will pay the levy at 1 per cent on all income earned over £173 a week, irrespective of total income for the year. Unlike income tax, there is no refund if total income is under £9,000 or if total income is beneath the level for tax liability. This is palpably unjust. Surely it should be refundable in the same way as income tax if total income is less than the individual's tax free allowances. I know of no other tax that is so unfair in this regard.
It seems clear from the briefing given by the Department of Finance officials that redundancy payment lump sums will be taxed at 1 per cent above £6,000. That is totally wrong. The Government is disregarding the NESC report, Strategy for the Nineties and the Culliton report and putting in jeopardy another Programme for Economic and Social Progresswhich it appears to want so much.
This is the first instalment of Labour in Government. It is no coincidence that the last time there was a 1 per cent income levy was when the Labour Party was in Government with Fine Gael. The levy was not temporary, it lasted from 1983 to 1986. It appears to be a condition of Labour in Government that there must be another tax. Public sector pay is rising by 9 per cent per annum and it is going to rise before any Programme for Economic and Social Progress next year by 5 per cent. That is before any annualised increase is granted. It is not surprising if the Government has to raid other people’s pay packets to fund these increases.
This measure is unacceptable. The threshold of £9,000 is below the average industrial wage. It applies regardless of whether one has a mortgage of £40,000, whether one has ten children or whether one is a single person. As Deputy Cox said, the real injustice is that it is untruthful in so far as it is a 2 per cent increase in the standard rate of tax if all the allowances and reliefs are applied. It is an underhand, deceitful, smash and grab raid on pay packets. It hits the PAYE sector hardest.
The sitting duck target every time has to be hit. These are the people who turned out last November in their thousands to vote for the Labour Party in the hope that there would be change, that there would be tax reform rather than an additional imposition.
I look forward to the Minister's explanation as to why seasonal workers, people made redundant and people with incomes of less than £9,000 a year should have to pay tax. It is against all principles of tax equity. It will raise £130 million in a full year and in that respect it is the single largest imposition that the PAYE sector has had to accept in more than six years.
Having criticised earlier the tax code as it has evolved in recent years, one would have to agree that some progress has been made compared to the dark dismal days of the early 1980s. Yet this measure by the Minister harkens back to those days. It is an updating of the Finance Act, 1984. It is a bad tax and regressive tax and one that penalises disproportionately those on PAYE and low incomes.
The Minister introduced three modest gains in this Bill. First, there are the very modest improvements in personal allowances, secondly, there are the extremely modest improvements in the exemption limits and, thirdly, there is the widening of the standard tax bands by £200. Cumulatively, however, the effect of these modest improvements is wiped out by the application of the 1 per cent income levy. I challenge anybody in the Minister's back-up team to deny that that is the factual position.
The president of my trade union, the largest in the country, said today in his presidential address to the SIPTU Conference, in denouncing the 1 per cent levy: "I want to tell the Minister that this risks breaking the back of social partnership". As I understand it, he is speaking for the trade union movement.
Some people commented that it was strange that the three Opposition spokes-persons had the same view on this issue on budget day because, as I openly concede, in the early 1980s the trade union movement supported the idea of employment and other levies. The movement supported this because the situation was so bad that it was genuinely convinced that apportioning so much money towards youth employment or for some specific purpose was a progressive thing to do.
That mood has changed. The trade unions have now followed our position in the Dáil on budget day. They are now firmly against this measure as it is a regressive tax. It is the low earner and the PAYE earner who suffers disproportionately. It is nothing more than the Minister getting his fist into the jar of sweets again. There is no point in dressing it up as an employment levy; it is more tax that the tax compliant citizen must pay.
The argument by Deputy Ferris that the Government should not be blamed as it did not have much time to put this budget together, is not a fair defence. There was a great deal of time spent in forming the Government and in preparing the budget, I would have thought if ever there was going to be a new departure it would have been made in this Bill. The Minister managed to deliver to us last night 57 pages of amendments to his own Bill. If the Minister did not have time coming up to budget day, then he had time between budget day and now to rethink the madness of this levy.
When the Minister argues that he has a plan and is trying to introduce some equity to the tax code, the imposition of the 1 per cent levy clearly establishes in the minds of the public that there is no such plan. It was an ad hoc measure, with the sale of State assets, to allow the Minister some budgetary manoeuvre. He stood to make exceptional gains and has achieved more than he believed in disposing of State assets. The £78 million accruing this year from this levy solves a budgetary problem for the Minister but it does not reflect any overall Government tax plan. It certainly does not introduce any equity and, in fact, is a regressive measure. The PAYE workers have reachted against it. It is not too late for the Minister to rethink the proposal.
I have tabled amendments to show what I mean by broadening the tax base. The money could be found elsewhere and we will discuss that when we deal with capital and corporation taxes. It is wrong of the Minister to persist in this.
Deputy Cox asked where is the commitment to this notion that the levy is temporary. I found it quite fantastic to hear it being bruited about, presumably from an inspired source, that it was temporary because if the PAYE sector and the trade unions could give their assent to an amnesty for hot money, the levy would be dropped next year. If ever offence was to be given to the tax-complying citizen, if ever we were to engage in moral blackmail that was it. It is moral blackmail to say to those of us who are paying our taxes that provided we close a blind eye to those who stash money abroad in tax havens and evade and avoid their liability to the Exchequer, then we will drop the levy next year. It amounts to comparing the sublime with the ridiculous.
There is no connection between the imposition of this levy and a tax amnesty for hot money. I do not know what the Minister will tell us later. I went through, as painstakingly as I could, the amendments he delivered to us and I cannot see anything about a tax amnesty in them. To suggest those who are paying their taxes should give their assent to a tax-dodgers charter in order to lift the 1 per cent levy from their overburdened backs in some kind of trade-off, does not seem to be acceptable, and I hope the Minister will rethink his strategy on this.
(Laoighis-Offaly): May I be permitted a moment’s indulgence? It is my first experience going through such detailed committee work. In the work completed so far we have included a new section 7. I would like to compliment the Minister on the amendments he introduced improving the tax treatment of redundancy payments. It was a matter on which I spoke in the budget debate and it is something to be welcomed by the unfortunate people who find themselves in that position. There is certainly no such thing as a popular tax. There is hardly anything more unpopular in the minds of people who are subject to it than a blanket 1 per cent levy on incomes, particularly for people in the PAYE sector. For that reason I expect that the commitment that it be a temporary levy will be honoured in next year’s budget.
However, I find the type of attacks made, not alone in the debate on the income levy but also in the general budget debate in the House by Deputy Yates and his party to be simplistic and dealing only with one side of the equation. In my contribution to the budget debate I mentioned that Deputy Yates' party at local level is looking for more services, housing and more roads. Yet, any measure to raise revenue that is proposed in the House is attacked and opposed by them. Anybody who has ever worked on a county council estimate knows you cannot get away with that because you have to balance the books at the end of the day.
I am hopeful of seeing this income levy removed next year. I recall the experience of campaigning in the election last November and it is opportune to remind ourselves of some of the needs that were presented to us at that time, particularly for large families. People were waiting more than 12 months for operations in hospitals and we were reminded of the needs of the mentally handicapped. Schools in rural areas were coping without the services of remedial teachers. People were five, six or seven years on housing lists without any hope of improvement.
The policies which resulted in those cutbacks were supported not alone in the Tallaght strategy by Deputy Yates' party but also by Deputy Cox's party in the last Government. In assessing the provisions in this Bill we have to consider what we are getting as well as what we are taking in. The record of the Government to date in these areas is one which gives me hope for the future and which I am happy to support. It is facile in the extreme to attack revenue-raising measures without considering the big improvements in services in education, health and housing that all of us have experienced in our constituencies in the past number of months.
I would draw the Minister's attention to the actual operation of the levy as well as the principle of it. Some invidious situations have come to light since people got their tax-free allowance certificates for the year and since this has been applied in the work place. I refer to groups of seasonal and temporary workers. The principle of the levy is that those who earn less than £9,000 in a year should not be subject to this levy. In my area, Bord na Móna workers — many of whom get seasonal employment for three or four months of the year — because of the way the regulations are devised would be subject to the levy provided they are not earning more than £173 a week, even though their annual income would not exceed the £9,000 limit. The Minister should consider this difficulty, and the other difficulties which I am sure other Deputies will bring to his attention, and come back to us with an improvement on Report Stage. I support this on the basis that it is a temporary levy. I would rather not see it there, but I have to acknowledge that in return for the revenue that is being raised through the Bill we are definitely getting an increase in the services which people demanded of us a few months ago.
In any budget there is good and bad, there are provisions we like and those we do not like. If we want services we have to pay for them. It is difficult to defend the levy and I am not going to try to do so now. I will leave that to the Minister and other people. It hits people at a ridiculously low level by putting it on those earning £173 a week. That is an extraordinarily low level. I accept the Minister had to raise revenue but it was a very crude way of doing it. I am inclined to think it was a last minute change because the level at which it hits people is extraordinary. Next year I hope it will not exist. I hope it is a once-off measure and that, if it is there next year, it will be integrated into the general taxation system.
If one examines income tax rates over the past couple of years one will see that the people who have gained were those at the top level, those who were taxed at 60 per cent a few years ago. That figure has continually come down. I would question the logic of having only two tax bands when a single person earning £12,000 is on the same tax rate as somebody earning £100,000.
I remember the philosophy of last year's budget. I awaited the fringe benefit tax which I understood was to tax top earners and managerial people who were manipulating the system and giving themselves low mortgage rates, continental holidays, school fees and other perks. The justification for bringing down the 60 per cent tax band was that these people would be taxed in another way.
There was no mention of fringe benefit tax in this year's budget. Perhaps it died when the Progressive Democrats left Government; I do not know which party was seeking it last year. I was disappointed a new tax of some merit which was promised last year suddenly was dropped. If there is a gap in the revenue figures the Minister should tax those who benefited over the past number of years rather than taxing people at the lower level.
We will have to bear the tax this year but I hope it will not still exist next year. If it does, I would rather it was raised to 1.5 per cent or 2 per cent but the threshold at which it applies be much higher. It would then raise the same amount of money. It is daft to tax people earning £173 a week.
Some Opposition speakers mentioned it was unfair in some ways, there are anomalies if one works for a couple of weeks. The reverse is also true. For example, I heard of a factory which pays employees a flat rate of £165 which after bonus work becomes £230 a week. This factory may now only pay the bonus one week in four. Perhaps the Minister would comment on this. The company believed it would only pay the levy for one week in four and workers would get about £170 a week. That is their way of fiddling the system. Where an anomaly exists, an opposite anomaly will balance it.
I support the Minister today. I hope next year the rough edges of this will be gone.
I would hate to hear the Deputy speak against the Minister.
Give that Deputy a medal.
That is brotherly love.
Deputy Gallagher said in order to provide for the significant improvements in health care, education and social welfare this year it was necessary to raise revenue by other means. This method recommended itself to some people. I accept that, and the Minister's assurance on budget day that many hundreds of thousands of workers are effectively outside the tax net.
I agree with a colleague of mine who said in the Finance Bill debate in the Dáil that the youth employment levy was a blunt instrument. As Deputy Rabbitte said, it is a regressive tax. It begins at a low pay rate. Everybody was astonished by it on budget day. Those of us who were not presented with the Budget Statement until after the Minister spoke were astonished to discover the low level of operation of this tax.
The principle of imposing an extra 1 per cent when we have a high marginal tax rate is open to question. When a Government faces a revenue gap, as it did last January or February, often civil servants devise the easiest possible option. This tax was an easy option but it is not a long term solution. The budget is settled and the Government must proceed with business this year and build on the improvement my colleague mentioned. Nonetheless, I ask the Minister to ensure this levy is temporary.
People have said if this is to be an employment and training levy we should be able to see where the additional revenue goes in those areas. Perhaps next year we will have the political courage — as I said in an earlier contribution — to start readjusting the very unfavourable tax balance against PAYE workers. One of the great scandals of our political culture is the way PAYE workers have to supply the bulk of the £9.5 billion which runs this country. We could start in 1994 by removing this levy in the next budget.
I have extreme reservations about the 1 per cent income levy. It is economically regressive. It is the antithesis of real tax reform. I would be wary of its inclusion in the 1994 budget. The Minister for Finance must emphasise that the levy is temporary. When the Minister begins framing the 1994 budget I urge him strongly not to include this method of raising finance.
Like Opposition Deputies I have reservations about its consequent anomalies. I come from a midland county as does the Chairman where there is seasonal employment in Bord na Móna, meat plants and post offices. People often work for 16 or 20 weeks and their gross pay would exceed £173 per week and, therefore, would be subject to the levy. After 20 weeks or so they would leave that employment. In the event of their not entering the work-force again they would have overpaid this levy and would not be refunded under the law as currently framed.
It is vital to have balance and consistency between the income tax code and this measure. A measure should be put in place to ensure that if people find themselves in that dilemma, particularly those in seasonal employment under the £9,000 threshold, they would be refunded that money on the submission of something similar to the P50 form. Their money should be returned on a pro ratabasis in relation to the number of weeks left in the tax year. Under the income tax system as currently operated every four weeks one gets money returned if still out of employment. There is no reason this tax should not operate on the same basis. I urge the Minister to examine this on Report Stage to see if a similar device can be introduced for the income levy.
Whilst I have deep reservations about this tax, other measures have been put in place by the Government to ameliorate some of the worst effects of cutbacks in other areas. In my area there were long waiting lists for orthopaedic and ENT treatment. The advances made in those areas should not be forgotten in the great furore over the 1 per cent levy. I will indicate to my party, and the Government, my deep reservations about the levy. In common with Deputy Rabbitte I am a member of SIPTU. I have also listened to the remarks——
For different reasons.
The Deputy is a paid official. I was an ordinary member. I have listened to what the president of the union said today and we should take note of that.
There is little need for me to argue against the income levy because most of the arguments against it are coming from the other side of the House. I doubt if they will carry their vocal opposition through to voting against it.
I am very reluctant to accept temporary measures because I am sure others have alluded to this earlier, the youth employment levy was introduced as a temporary measure in 1983 but still remains in place. Such temporary measures are difficult to discontinue.
When the levy was introduced financial circumstances were different from what they are at present. Interest rate reductions have reduced the cost of servicing the national debt and the consequent savings could help pay for the measures which it was intended would be financed by the levy. I am concerned that the levy is being imposed on people who earn £173 per week, even if they earn this amount for only one week. It is only those in the PAYE sector who are liable for this levy, as if they are not paying enough tax in the first place.
I know the Minister can ably answer all his critics but I would like to point out that when the levy was introduced the Government was faced with a most difficult budgetary situation and despite interest rate reductions that situation still exists. The Minister had to make difficult decisions regarding the balance between revenue and expenditure and this was a most difficult decision.
Many of the reasons why across the board levies such as this should not be introduced were advanced by nearly every speaker and I concur with those views. An anomaly was outlined earlier regarding a person who earns less than £9,000 a year who could be liable for the levy but others could earn less than £173 per week for three or four weeks, earn considerably more than £173 the following week and only be liable for the levy on that week. The Minister should set an income threshold of £9,000 below which the levy would not apply.
Four or five other Members have intimated that they wish to speak. Only five minutes remain before we have to take the votes. The Minister may reply, if that is agreed.
I repeat that the Government found itself in a difficult budgetary situation at the beginning of the year for reasons well known to all of us and additional revenue had to be raised. We were faced with difficult choices and the 1 per cent temporary income levy was chosen in the belief that taxpayers would accept this temporary imposition against the background of the pay increases which resulted from the Programme for National Recovery and the Programme for Economic and Social Progress. The rate of these increases exceeded inflation and growth rates over the period and this has been recognised by trade union leaders at their unions’ annual conferences. A new tax or levy is never popular but hopefully this levy will apply for only one year.
To quickly reply to Deputy Cox, the Bill states that the levy will only apply during 1993-94, unlike levies introduced by other parties in the 1980s with no provisions for thresholds or indexation but which were charged on total income. The difficulties referred to today arise from the fact that the levy is not charged on total income but is introduced at a certain income level. I thought that was far more palatable but I can see that it creates some difficulties.
May I make a brief point about the refunds? The difficulty with refunding is that the levy is linked to the other schemes. Social insurance has a £60 per week exemption level. There is no refund because if one's income is below this level one does not pay social insurance. The employment, training and health levies do not have any exemptions. It is intended that the levy should be easy for employers to operate although I accept that it is difficult for employees to pay.
A number of Deputies have asked me to look at the position of seasonal workers and I will do so. Some Deputies say the £9,000 exemption from the levy is a very trivial figure. However, it is not trivial to the 509,700 persons who are exempt from the levy because of this limit.
How many are included?
How many are paying it? Probably the remainder of the work-force.
Six hundered thousand.
It is 665,000, to be precise. Deputy Cox, Deputy Rabbitte and Deputy Yates are aware that people move into the tax net at low levels of income. Increasing the exemption limits by even small amounts would remove many people from liability for the levy. At the £9,000 income threshold half a million taxpayers are exempt from paying the levy. This answers some of the issues raised this morning. A similar situation existed in 1983. The then Fine Gael Minister for Finance in 1984 — I am not sure who the Minister was in 1984——
Labour were there anyway.
——brought in an exemption limit having initially introduced a levy without any exemption. The exemption limit was introduced because so many people were liable for the levy. I followed the same procedure which is not an unreasonable one.
The key question is whether we can give guarantees about next year. Unfortunately, I cannot give any guarantees. When the budget was introduced on 24 February interest rates were at 16 per cent, the external reserves had been depleted and there was great concern about how we were going to get through the first quarter, not to mind anything else. Even though we devalued our currency two weeks earlier the external reserves remained depleted. The morning after the budget there was an inflow of £500 million because the budget was seen by the financial markets to be credible.
Because of devaluation.
Because of sterling.
There was no change whatsoever from the time we devalued until the morning after the budget. I want to kill that myth once and for all. What the markets——
You are saying devaluation had nothing to do with it?
Sterling appreciated and the Bundesbank cut their rates.
The Fianna Fáil-Labour Government acted totally responsibly, had total fiscal control and convinced the international markets of what was right. The fact is that this levy contributed towards that and it is one of the main reasons today that we have 8.5 per cent interest rates.
(Interruptions.)
As it is now 3.30 p.m. I am required, in accordance with the Order of the Dáil of 20 May 1993, to put the following question:
That all the amendments set down by the Minister for Finance to Chapter 2 of Part I of the Bill and not disposed of are hereby made to the Bill and in respect of the section undisposed of in the said Chapter that the section is hereby agreed.
On that question a division has been challenged. In accordance with Standing Orders, the Clerk will take the division after eight minutes have elapsed or as soon as all the Members or substitutes are present in the House.
Deputy Yates grouped the amendments. If that group included amendment No. 48, I would like to withdraw that.
We will allow that, but in future they should be withdrawn beforehand.
I was trying to catch your eye, Chairman, but you have the practised eye of a bar person.
Amendment No. 48, by leave, withdrawn.
As eight minutes have elapsed I will ask the Clerk to take the roll call vote.
Question put.
The Committee divided: Tá, 19; Níl, 11.
Tá
- Ahern, Bertie.
- Ahern, Michael.
- Ahern, Noel.
- Broughan, Tommy.
- Connolly, Ger.
- Ellis, John.
- Ferris, Michael.
- Kirk, Séamus.
- Kenny, Seán.
- Kenneally, Brendan.
- Briscoe, Ben.
- Nolan, M.J.
- O’Keeffe, Batt.
- O’Keeffe, Ned.
- O’Leary, John.
- Penrose, Willie.
- Smith, Brendan.
- Gallagher, Pat.
- Walsh, Eamonn.
Níl
- Boylan, Andrew.
- Connaughton, Paul.
- Cox, Pat.
- Currie, Austin.
- Rabbitte, Pat.
- Doyle, Avril.
- Finucane, Michael.
- Keogh, Helen.
- McGrath, Paul.
- Nealon, Ted.
- Yates, Ivan.
Question declared carried.
Amendment No. 50 has been ruled out of order.
It has not prevented us from discussing amendments in the past. I do not want to move from what has been the trend so far. I was looking forward to having a meaningful discussion on this amendment. Since Garret FitzGerald retired there is no socialist left in the House except myself. There would have been support from some of the Government benches for this amendment and I am sorry it has been ruled out of order.
The Minister has a detailed amendment in the new section before section 8, in Chapter III. Why was this amendment not taken before Deputy Rabbitte's amendment?
It was included in Chapter II.
The heading on this amendment is Chapter III.
It is in Chapter II, before section 8.
Amendment No. 50 not moved.
NEW SECTION.
I move amendment No. 51:
In page 16, before section 8, but in Chapter III, to insert the following new section:
"8.—Section 15 of the Finance Act, 1992 is hereby repealed.".
I hear the collective sigh of relief that wealth tax will not be reimposed. We are told that not only do we have a great deal of money in the country but we have a great deal of money outside the country. We now move from the sublime to the ridiculous. This amendment proposes the repeal of section 15 of the Finance Act, 1992. That section deals with disability benefit. The Finance Act, 1992 enabled the Minister to introduce a regulation that would make disability benefit liable to tax. This was not done during the course of the Finance Act, 1992, but it was done with effect from the beginning of this tax year.
I ask the Minister, in terms of revenue, what is the rate. I, and I am sure other Deputies, have had a lot of representations in relation to this matter. People who through no fault of their own find themselves on disability benefit have found their spouse's income reduced by up to £30 per week. It is a severe measure. These people are usually on low incomes. Disability benefit by its nature is not intended to be long term. There is the option of going on to long term invalidity pension when it is deemed necessary. I raise this matter because it has a serious impact on the take home pay of the working spouse, who is often on low pay. It is unfair.
Deputy Rabbitte has raised this matter so I will outline what his amendment entails. The 1993 figure is £10 million and I believe the full year figure is £20 million. Deputy Rabbitte is proposing to repeal section 15, which provides for the treatment of income for tax purposes of certain short term social welfare benefits, including disability benefit, injury benefit, unemployment benefit and the pay-related benefit.
Section 15 is the enabling provision and only comes into effect in respect of the particular benefits by way of an draft order, which is approved in advance by the Dáil. Last year the Government gave a commitment that if these areas were brought into the tax net we would bring forward an order and it would be debated in the Dáil. I recall that that was the basis of an amendment tabled by the Deputy last year. An order effective from 6 April 1993 was made on 10 March. At present, unemployment benefit and pay-related benefit are outside the tax net, but it is hoped that it will be possible to apply those for taxation purposes for the 1994-95 tax year.
Last year I introduced section 15. When the draft order in respect of disability benefit and injury benefit was debated in the House on 9 March, I emphasised that the taxation of short term social welfare benefits, which in essence are a substitution for unemployment income, is essentially a matter of equity. Social Welfare income must be treated as income for tax purposes because people in similar circumstances with a similar income must be treated in the same way regardless of whether an individual is in receipt of social welfare payments. The extent to which taxation will arise will depend on the level of non-social welfare income. In cases where the only income is from social welfare sources exemption from income tax which is being increased by section 1 of the Bill, will be assured.
The taxation of short term social welfare payments has been rcommended by the groups who have looked at this issue, including the Commission on Taxation, the Industrial Review Group, the Culliton Report, the Commission on Social Welfare and the former National Planning Board. In particular, the taxation of disability benefit will remove any role that benefit played as a disincentive to work.
Like Deputy Rabbitte, I have had representations on the matter. For example, if a husband is paying income tax and his wife is on disability benefit he faces an increase in his income tax bill because his income and the disability benefit are taken as the joint income of the house-hold. It is processed in the normal way.
I have some questions for the Minister. Like Deputy Rabbitte, I get a great deal of representation in regard to this. First, does the enabling Act that went through the House last year make it legal to tax the disabled person's maintenance allowance from the health boards, as well as disability benefit? Secondly, is all social welfare benefit, such as long term unemployment assistance, now also subject to tax? Thirdly, does it also relate to farmer's dole? When the people affected contact the various agencies, no one seems to know the exact position relating to those categories.
The enabling section was designed to cover short term social welfare benefits: disability benefit, injury benefit, unemployment benefit and pay-related benefit. Section 15 of last year's Finance Act was the enabling provision. We have brought forward only the order relating to disability benefit. There has been no order for the other three.
It will not be this year?
It will not be this year, but we intend to bring one of them forward next year. We have not yet brought forward the order for unemployment benefit, but the farmers' dole is not part of this.
I am concerned about the Minister's selective sheltering behind the Culliton report. He just quoted Culliton in relation to this amendment, but the previous amendment concerning the 1 per cent income levy is totally contrary to Culliton's recommendations. We are really debasing the value of the report if selective parts are picked from it, while other portions are ignored or opposed. We should not devalue its currency because they will be of no use to any of us.
I have a mixed view on this. I accept the explanation the Minister has given and anyone looking at this over the past decade has recommended his course of action. I agree that the Minister has taken to a menu of Culliton á la carte, but it is a pity he has not chosen to take the set menu. When we discussed the Second stage of this Bill I recall suggesting, as between some members of the Government who described themselves as intellectually accepting and therefore believers in Culliton, and the Taoiseeach, who saw tax reform as a quack remedy for unemployment — he is clearly an atheist in Culliton — that this left the Minister as a type of agnostic, partly he believes and partly he disbelieves.
I am aware of some of the work done on this, including that done by the Commission on Social Welfare, but there are a number of recommendations that the commission made that have not been implemented yet. The amendment was prompted by the number of people I have had making representations to me explaining their domestic circumstances and how it hurts and the Minister acknowledges this. I am sorry that Deputy Ferris and his team have left, but——
It is half-time.
—— I have a letter here that sets out the point:
A copy of this letter is being sent to each of the four Teachta Dála in South Tipperary, and to each leader of the political parties in Dáil Éireann. I have already written directly to the Minister for Finance but having thought further about the matter, I feel that my dissatisfaction should be made known across the political spectrum. Following the budget on Ash Wednesday, Statutory Instrument No. 66 brought part of the 1992 Finance Act into effect, from the beginning of this tax year. This causes me concern in that it resulted in certain social welfare benefits becoming taxable for the first time. In my case, the problem arises with disability benefit payments. Prior to the introduction of this regulation, my tax free allowance was some £5,350 per annum, on an income of just over £8,000. As I qualified for marginal relief, I paid tax of £397. My wife has been in receipt of injury benefit and disability benefit since August which amounts to around £3,000 per annum. Thanks to Statutory Instrument No. 66, that is now taxed resulting in loss of marginal relief, loss of my tax free allowance and my tax bill being increased from £397 to £1,600.
That letter is typical of what I have come across. It is a savage impact on someone with an income of £8,000 per annum and it is exacerbated, as the Minister has acknowledged, by virtue of the fact that most cases I have come across involve husbands losing their tax free allowance, which is promoting all kinds of — whatever is the opposite to domestic harmony — and so on. I am pressing the amendment.
Did I hear the Minister correctly when he mentioned the figure of £10 million. Is this what the saving will be?
The figure was £10 million in 1993 and £20 million in a full year approximately.
That is a significant figure. I do not know how many people are in receipt of disability benefit, but I have been led to believe that the cut could be as high as £55 per week. The Commission on Social Welfare has advocated this and it appears that most of the organisations involved, provided there is a level playing pitch, would agree. I put it to the Minister that some may be overly penalised because of this. Many people, by virtue of the fact that they are in receipt of disability benefit, are extremely sick and there are many extenuating circumstances. Extra heat or more than the average domestic help might be needed. Is there any way, either thought the health boards or any other system, that people can be helped to some degree if it is proved that they are suffering financial hardship because of the new law? I am sure every Deputy and Senator here knows what I am talking about. I do not know how many such cases there are, but I know about up to ten of them.
I have sympathy with the amendment, but there is a limit to how far you can go. If a person's income is over the amount, they will have to pay tax but if it is under their tax free allowance, it is not payable. I have seen cases over the years where some people who became ill towards the end of January used whatever means they could to claim tax back by using disability benefit. Admittedly it was a tiny minority who did this but over the years other people were told how to do it. Is it that others who work and perhaps take a couple of days off due to flu cannot claim benefit? There is a limit on how far one can go. It will be difficult to find an amendment in regard to those who could be acutely ill on disability benefit. I have come to the conclusion that if one has an income, whatever that income is, one pays according to his or her tax free allowance, but that is not allowed. All Members would like the rates lowered, but we are unable to do that because of the enormous drain on our resources.
I have sympathy for the amendment but regrettably I could not go along with it because the system has been abused. We have to stop abuse. I and the vast majority of people do not mind paying tax provided it is used to look after people who are ill and incapacitated. I cannot go along with a tiny minority of individuals who use the system to claim back tax and claim benefit too. I am open to correction but that is why pay-related benefit has been abolished, because there were some who were claiming that also. Regrettably some people have used the system very well.
Amendment put and declared lost.
SECTION 8
Amendments Nos. 52, 56 and 58 are related and it is proposed to take them together by agreement. Is that agreed? Agreed.
I move amendment No. 52:
In page 21, to delete lines 26 to 51, and in page 22, to delete lines 1 to 28, and substitute the following:
"(d) the aggregate of the consideration shall not be less than 75 per cent in Irish Government stocks (gilts) and quoted Irish equities,".
Quite a lot of the Bill is dedicated to the establishment of the new 10 per cent tax treatment of special investment funds, special investment schemes in the unit trusts and special portfolio investment accounts for stockbrokers. I wish to make a number of general points because I wish to discuss seed capital and other areas and time is limited.
I have reservations about this area. Our absent friend, Deputy Ferris, has constantly cajoled me to state where I would raise revenue. As everyone knows measures to raise revenue proposed by Opposition TDs are ruled out of order. Deputy Ferris is back so I will have the benefit of some wisdom on this point.
What would the Deputy do without me?
The committee would be rather more boring.
They were reading the letters of the Deputy's constituents.
Deputy Ferris and others have criticised me for not stating how I would pay for some of the objections to tax increases that I have raised this morning. First, the 10 per cent special savings accounts are not a good idea. The banking community basically misled the Minister by stating that there would be massive capital outflows when DIRT was abolished if there were not 10 per cent special savings accounts. What happened was that bank and building society managers wrote to their depositors and told them that they had money on account and were paying 27 per cent DIRT. The depositors were asked if they wished to switch to a special account and pay 10 per cent DIRT. Up to two-thirds of deposits are likely to be relocated from the 27 per cent tax treatment to the 10 per cent. To rectify that anomaly, instead of putting money into a risk free bank account other investment products such as life assurance policies, stockbrokers accounts and unit trust policies are to receive the same treatment. We are levelling the playing pitch and I have no difficulty with that. The problem is that it is the wrong pitch. An original error is being compounded by a very favourable tax treatment that should not be granted and we are going further this year by saying that under no circumstances will anyone pay tax of more than 27 per cent. The differential between PAYE and unearned income is too large. I do not accept that a rate of 20 per cent as opposed to 10 per cent would not be fair.
I am surprised that the Labour Party, who waxed so eloquently on the rights of workers, should seek to give speculators and investors such favourable tax reductions at the expense of the 1 per cent income levy and other such measures. These products exist and people now have an entirely risk free guaranteed income. One building society is advertising car finance and it is being given the most favourable tax treatment possible. That is ridiculous. All the cars are imported and they bring no net wealth to the country. It is an incredible situation. It is not stated how the money from the 10 per cent savings accounts should in turn be invested. It defies all logic in respect of employment creation.
The Minister has set out some conditions on how this money must be invested, 40 per cent rising to 55 per cent in certain types of quoted companies. I have spoken to a number of fund managers about this and they say it will not work simply because they are not prepared to invest in equities that will not result in a guaranteed return. For example, fund managers have told me that £205 million that was invested in unquoted stocks are worth £65 million today. People invested in GPA and their paper now is worthless. They have to compete with these totally guaranteed risk free savings accounts and they say that conditions set out for the way in which the money must be invested in equities is such that it will not have an uptake.
What I have proposed in amendments Nos. 52, 56 and 58 would ensure more benefit. We would be insisting that the money remains in Ireland — not 40 per cent or 50 per cent but 75 per cent. It can stay in Ireland either in Government stock, in gilts or in equities; but it gives flexibility to the fund managers to switch between the two as opposed to being stuck with a particular equity that is too risky and may not have any uptake. Notwithstanding my overall objections to the provisions regarding the 10 per cent, rate and the maximum rate of 27 per cent, if an attempt is being made to level the playing pitch it should be done in an attractive way. The only difference is that I have specified the option of Government gilts and it is Government policy to promote the greater usage of gilts. It would be a more sensible way to go about it while at the same time ensuring that money is not invested simply in equities that are quoted in Dublin and London. These are British stocks or multinational stocks and we should ensure the money stays in Ireland.
I ask the Minister to consider these amendments. They will give larger benefit in terms of job creation and ensure that the uptake in respect of these investment products will be more successful.
I wish to raise two issues. One relates to the Government being selective in implementing the Culliton report. In fairness to the Minister, some influence of the Culliton report is evident in this section, in that it tries to establish a degree of neutrality between special savings accounts and other potential savings media. In that sense, there is an attempt to iron out some of the creases which were observed after announcements in last year's budget and in the course of the debate on the Finance Bill.
I understand we had a low rate of DIRT because of fear of capital outflows, the completion of the internal market and a requirement to prevent capital leaving this country when there were free capital movements. I do not know where the cut-off point is before capital is propelled outwards on the grounds of retention taxes such as this. I would share the suspicion expressed by Deputy Yates that there may be a greater taxable base or a greater rate of taxation from the given base to be found. Germany had an unhappy expeience when it introduced its DIRT and promptly withdrew it but I think — I may be wrong in this — the circumstances were different.
I recently put questions to the Minister for written reply in relation to how these products are working and he replied that it was too soon to say, the date was not available, we have not been through a full cycle of a year and they are only recently operational in some cases. I suspect that many of the people who will be saving in Ireland in these accounts are unlikely to have detailed knowledge of the financial market in Luxembourg and elsewhere or to seek much advice in that regard.
I suspect that a greater taxable base is possible because people on low incomes here reach the penally high rates of tax very quickly and there is also this treatment of unearned income. There are questions about equity and about the feasibility of reviewing these rates once there is a level playing field across the products, which has to be welcomed because it removes — at least within that sector — the argument of favoured products and areas. This is a significant attempt to do that.
I wish to remind the Minister that this time last year he argued for the special 10 per cent products on the grounds that the lifting of exchange controls and so on would have lead to massive outflows of capital if those measures had not been taken. Is he able to quantify how that has turned out in practice because there are conflicting views? There were strong views at the time about the inducement it gave to invest lazily rather than productively.
There is a great difference between an entrepreneur whose investment is likely to result in job creation and one who invests in the Mespil flats complex or the Telecom Éireann site or puts money away in tax havens outside the State — in Northern Ireland or the United Kingdom which can hardly be described as tax havens if we are to believe the figures being bandied about in terms of the "hot money" amnesty. Can the Minister evaluate the experience of the 10 per cent products? Had this measure to be taken? Is it something on which he can make a judgment? What might have happened if we had been less generous, because it is extraordinarily generous?
Deputy Yates' amendment seeks to construct the incentive on the basis of 75 per cent being invested either in Government gilts or in Irish securities which is considerably higher than the figure advanced by the Minister. Leaving aside for the moment the option of Government gilts which Deputy Yates suggested, to what extent can the Minister address the issue raised by some managers and other business people, that investment projects are not available here? We do not have the capacity to absorb such sums of money.
Deputy Yates gave the example of one area where £200 million was invested which is worth £65 million today. If a life assurance company was handling a person's pension entitlements, they would not want them to be invested in a manner which brought such a return. It is a serious question in terms of the capacity of our industrial infrastructure to absorb such levels of investment.
Business people argue that these are the circumstances, so therefore I doubt the reality of the balance here, 75 per cent as suggested by Deputy Yates against the sliding scale up to 55 per cent suggested by the Minister. I imagine that Government gilts have a limited attractiveness. The Minister seems to have gone in this direction rather than hitting the life assurance companies who would seem an easier target than the 1 per cent income levy but we will not go over that again. That would have yielded a great deal more and may have been more efficacious than this is likely to be but I honestly cannot judge.
With exchange controls now removed it is difficult to gauge the outflow of funds from this country. I firmly believe that the 10 per cent DIRT resulted in an enormous amount of money being left here. I also believe that it was a factor in reducing interest rates here. Many of the financial institutions are offering attractive rates now even on loans to buy cars, which are no longer a luxury. Attractive packages are available over a three year period on a sliding scale. The 10 per cent DIRT introduced by the Government of the day, brought about the inflow of funds. My late parents told me that if I was to invest money in shares to be very careful and to make sure I never needed the money. That was a long time ago.
The Deputy decided to go into politics instead.
He took the softer course.
He took the safe pensionable job instead; he took their advice.
Is the Deputy going for Europe?
I will be down to see Deputy Yates. I have been slightly derailed there.
Just like Mary Poppins.
Deputy Connolly without interruption.
In recent years there has been a dreadful return on managed funds and one would have to be cautious investing in them. Investors are turning to deposit accounts because they are sure of a return on their investment. As a result there is a large inflow of funds into the financial institutions. The 10 per cent tax rate has attracted millions of pounds into the country and that has been important.
We have not seen the anticipated upturn in the economic sphere because those who got a moratorium on repayments from their financial institutions now have to meet the higher repayments. However, after that situation settles we will again see good inflows of funds into our national reserves. The Government made the right decision and is to be commended for it.
Deputy Rabbitte participated in the debate on this matter last year when conflicting arguments were offered by different groups including the Revenue and the Department of Finance. I had to make the final decision. Nobody knew what to do as it was a new situation.
What persuaded me to opt for 10 per cent was the experience of Germany. Germany introduced a 10 per cent rate and lost not only 50 billion Deutsche Marks to Austria and Luxembourg within four weeks but also their Minister for Finance.
That was the double yellow line.
Nothing concentrates the mind quite like that.
It was self preservation.
Presumably he did not have an anorak.
I thought it necessary to be prudent. A lower rate then 10 per cent seemed ridiculous and a higher rate seemed dangerous. A rate of 15 per cent was my preferred option but the banking sector strongly advised a zero rate. There were questions in the Dáil and, while no Deputy insisted on a zero rate, it was clear they had been lobbied.
The view of the bank was that there would be outflows of funds unless a zero rate was decided. The 10 per cent rate was tried and it must be reviewed periodically. Capital liberalisation within the monetary systems has only been in place since 1 January. It cannot be judged in the first few months of the year even in countries that are stronger than ours. Special investment accounts were only introduced in mid-February.
We must look at the products and encourage Irish investors and those with significant finance to invest in those products. The products were worked out in detail with the financial sector and with the industries involved and they are being utilised and marketed.
Deputy Rabbitte asked about the kind of moneys involved and if the equity managers had a valid argument. I have spoken at length with equity managers in an attempt to understand their position. They have a huge asset base of £9,000 million in pension funds alone. The cash flow and turnover on that per year is £850 million. It is a great deal of money in the context of projects here. Their job is to invest in safe areas. They are prone to favouring the six top companies on the Stock Exchange. In fact it is hard to interest them in an Irish company where capitalisation is under £100 million.
I have been encouraging them to invest in these projects and establish equity in Irish companies, quoted and non-quoted. There is no point in arguing with them, they must be convinced. We are endeavouring to convince them to put small resources into the system. Deputy Rabbitte is quite correct. If they offered £500 million between 1993 and 1994 to invest in Irish quoted and non-quoted products I would probably have to tell them that I have no suitable takers.
We may achieve a sum between £25 million and £40 million of such investment. The big operations will be fine. There is no need to encourage investment in those products. It is in the quoted and non-quoted products and those in other sectors we are attempting to build confidence; to move money into the special savings accounts and the pension funds. In this year's and last year's Finance Bills we have endeavoured to get it right by working closely with them. We must have good faith in this and see if it operates effectively over time.
A large number of companies are advising me on the special investment accounts. Deputy Cox is right in saying that the ordinary individuals may not be bothered with them. I have found that, with tax consultants and accountancy groups, things have changed from five to ten years ago and are totally different to when I was dealing with financial markets 15 years ago. Most people's money goes to an adviser, as we found during meetings before introducing the Finance Bill. More people seek advice and have their money managed by such individuals. Advisers are looking for global investments. While we were having great difficulty with the Finance Bill I have already launched two books and I think Deputy Yates launched a third one. The resources of the people following this debate are quite unbelievable and they convince people to use those schemes. In all of these sections we have endeavoured in conjunction with the industry, to work out compromises that will encourage them to invest in the products, invest in the country, hold their reserves here and use these products.
Deputy Rabbitte referred to hot money inside and outside the country. That is a difficult issue. From the discussions I have had on the matter I think there is a lot of money there and how to use it is naturally a focus of the Government's attention. There is, I believe, a massive amount of resources there which is not utilised. The issue has to be addressed one way or the other. There are numerous proposals about what should be done. There is no doubt that the moneys exist. I have access to substantial information from both inside and outside the country, about where the money is and we must do something with it. That is a matter for another day.
These products are worked out as good as we can. I am not against what Deputy Yates said. I am open to reviewing and monitoring this as it goes on. No one has the wisdom required to watch the kind of money we are talking about, which is hundreds of millions of pounds. Savings between non-life, life and pension funds amount to £26 billion, perhaps even excluding the pension funds. I am open to correction on that figure. I am using information I received at another meeting. There are vast resources within our economy.
The Minister did not respond to my proposal about an interchangeable fund between gilts and equities. I would like to hear the Minister's view on that. The fund managers say to me that there are problems with the situation as it is. One problem is that the bulk of the investment will be made in stocks that are quoted on the Irish Stock Exchange and on the London Stock Exchange, which are not necessarily Irish. Another difficulty is that people invest over ten or 20 years and they want a return on their money. Therefore, it is up to these fund managers to play the market. It could happen that they would favour stocks gilts over equities if gilts are giving a better return.
Deputy Connolly is absolutely right. Up to six months ago equities were a bad investment. The Deputy was probably in a position to take his parents' advice and still invest money that he would never need again in those equities. The Deputies would have been most disappointed with the return on his money. Over any 20 year period fund managers will tell you that equities will out-perform inflation better than gilts or property over a long enough period. That is a truism. I ask the Minister to consider a point made to me by the association of fund managers. They said they would agree to 100 per cent of the money staying in Ireland but that if they must invest in these four stocks the investments will not be made.
I will consider the Deputy's point. We listen to investment managers at all times. I will make one further point. The Irish Insurance Federation has suggested that the Irish equities requirement is too high and that instead a minimum requirement for investment in Ireland should be made. Deputy Yates tabled an amendment asking for 75 per cent investment in either equities or gilts. If we were to amend the legislation along these lines it would allow products with a very small Irish equity content to avail of the very low tax regime. The Deputy says that is not what he wishes to do. It would defeat the purposes of the special investment accounts which is to increase the availability of finance for the Irish equity.
To allow many existing life assurance products move from the 27 per cent tax regime to the 10 per cent tax regime would be expensive for the exchequer. There are restrictions on the products taxed at 10 per cent I will not explain in detail what these restrictions are but there are various limits on the individual. The change would not be of any great benefit to Irish business. This is the first year these products have been available and we will keep the matter under review.
There will be Report Stage amendments in sections 8 and 10 as published and on the new section 14. I am considering the possibility of Report Stage amendments to deal with the interaction of making gilts chargeable to capital gains tax in the case of life assurance companies and unit trusts, and certain detailed provisions of the Capital Tax Act, 1975.
Amendment, by leave, withdrawn.
Amendments Nos. 53, 57 and 59 are related and may be discussed together.
I move amendment No. 53:
In page 22, lines 33 and 34, to delete "and section 9 of the Capital Gains Tax Act, 1975" and substitute ", section 9 of the Capital Gains Tax Act, 1975, and paragraph 4 of Schedule 1 to the Capital Gains Tax (Amendment) Act, 1978".
As Deputies are aware the special investment funds, special investment schemes, and the special portfolio investment accounts which are being provided for in sections 8, 10 and 11 respectively must all satisfy certain conditions in relation to minimum investment in Irish equities. At any time a minimum percentage, calculated by reference to cost of the assets, fund, scheme or account in question must be invested in Irish equities. Essentially, there must be at least 40 per cent in the first year rising to 55 per cent in year four; the minimum percentage in smaller Irish companies must be 6 per cent in year one rising to 15 per cent in year four.
If assets indistinguishable from each other, for example, quoted ordinary shares in a particular company, are required for a fund or account on different dates, the cost of those assets is clear. It is the sum of their historic costs — so long as the fund retain all those assets. However, if the fund disposes of some, but not all, of its holding of the indistinguishable quoted ordinary shares, the position is not so clear. The question then arises as to what was the cost to the fund of its remaining holding of those shares. Identification rules, such as first in — first out, or last in — first out rule are required. Given the presumption of an overall increase in value over time of Irish equities, the first in — first out rule would be most favourable to the fund in terms of meeting the Irish equity investment requirement.
In general, Irish shares acquired more recently will have cost more and, accordingly, will contribute more per share to meeting the percentage requirement's which are based on cost. Accordingly, the rules at paragraph 4 of Schedule I to the Capital Gains Tax Amendment Act, 1978, which are first in first out rules, will be applied by the amendments proposed to each of the relevant provisions in sections 8, 10 and 11. I commend the amendments to the select committee.
Could the Minister now explain that in English?
The people studying this section will readily understand it. The main point is that there must be 40 per cent in year one rising to 55 per cent in year four and the minimum percentage in the small Irish companies starts at 6 per cent in year one rising to 15 per cent. I will leave the technical details to others.
I am pleased to hear the Minister is using the first in first out rule in this case. As a new Deputy I hope it does not apply to the House in the next election.
Amendment agreed to.
Amendments Nos. 54 and 55 are related and may be discussed together.
I move amendment No. 54:
In page 26, line 24, to delete "an asset" and substitute "the whole or part of an asset (any interest in or rights over an asset being regarded for the purposes of this section as part of the asset)".
The new tax regime for life assurance companies establishes two effective rates of tax in respect of capital gains accruing within a life assurance company for the benefit of policyholders. If the capital gain arises in a special investment fund for the benefit of special investment policyholders they will be charged at 10 per cent and if the gains accrue to the general life business fund they will effectively be charged at 27 per cent.
Amendment agreed to.
I move amendment No. 55:
In page 26, lines 32 and 33, to delete "that asset at the asset's market value" and substitute "the asset or part, as the case may be, at the market value of the asset or part, as the case may be,".
—An tAire Airgeadais.
Amendment agreed to.
Section 8, as amended, agreed to.
Section 9 agreed to.