Select Committee on Finance and General Affairs debate -
Tuesday, 9 May 1995

SECTION 4.

Mr. McCreevy

I move amendment No. 6:

In page 15, between lines 32 and 33, to insert the following:

"(c) the allowance shall be doubled in the case of a married couple.".

Amendments No. 6 and 7, the latter of which relates to the next section, are in my name but will be addressed by Deputy Ó Cuív who has a great interest in this area. In drafting amendment No. 6, I think I made a small error. After "in the case of a married couple" it should read ", one of whom is not working" and the same change was intended in amendment No. 7.

Section 4 relates to the PRSI allowance which has a history as Members well know. The Minister for Finance, Deputy Quinn, Deputy Mitchell and I were here at the time of the PAYE marches of the late 1970s which arose as a result of a Government changing its mind about a farmers' sales tax and it brought 750,000 people out on the street. We appeased one section of the community and——

Mr. Quinn

It was in the middle of an Árd Fhéis.

Mr. McCreevy

I remember it quite well, Minister. It was in my first period in the Dáil. I learned one lesson from it, and all Ministers should learn it too. I remember the farms sales tax was put into a budget without a lot of consideration. After the budget, considerable lobbying took place. It would be well to remember that it was a 2 per cent sales tax at marts, it was not penal but it raised a lot of justifiable questions at the time. A number of Fianna Fáil Deputies, myself included, had meetings in the parliamentary party rooms to try to get this changed. It came to an Árd Fhéis and I remember the late Deputy George Colley, in referring to all this, coined a phrase which has now entered political folklore. Arising from this the sales tax was dropped, it was a bad idea at the time, although much thought had gone into it. The result was that 750,000 PAYE taxpayers demonstrated on the streets. PAYE has remained an issue to the present. People were overtaxed at that time but it did not become such an important political issue until then. Attempts to reduce the tax burden have become the hottest political issue at every subsequent election.

If I remember correctly the Government decided to introduce a PAYE allowance of £800 and a subsequent PRSI allowance of £312 as a result. What my colleague Deputy O Cuív is saying is that — apropos the point made earlier by Deputy McDowell about the PAYE allowance being doubled in the case of married couples — what is being attempted here, and in section 7, is that if a wife decides to remain at home, and does not work outside the home, the allowances for that person should be doubled. That is the purpose of amendments Nos. 6 and 7. Perhaps Deputy O Cuív would like to elaborate further on this point.

Éamon Ó Cuív

As Deputy McCreevy has pointed out there is a drafting error in this amendment. The basic point being made is that people in similar circumstances, on the same income, should pay the same tax. That is not how the system works at present. There is a significant tax difference, for example, if the PRSI allowance and the PRSI exemption — which is a social welfare matter — and the PAYE allowance of a family with one spouse working and a family with both working are taken together where the gross income is the same. I calculate that when a family with a single income of £16,000 is compared to a family with two incomes where the gross income combined is £16,000, due to tax relief and PRSI exemption, which has been doubled, the second family is £7.62 better off in take-home pay. When the income is £32,000 the difference is in excess of £10 per week.

That is a nonsense. A married couple with the same number of children, earning the same income, be it £16,000, £18,000, £20,000 or £32,000, irrespective of the combination —£16,000 each, £32,000 and nil, or £30,000 and £2,000 — should pay the same tax. That would ensure equity in the system. In situations where there is a full-time home-maker or non-earning spouse, irrespective of whether it is a man or a woman, the family should not be penalised. It is important to allow total flexibility in people's personal arrangements but they are, in fact, penalised if there is a full-time homemaker involved.

Mr. M. McDowell

I oppose this for the reasons I elaborated earlier. I believe it would tilt the system more towards the Murphy tax decision than it is at present. I ask Deputy O Cuív to take into account that a couple who both work 40 hours per week get no help of any kind with childminding, they get no help with work expenses such as bus fares. There are expenses attached to taking up employment. Some people spend 40 hours per week working behind a machine and have to arrange for childminding at home and that is a very serious sacrifice for a working mother. When we are talking about homemakers we usually mean mothers. Therefore, I would be absolutely opposed to anything which extends the Murphy 2:1 tax rubric to the few remaining areas where it does not apply.

Éamon Ó Cuív

In relation to amendment No. 6, in the case of the PRSI allowance, Deputy McDowell's argument falls. Whatever about tax, PAYE allowances and so on, in relation to the PRSI allowance it has to be accepted that where two people are working and getting two PRSI allowances, they are also getting all the advantages of paying PRSI; for example, each is separately entitled to unemployment benefit, disability benefit etc. People are getting something for their money in that case, which means that they are already getting an advantage for having paid their PRSI.

The same basic rate of PRSI is paid on one salary of £16,000 as on two salaries of £8,000. However, the difference is that with two £8,000 salaries there is twice the advantage because two people are making separate contributions and they will both have a completely separate set of entitlements in their own right, irrespective of which of them falls sick, is unemployed and so on.

Mr. Quinn

This amendment comes about as a result of looking at PRSI as a tax rather than as an insurance contribution. PRSI is charged on an individual basis, similarly the PRSI allowance is granted on an individual basis against the income of the individual which is liable to higher rate PRSI. The reason the allowance is there in the first instance was accurately described by Deputy McCreevy — it was in response to the marches in 1979 and the subsequent pressure.

I have great sympathy for the position of principle outlined by Deputy McDowell. It appears to be the choice of many women to work outside the home as part of their overall career. There are occasions when they want to take time off for a couple of years to work at home to mind their children, but in many cases they want to retain the option of going back to the paid workforce outside the home afterwards. We should not penalise that in any way. The points which Deputy McDowell made in relation to the costs of two people working outside the home were well made. There is an element of philosophical debate in relation to this and I find myself more in sympathy with the views expressed by Deputy McDowell in this particular instance.

I am not prepared to accept the amendment. It would cost an additional £4.6 million in 1995 and £7.4 million in a full year. It would also introduce a distortion which I am not prepared to contemplate.

Éamon Ó Cuív

There seems to be a presumption in Deputy McDowell's argument that every two income family has children and child minding expenses, which is not true. If anything, a greater number of single income families have children. For obvious reasons, a large number of two income families have no children and, therefore, have no child minding expenses. That is an over-simplification and a rather simplistic argument.

If one believes that people should be given allowances for travelling to work and for child minding, they should be targeted at those who need them. Otherwise, one is making a general statement in relation to the specific. I repeat that I am talking about similar people in similar circumstances. If we want to talk about child minding expenses or the cost of travelling to work, let us do that. However, the fact is that it is equally inequitable, according to Deputy McDowell's' argument, that somebody works 40 hours a week slogging behind a machine and is paid £10,000 for their effort while somebody in another profession, such as a barrister or a doctor, works for 40 hours a week and is paid £1,000 a day for their effort. I agree that this is totally inequitable.

I wish there was some way of stopping it, but unfortunately there is not. However, this is not the argument in question. The argument is simple; people in similar circumstances and on similar taxes should pay the same. A married couple, irrespective of their working relationship, should be treated as such and should get double the allowance. The advantage of that is that it allows for all circumstances to be totally and flexibly dealt with in an equal way and does not create the wrinkles that we currently have in the system. Our system is full of wrinkles because we always think of a couple as either having two equal incomes or only one income. Ultimately, I want to see a flexible system because it could deal with a married couple as a couple, irrespective of their personal arrangements.

I fully welcome Deputy McDowell's suggestion that the cost of travelling to work should be taken into account. On average, rural people pay a lot more to travel to work than those in urban areas, who can normally avail of subsidised transport services to get them there and back.

Mr. Quinn

I am not sure whether I wish to open up a debate on the urban-rural divide. Not only am I a self-proclaimed Dublin Nationalist but an urbanist to boot. There is a strong argument that can be made on the other side of that equation and it has not been articulated with sufficient vigour for many years. However, in deference to the committee and to you, Chairman, I will not get into it. This area is fraught with enough difficulties at present.

To accept the Deputy's amendment, leaving aside the philosophical argument underpinning it, would be to make a difficult situation even more complicated. We had a discussion, before Deputy Ó Cuív had a chance to join us, about the relationship between single and married people and taxation generally. If one accepts that PRSI is perceived and considered to be a form of taxation, the arguments that were advanced in the Deputy's absence would prevail. The main reason I am not accepting the amendment is that it would cost £4.6 million in 1995 and approximately £7.5 million in a full year.

Mr. McCreevy

This allowance has been cut from £312 to £140; which at 27 per cent, approximately comes to £39 per year or 70 pence a week. Why is this allowance still here after all the good changes the Minister made in the PRSI system? Surely it could have been incorporated within the tax free allowances or the changes the Minister made in relation to PRSI? How much will this £140 allowance cost for the year? I would almost make the same point when we come to the PAYE allowance.

We now have — this was touched on earlier — many PRSI rates and exemptions. A programme some years ago said that we were trying to get rid of different PRSI rates so as to bring some order to the system. However, we have taken the other direction in the last few years. There are now more exemptions and thresholds and these make the system even more complicated. Surely that area could be examined in order to get us back to where we were before. I know the Minister did this with the best of intentions, but I humbly suggest that there is a better and more efficient way of doing this than getting a lower rate.

Mr. Cullen

I want to ask the Minister — I know he is aware of it because I heard him refer to it before — about the number of categories of PRSI rates that are currently in existence; there are approximately 126 of them applying to employees alone. Trying to work it out has become a nightmare and people are spending all of their time, both in factories and in companies, trying to work them out and using accountants. It is quite an expensive exercise, as people move from one category to the next, or from one sub-category to the next. We have reached a point where something will have to be done. I am not saying that the blame lies with the Minister. It has just happened that way over the last number of years and the system has burst. It is time we had a serious look at this and tried to simplify it. What was meant to be simplified has become more complicated in the last couple of years and in the current budget.

Mr. Quinn

I will try to comply with the Acting Chairman's wishes and answer the questions as succinctly and briefly as possible. Deputy McCreevy asked for the cost of the allowance. It is estimated at £17.6 million in 1995 and £27.8 million in a full year. The number of taxpayers who will benefit from the allowance is estimated at 492,000. The reason why it was not eliminated altogether, which was our opening position when we introduced the PRSI tax allowance, is that there are certain categories of people who would have lost out had we abolished it entirely. The allowance will be granted to PRSI contributors who come within the following contribution classes: A0, A1, A2, H0, H1 and H2.

That addresses the second point made Deputy Cullen. I concede that there is a need for some clarification. I have already heard from people trying to run pay offices in small companies that it has become very complex. It is, however, one of the consequences of trying to target and tailor a taxation regime for different categories of employment. Maybe we should be able to do the targeting but provide a more simple system.

Mr. Cullen

We will have to, because, as the Minister said, the whole system is becoming a paper chase, in terms of trying to organise it and do the thing efficiently. It has gone beyond being workable. In spite of our need to target it, there must be a simpler way of doing it. It is a tendency of Ministers for Finance, in their desire to improve the system, to make changes every year. We also need some stability in the system so that companies know that, for at least a few years, they are going to be within some band and that the whole thing does not have to re-jigged at the beginning of every tax year. That should also be borne in mind.

Amendment put and declared lost.

Section 4 agreed to.

NEW SECTION.

Mr. McCreevy

I move amendment No. 7:

In page 15, before section 5, to insert the following new section:

"5. Section 138 (B) of the Income Tax Act, 1967 (as inserted by the Finance Act, 1980) shall be amended and the £800 allowance referred to in that section for a married couple shall be doubled.".

The same argument applies as that made on section 4 by Deputy Ó Cuív. It is his amendment as well. It has to do with PAYE allowances and social insurance. He will make the same arguments as he made for the previous section.

Éamon Ó Cuív

Basically, the argument is the same. I made the same case in reference to the PRSI allowance. Again, to elaborate on Deputy McDowell's counter argument, the PAYE allowance is a PAYE allowance. One of the peculiarities of any of the other arguments made against it — taking cost of going to work or whatever — is that it would imply that self-employed people do not have any costs for going to work and so on. I know that an argument will be made that self-employed people can claim some of the expenses: childminding and other expenses that are involved. They can claim some of those expenses but they certainly cannot claim childminding expenses.

The other argument is that two people have to work 40 hours a week to have a joint income of £32,000. That is not true, for all sorts of reasons. First of all, people are paid different sums of money for different amounts of effort, depending on what job they are in. Secondly, the optimum solution for minimum "cur isteach" is to get the maximum tax free allowance. If one person is earning £31,000 and the other is earning £1,000, they get the two PAYE allowances and that gets them out of the problem but they do not have all the costs associated with Deputy McDowell's argument. Those arguments are totally spurious and do not stand up to logic. When people get married and opt to be treated as a married couple, they should get double the allowances. There should be a personal arrangement between the spouses as to what job each does and how the household income is earned. Theoretically, someone could earn £50,000 and never have to leave their house. The taxman never takes into account how much effort goes into earning a living.

Mr. Quinn

We are rehearsing and repeating the same arguments and the logic of our position is the same. Notwithstanding the contribution made by Deputy Ó Cuív, this is a broader and more philosophical issue which perhaps we could address at a later time, as there are clearly conflicting views.

The allowance was originally introduced in 1980 to compensate the PAYE taxpayer for the fact that the self-employed enjoyed generally more favourable bases of taxation. The PAYE allowance is given on an individual basis against a particular source of income, that is income from PAYE employment and not from employment in the home for a homemaker. I am not, therefore, prepared to accept the amendment.

Éamon Ó Cuív

The Minister accepts that a personal allowance is given on an individual basis except in the case of a married couple, where it is doubled. Where only one spouse is working the PAYE allowance should be given on an individual basis but in the case of a married couple with only one income the allowance should be doubled.

Mr. Quinn

Earlier this morning the basis of the 2:1 rubric, as Deputy McDowell referred to it, was questioned. It restricts flexibility in targeting income and income tax relief. The Deputy is asking us to extend that rubric to every aspect of the taxation system. I have some sympathy with the view that we should be flexible. We already have flexibility in relation to the way in which certain allowances are applied.

Éamon Ó Cuív

We should either apply the 2:1 rubric or not. My understanding was that we should do it. In this country we often fail to do things properly; we do not do things in a systematic way. The public often wonder about total contradictions. The same problems occurred when the PRSI allowance was introduced. We introduced that at £50 even though there is an exemption of £60. When a person earns £61 they are suddenly paying PRSI from £50 rather than from £60. The allowance should have been the same as the exemption at £60 to get rid of another hump that we have created in the system. We create all sorts of humps and hollows and anomalies because we do not do the job properly. We should follow one road or another and stick to it.

Mr. Cullen

On the section, could the Minister explain why he did not consider making the allowance available to parents who have children in college?

Mr. McCreevy

That is the next section.

Amendment put and declared lost.

Acting Chairman (Mr. Creed)

Can I put the question on section 5?

Mr. McCreevy

We have not discussed section 5. Deputy Ó Cuív's amendment would have inserted a new section 5, that is why it was called section 5. We have to discuss section 5 as it appears in the Bill.

Mr. Cullen

That is what I was trying to say, but I was interrupted.

Mr. McCreevy

We still have to discuss section 5 after lunch because the guillotine only applies at 6 p.m. The arrangements have been changed. We can discuss section 5 at 2.30 p.m.

Sitting suspended at 1.30 p.m. and resumed at 2.30 p.m.