Special Committee on the Finance Bill, 1992 debate

SECTION 1.

Mr. Noonan

(Limerick East): I move amendment No. 1:

In page 16, between lines 14 and 15, to insert the following subsection:

"(1) As respects the year of assessment 1994-95 and subsequent years not more than 20 per cent of all taxpayers shall pay tax at the higher rate.".

Before I address amendment No. 1, I want to raise an item on the procedure of this committee. In the Dáil we agreed to a time motion for discussing various chapters and sections of the Bill. The Minister kindly consulted us; all had a say and agreed to it. Subsequent to that the Minister issued an amendment, a new chapter of enormous length inserted before section 125. The new chapter deals with first registration of motor vehicles so that the yield lost to the Exchequer for excise duty on motor vehicles is recovered on the first registration fee.

The Minister for Finance, who is always courteous in his dealings with the Opposition, arranged to circulate the amendment to party spokespersons on Friday but that was after the time motion was agreed to. We are now faced with the inclusion of a new chapter to the Bill where the time allocation was already tight. I object strongly to that. Is it possible to get additional time at this stage to discuss a new chapter to the Bill?

I would like the Minister to indicate if there will be additional major amendments over the next three days which will affect the allocation of time?

Chairman

I understand that the time allocated for the debate is as stated on the Order Paper and we have not got the power to change that. I understand that we are tied to the timescale set down.

Mr. Quinn

I appreciate that this committee is a new departure and, therefore, all of us want to make it work. We are bound by the Orders of the House and any change effected would have to be by agreement which was what I believe Deputy Noonan suggested. I would like to add my voice to his. We may have an opportunity for further discussion — I offer this in a constructive manner to the Government — on the second Finance Bill this year to which a commitment has already been given. We have an enormous amount of work in the Bill before us. In relation to the later part of this Bill which will not be discussed until Wednesday, I propose that Part VII, that is the anti-avoidance and anti-evasion measures, be referred back to the autumn session because of widespread disquiet about it among practitioners.

We have a unique opportunity for financial reform in 1992 because of the commitment to publish two Finance Bills. What Deputy Noonan said is correct in relation to the substantial number of additional amendments included by the Minister today albeit heralded by him on Second Stage. I would like the Minister to consider deferring not only the section Deputy Noonan referred to but also Part VII until autumn 1992 when we discuss the second Finance Bill. That arrangement may afford us the extra time needed.

Minister for Finance (Mr. B. Ahern)

I accept Deputy Noonan's contention that the chapter was issued after the time motion. The content of the chapter is not overly complicated and is set down clearly. At all times in preparation for this special Committee I attempted to be as helpful as possible and I acknowledge that Deputy Noonan concedes that. The earlier part of the Bill which includes petroleum taxation has been allocated a four hour session. Perhaps we could see later this evening if some of the time allocated to that section — I know it is an important section — could be used. I do not want to begin Committee Stage in continuation and this could be looked at with Deputy Noonan, Deputy Quinn and Deputy Rabbitte.

Mr. Noonan (Limerick East)

That is an acceptable suggestion from our point of view. We could meet later informally to see if something could be arranged before we arrive at that point.

I have put down amendment No. 1 before the first section of the Bill after the long title to indicate that my party believes that the tax priorities agreed between the two parties in Government are incorrect. As I said on Second Stage, far too much weight has been given particularly by the Progressive Democrats Party in Government to the idea that the key to tax reform is the tax rate and that if marginal rates of taxation are reduced not only is there a solution to the tax problem there is a macro economic effect as well which will contribute towards solving the unemployment problem. This amendment and another which follows is my party's way of formally indicating that we do not agree with this approach. I know that the Progressive Democrats and Fianna Fáil agreed last autumn that so called tax reform would be achieved by the abolition of reliefs, tax breaks and allowances, or their reduction and that the yield from these sources would be dedicated to the reduction of marginal rates of tax. That is in line with the policy of this Government over the last number of years.

When this Government came to power the top rate of tax was 56 per cent; it is now 48 per cent. The standard rate of tax was then 35 per cent and that is now 27 per cent. It is written into the Programme for Government that these rates will be reduced to 44 per cent and 25 per cent respectively after next year's budget. The theory is simple or, is simply stated at least. The marginal rate of tax rather than the actual burden of taxation is the cause of difficulty. If one could get the marginal rates down to one single top rate of 44 per cent and subsequently 40 per cent and the standard rate to 25 per cent that would firstly solve the "tax reform problem" and secondly have a major effect on the jobs market and encourage many people to go back to work.

I disagree with this formulation. There are two things wrong with the tax system. First of all, people pay too much tax; we cannot ignore the fact that the individual burden of taxation is too high particularly on PAYE people. For the person who feels the burden of taxation weighing on his or her shoulders it is not the matter in which the code extracts tax that is at issue but the size of that burden. The second disagreement I have is this: I do not believe that the marginal rate of tax is proving excessively onerous to taxpayers at the moment nor do I believe it is a disincentive to job creation. The level at which people pay particular rates of taxes is the key issue.

Firstly, people are coming into the tax net at too low a level of income. Single people on just over £60 a week are liable for tax. That is too low as a matter of justice and by any international comparison. Not only are they coming in at the 27 per cent level but they also incur full PRSI. The effective marginal rate of tax for somebody on £62 a week is 34¾ per cent. One pays nothing on the first £60 but suddenly one is paying over 1/3, 34 3/4; per cent on subsequent amounts. That is a huge burden of taxation. I have a second amendment down which I do not intend to speak on now, which proposes to break this pattern with an introductory tax rate of 15 per cent which would apply over a preliminary tranche of income of £500 for a single taxpayer and £1,000 for a married taxpayer. Once the principle is established, I would like to see it extended in subsequent budgets and Finance Bills. That would halt the present spiral.

Ideally, many people currently in the tax net should be exempted. I know that would cost an enormous amount of money and some progress has been made on it in previous years. We should restructure tax rates so that persons coming into the tax net do not automatically go on 34¾ per cent but begin paying tax at 15 per cent as an introductory tax rate. We proposed this reform as part of our tax plan at the time of the last local elections. Not many people are interested in tax plans at local elections and no great note was taken of it. We were all busy gathering votes out of local issues which is the way of local politics. However, coincidentally, the UK Chancellor of the Exchequer adopted the same strategy in his last budget and right through the Thatcher years the UK Government adopted the policy imitated here by the TDs of pulling down tax rates, aiming for a rate of 25 per cent. In the last UK budget, when there was a move away from Thatcherism, Norman Lamont introduced an introductory tax rate of 20 per cent although he should bave pitched it lower. So, this recommendation has not suddenly been pulled out of the air; it has been in Fine Gael tax policy documents since before the local elections and has received international credibility since our nearest neighbours introduced it. That is the substance of a subsequent amendment, but it runs with amendment No. 1.

This first amendment attacks the problem where the shoe pinches particularly hard. People move on to the top tax rate at too low a level of income. Most of the people I meet do not pay tax at 29 or 27 per cent nor will they be exempt from paying tax next year if the Minister can fulfil the commitment to reduce the basic rate to 25 per cent — that is not the issue. The issue is that for much of their income, they pay tax at the higher rate and it is the jump from the standard rate of 27 per cent to the upper rate 48 per cent which is the crunch. Just over 61 per cent of taxpayers pay tax at the standard rate only, but almost 40 per cent of taxpayers pay tax at the higher rate, an unacceptably large proportion. There are three things wrong. First, the jump from 27 per cent to 48 per cent is too much and if one adds on the PRSI contribution, the relativities will be the same. Second, internationally, I do not know of any tax code in Europe or among our competitors whereby people on such low income have to pay tax at the higher rate; it is particularly onerous on single people because of the way the bands are organised — single people come under this higher rate at a much lower income level than married people. We suggested previously that the emphasis be changed and rather than an obsession with whether the rate should be 27, 28, 29 or 25 per cent, the key requirement is to widen the standard rate band so that it applies to a much larger tranche of income than at present enabling a greater percentage of people to pay tax at the standard rate only.

Only 20 per cent of taxpayers should pay tax at the higher rate in the tax year 1994-95 giving the Minister two budgets in which to widen that standard rate band. It should not prove onerous to do so over the period of two budgets. Eighty per cent of taxpayers would then pay tax at either the new introductory rate I have talked about or at the new introductory rate plus the standard rate; only 20 per cent or so of taxpayers would pay tax at the higher rate. Introduction of that arrangement would bring us nearer to international personal taxation practice.

People would not worry about the higher rate if it applied only to a small group of wealthy people. The higher rate currently applies to the majority of workers and that is the big problem. One could talk about tax wedges and argue that higher rates are a disincentive to work and that persons doing overtime pay half of what they earn in tax. All of those arguments prove that it is largely unimportant whether the basic rate is 25 or 27 per cent; the issue is that extra pay, incremental payments and Christmas bonuses are almost always taxed at the higher rate of 48 per cent plus PRSI. Now that PRSI ceilings are going up so dramatically the full rate of PRSI is applicable to almost all income.

Fianna Fáil should find this approach acceptable. For the 1987 election Fianna Fáil issued a long manifesto which was very strong on policies for different sectors, on the food industry, for example and the importance of being led by a thriving beef industry and so on. Its tax reform section was quite short but contained a commitment that two thirds of taxpayers would pay tax only at the standard rate, a commitment never fulfilled. Progress was made under Commissioner MacSharry when he was Minister for Finance and the percentage began to creep up to the low sixties. Once the Progressive Democrats joined the Government the priorities changed. The emphasis switched to the rate at which tax would be paid from the burden of taxation or the kick-in points. The original 1987 policy was reversed. There are probably slightly more people paying tax at the higher rate now than in 1987 when the first Fianna Fáil administration of this series came into Government. Two thirds of taxpayers at the standard rate was not an ambitious target in 1987. Eighty per cent of taxpayers at the standard rate in the present outlook seems a reasonable objective.

I am putting down the amendment to indicate that I disagree in principle with the approach to tax reform adopted by the Government. This approach to taxation is front driven by the Progressive Democrats and the Fianna Fáil Party is being dragged along in its wake and I believe Fianna Fáil would agree with much of what I have said. They have a softer attitude than the Progressive Democrats to the preservation of allowances and to the line of argument I am putting forward here. To place amendment No. 1 in its full context, it needs to be seen in conjunction with amendment No. 8 which tries to introduce an introductory tax rate of 15 per cent. I appreciate that the Minister will not like making commitments two years ahead but he would be even more reluctant to commit himself with regard to the tax year of 1992-93.

Mr. Roche

I find it gratifying as a member of Fianna Fáil that Deputy Noonan even at this late stage would take time to endorse the Fianna Fáil election manifesto of 1987. Secondly having listened to the good sense that he spoke today——

Mr. Noonan (Limerick East)

That is the manifesto the Deputy was involved in writing, he will recall; he and Martin O'Donoghue.

Mr. Roche

I was a civil servant. I am pleased that Deputy Noonan raised that old saw.

Mr. Quinn

Deputy Roche was a civil servant in the Department of Finance.

Mr. Roche

I was a civil servant in the Department of Finance, I would remind the Minister and Deputy Noonan until 1978.

That period was one of maximum economic growth and increased employment. Things went down the drain when I left the Civil Service in 1978.

I wonder where Deputy Noonan was between 1983 and 1987? Bad as the situation may have been for somebody at the top rate in 1986 — he chose to go back to 1987 — I am simply referring to the position as we got it from Deputy Quinn and Deputy Noonan. There is much sense in the point that we should focus on broadening the bands. However, it is impractical for a Minister to commit himself to what will be the case in 1994 and 1995. I would like to see a greater concentration on broadening tax bands rather than simply a narrow concentration on reducing the top rate. I think Deputy Noonan and I are ad idem on that. The Fianna Fáil manifesto of 1987 was a very good one——

Mr. Quinn

Which version of it?

Mr. Roche

——where it suggested that we should focus our attention on having two-thirds on the standard rate. That was in 1987 and we are now in 1992. The Deputy is trying to bring 80 per cent of people below the top rate but it would be impractical for the Minister to give a commitment of that level. We should focus more on tax bands, particularly at the top level and try to reduce the rate by 1 or 2 per cent. It is gratifying that after five years Deputy Noonan is finally prepared to admit we were right.

Mr. G. Mitchell

The Minister will accept the amendment and there will be egg all over the Deputy's face.

Mr. Roche

I doubt if there will be egg all over my face.

Mr. B. Ahern

At the outset, this is a good way of dealing with Committee Stage of the Finance Bill. At the weekend I had an opportunity to look at some notes the Assistant Whip gave me on Finance Bills over the years and I noted the time allowed this year as against other years. I want to thank Deputies Noonan and Quinn who suggested this in the debate on the Appropriations Bill in December. I also thank the Government and the main parties for agreeing to this. Deputies Quinn, Rabbitte and Noonan will be familiar with the short time allowed to deal with Committee Stage of Finance Bills in the past number of years. I did not realise we spent so little time on it; the time allowed here is more than twice that allowed in other years. I thank Deputies for their co-operation in the planning arrangements. In particular I thank those involved in allowing us to use the Seanad Chamber. We had some slight hiccups; it was nobody's fault and everybody's fault, but I want to thank the Clerk of the Seanad and others who helped in providing us with accommodation for the next few days. I accept that it created some difficulty.

This amendment seeks to impose a statutory obligation on the Government to ensure that from 1994-95 onwards, only 20 per cent of taxpayers will pay tax at the higher rate. For the information of the committee in the present tax year, 1992-93, it is estimated that 62.5 per cent of taxpayers are paying tax at no more than the standard rate while 37.5 per cent are paying tax at the higher rate. I accept that to increase the 62.5 per cent to 80 per cent, as the amendment proposes, would involve a substantial cost. The percentage of taxpayers on the higher rate in the current year is 37.5 per cent, in 1987-88, taking the two higher rates into account, the percentage was just over 44 per cent.

On the basis of the current tax structure, the standard band would have to be extended by £3,215 for a single person and £6,430 for a married couple. This would cost an estimated £137 million in 1992 and £228 million in a full year.

The review of the Programme for Government sets out the Government's firm intention, within the overall budgetary parameters set out in the review, to endeavour to achieve the objectives of further reducing tax rates and increasing the basic personal allowances. The committee are aware that a particular objective is the reduction of the standard tax rate to 25 per cent. That objective is not only set out in the Programme for Government, but also in the Programme for Economic and Social Progress agreed with the social partners. It is estimated that to reduce the standard rate to 25 per cent in the current tax year would cost £140 million. I am sure the committee appreciate the cost of reducing it to a lower standard rate.

Acceptance of the amendment would involve excessive concentration on only one aspect of personal income tax. By contrast, income tax changes in recent years have achieved substantial improvements in three areas and Deputy Noonan acknolwedges this. First, we have made special provision for the low paid by means of the exemption limits and the child addition. Perhaps this is never enough but it has had a good effect and Deputies will acknowledge that it has helped a considerable number of people. Second, we have cut the top rate from 58 per cent to 48 per cent, something which a few years ago we believed would be difficult to achieve. We reduced the standard rate from 35 per cent to 27 per cent. Third, we have extended the standard rate band by £2,775 for a single person and £5,550 for a married couple, or nearly 60 per cent, which is a considerable increase.

In view of the costs involved and the Government's objectives for other aspects of the tax code, the committee will appreciate that I cannot accept the amendment. However, I would stress that I have considerable sympathy with the view that our standard tax band is too narrow. On many occasions, since becoming Minister for Finance, I have said that the tax band is too narrow.

I would also emphasise that one of the objectives set out in the review of the Programme for Government is a considerable widening of that standard band. I was involved in the discussions on that programme in 1989 and again in the autumn of 1991. There was a considerable move in this direction in this year's budget. I can assure the committee that the Government's aim is to make further substantial progress in this area as well as in other areas of the tax code, consistent with the pursuit of sound budgetary policies.

The point Deputy Noonan made on budget day, on the Second Stage debate and, again here today is that it is not the high tax rate that matters but the number of people who are on it and I agree with that view. There are two ways of helping the people at the bottom. There is Norman Lamont's idea, which Deputy Noonan says was taken from his manifesto which I will not deny. Deputy Noonan put forward the idea at least a full year before Norman Lamont mentioned it.

Mr. Noonan (Limerick East)

They also took some of the Minister's ideas.

Mr. B. Ahern

They did; they followed some of my base broadening measures, but I could not get them to follow all I wanted this weekend. I would not have any fundamental disagreement with the Opposition about people on low rates and going on to high tax bands on low salaries. The exmemption limit seems to be a better system because that would take a block of people out of the tax net. If you introduce a rate of 15 per cent or 20 per cent, you automatically have to protect that through the whole tax system. Therefore, the first part of my income is taxed at the rate of 15 per cent and I do not believe that is our objective. We are trying to change the system to prevent people, both single and married, going on to the high tax rates at low levels of remuneration and I believe that with the exemption level this year some progress was made in this area although not as much as in previous years. We should aim to reduce the standard tax rate to 25 per cent, widen the tax bands and have an exemption rate at whatever level is possible rather than introduce a third tax rate and it is important that we follow a similar course in future years.

For a number of years now we have been following the same policy; it is important irrespective of who is in Government, that there is consistency in tax reform and that the same course is followed each year. If there is exemption limits for people on the lower tax rates and an increase in the standard bands we will continue the progress we have been making for the past number of years in reducing the high tax rates and widening the standard bands to what we all consider to be fair levels. We have already made some progress in that regard.

The cost of the tax changes in this year's budget is approximately £280 million for a full year. This is a considerable cost. However, if there is consistency — there does not appear to be any great difference in our objectives, only in the manner in which we set about getting people on low pay out of the tax net widening the standard band and being more concerned with the lower rather than the higher rate — then we can make considerable progress.

Mr. G. Mitchell

I support Deputy Noonan's amendment. It is very clear and he has given two years notice which would, in itself, have the benefit of allowing taxpayers to see that there is an incentive down the road. The system, as it stands, is clearly anti-work and is asset-based rather than production-based. People will not take risks to create employment because the return is so low; instead they will invest in property or other assets of that kind because that is where the tax incentives lie.

The whole system is geared in the wrong direction for employment purposes. If we are serious about coming to terms with the high level of unemployment, the market which Deputy Noonan seeks to put down today is the way to go about it so that people will know they will get a return for the work they do, that they will have an opportunity to spend the money and that they will have the right to decide themselves what they will do with the money they retain. In many cases now, there is a marginal financial difference between going to work and staying at home and if we can come to terms with the marginal tax rates, which is the objective of Deputy Noonan's amendment, then we can make great progress in this regard. The Minister stated that the exemption provision is the way to deal with this problem rather than pursuing the matter in the way Deputy Noonan's amendment suggests. It is clear to any of us who know anything about tax or who meet people with tax complaints that many taxpayers are unknowingly overpaying their tax, particularly people covered by exemption provisions and related marginal relief because they do not know about them. I cannot accept that the Minister's argument is valid, that the exemption provision is the way to deal with the problem. The clear indication set down in Deputy Noonan's amendment would be much more beneficial from the point of view of employment and of equity. Many people, who come to me annually, are overpaying their taxes because they are unaware of the exemption provisions and the marginal relief that goes with them or the option to go for that rather than the income tax level. Most of those who are overpaying their taxes are senior citizens who cannot afford to do so.

In addition, people who are entitled to claim medical expenses against their income tax do not do so because they are unaware of their entitlements. We have a long way to go in informing people about their entitlements. I have tabled an amendment in this regard because I feel strongly about this. I mention this under the exemption provisions because this is where most of the hardship occurs.

I want to see the week beginning 6 April each year made taxpayers' entitlements week so people can have those exemption provisions and thresholds explained to them. People who are entitled to claim medical expenses and so on against their taxes are not doing so because nobody takes the time to explain it to them; in many cases they are paying too much tax year after year. If we are to go down the road the Minister says and further extend the exemption and marginal relief provisions, we will need to explain them to people. In any year I meet up to a dozen people at my clinic who are overpaying their taxes. In my estimation there are thousands of people out there who are overpaying their taxes because they do not know the details of those exemption provisions. If the Minister goes down that road I hope he ensures that taxpayers are fully informed in regard to exemption provisions, that they are different to normal income tax allowances and that one can claim which-ever is most beneficial.

Mr. B. Ahern

I agree with Deputy Mitchell. I included a section on it in my Budget Statement. A special leaflet was included with the tax free allowance certificates which were issued to 175,000 PAYE taxpayers identified by Revenue as possibly being eligible for the relief. Details of the family income supplement operated by the Department of Social Welfare were also included on the leaflet because the discussions on Programme for Economic and Social Progress identified it as another area where people did not know their entitlements. Those leaflets contained a simple claim form on which taxpayers could claim exemption of marginal relief. The difficulty was that the other form was quite complex. Details of the improved exemption limits were also highlighted in a series of major advertisements in the national press during the period in which the tax free allowance notices were issued, and that campaign will continue. I take the Deputy’s point and I will continue to highlight this as long as I am in the Department of Finance.

Mr. G. Mitchell

While that is an improvement, people often come to TDs' clinics clutching these forms and asking if they have to complete and return them because the forms are not explicit. They do not explain to a taxpayer his or her entitlements, they believe they have to complete and return them. I ask the Minister to look again at this matter because something needs to be done in this regard.

Mr. Martin

There is broad agreement across the House on the basic philosophy being espoused in relation to the reduction of tax rates, the question is how many should be paying the higher tax rate rather than magical figures reducing the rate from 48 per cent to 44 per cent. It is desirable that we move towards a situation where more people pay only the standard tax rate and where people come in at a higher level into the tax system in general.

This amendment endeavours to write the Finance Bill for 1994-95 but that precedent is questionable. If we start writing the Finance Bills for future years, we could be here for another two or three weeks. It is dangerous in the present economic climate and, indeed, in the present fiscal climate, to put constraints on future Ministers for Finance. Given the overall budgetary framework, our need to converge with other European economies on a fiscal basis over the next five to six years in line with Maastricht and so on and given the constraints on public expenditure, we must proceed cautiously in the whole area of tax reform and reduction. I would sound a note of caution in that regard. I have some reservations about the general glib manner in which politicians, from all sides, announce to the public that a reduction in taxation will mean more employment. I am not sure there is quantitative research to sustain that view because the unemployment problem is caused by more factors than taxation; there are other more fundamental structural problems in our economy and society which have given rise to the unprecedented levels of unemployment that now pertain.

We should avoid, as it were, holding out as a carrot to people, the simplistic notion that reductions in taxation or even taxation reform will automatically lead to a sustained rise in employment or dramatic improvements in the situation. That could be misleading. However, there is general agreement on reform of the taxation system on the basis of equity and giving people a fair crack of the whip. That is from where tax reform originally emanated and was the original motivation; the PAYE sector was, if you like, contributing an uneven amount to the Exchequer and there was a widespread desire within that sector to be relieved of some of the burden which should be more evenly distributed. That is what we are aiming to do. In the past number of years we have reduced rates, we have also increased exemption limits and improved the tax position considerably. People are now entering the rates at a higher level.

Deputy Mitchell's view is basically a separate issue to the Minister's overall statement on policy. Essentially, Deputy Mitchell spoke about the capacity of the Department to impart information to people and to assist them in attaining their proper entitlements and to pay their correct taxes. There is a general problem in terms of people's entitlements and people getting a fair crack of the whip from the State in regard to being made aware of them. That is an overall problem with which we have not come to grips yet, either through the establishment of an Ombudsman's Office or whatever. The Civil Service could, perhaps, be more alert in responding to that problem.

Mr. Rabbitte

First, I thank the Minister for giving me the opportunity to speak in the Seanad Chamber; the way things are looking it is an experience I might come to value. Second, I acknowledge that what we are doing here is a big improvement on the way Finance Bills have been processed in previous years.

Mr. Quinn

Hear, hear.

Mr. Rabbitte

I do not think Deputy Noonan will be too upset if I do not vote for his amendment. Deputy Noonan represents the largest Opposition party and down through the years has managed, by resort to more and more ingenious methods every year, to have the first amendment on the Order Paper, to make a general policy statement based on that amendment rather than seeking to have it enshrined in law and in the process quite properly pointing to the fallacy of the Progressive Democrats road to tax reform. I support him in that but not necessarily on this particular route to tax reform because I do not believe it is correct to pick an arbritary figure of 20 per cent and say that no more than 20 per cent shall pay tax at the highest rate.

Mr. Power

That figure means a great deal to the party.

Mr. Rabbitte

That is true and it means more to some party supporters than others but even acknowledging that if one is interested in the non-Progressive Democrats road to tax reform one must build from the bottom up and, in that respect, Deputy Mitchell's reference to the fact that it is often cheaper to stay at home than to go out to work is not appropriate to this section. We will deal with this point later, but it is not appropriate here.

In any policy on tax reform one should try to improve the exemption limits because the level at which people are brought into the tax net is absurd and I have tabled an amendment in that regard. It is ridiculous that a single person earning approximately £70 per week is, theoretically in the tax net. Having improved the exemptions, one must look at the standard band and, of course, it is true that the standard band should be widened. You then have the higher rate of tax over which I would not shed any tears because that is not a great impedement to productivity or work. In my experience people paying tax at the marginal rate are the very people who can afford the best advice and professional expertise to minimise their tax liability, and they have been expert in doing that. As I said on Second Stage, the Minister has gone some way to shutting off some of the tax shelters that were available to such people, although there are still some left. Some have been shut off but the people in that area could avail of them and they are not the people I would claim to cry first for in this situation.

Deputy Mitchell is correct about the necessity for people to have their tax entitlements clearly explained to them. I am not sure that the entire array of the Department of Finance could ever match Deputy Mitchell's clarity in doing that at clinic level, but they could, perhaps, improve on the existing position.

Mr. G. Mitchell

I could hire my services out on a consultancy basis.

Mr. Rabbitte

I agree with the thrust of Deputy Noonan's amendment, the point at issue here is, at what stage is one dragged into the tax net and how long is one subject to the standard rate? The Progressive Democrats — unless Deputy Roche is representing them — are not with us but their approach is that——

Mr. Noonan (Limerick East)

It is progressive anyway.

Mr. Roche

That would be the least likely representation they would ever wish to have.

Mr. Quinn

They are getting desperate.

Mr. Roche

——the drift is in favour of the higher paid and that is not a priority as far as I am concerned.

Mr. Dennehy

First, I would like to join with Deputies Rabbitte and Noonan in welcoming the changed format this year. More than twice the number of hours will be available to debate Committee Stage of the Bill than in previous years and, hopefully, that is a sign of things to come, particularly in regard to complicated legislation. This is a fairly extensive Bill and there is a great deal of work entailed in it. Even with the difficulty raised this morning I am sure that with the Minister's approach, it can be ironed out.

On the amendment, there is a conflict between what Deputies Mitchell and Noonan said about, on the one hand, simplifying the system and, on the other, introducing a third rate of taxation. It cost a great deal of money this year to abolish the third rate. Part of that movement was to simplify things so that people would understand their tax position more clearly. I agree with the Minister's approach, we need to broaden the tax bands and work on the exemption limits. That has been done consistently over the past four or five years. I would be concerned if we got into the area we seem to be getting into today, as we did on Second Stage, of discounting totally a 10 per cent cut in the rates being paid. People seem to take this very glibly. The Minister pointed out that since 1987 this consistent approach cutting the rates has been taken. This has almost been discounted and I am concerned because I know that most of the demand for taxation reform came from the PAYE worker who simply wanted to pay tax at a lower rate. We have consistently lowered the rate by ten points. In moving on and trying to improve things further, we cannot discount that. We must broaden the tax bands and that is being done again this year. We would like to have achieved more in that area, but this year was unique in that we abolished the third rate.

The argument was made on Second Stage on the question of an introductory rate, that almost everybody starting work should pay tax and I disagree. I believe that we should work on the exemption and extend it as far as possible as the tax bands are widened. I disagree totally with the idea of complicating what we have started to unravel.

I agree with Deputy Mitchell that we should make this as simple as possible. The whole thrust by the Revenue Commissioners work is in that direction, we have in place the taxpayers' charter and the commitment to it. Even if the notices are somewhat complicated — and there are weaknesses in that area — we should address that problem rather than throw the baby out with the bath water.

Mr. G. Mitchell

I agree. There have been beneficial changes.

Mr. Dennehy

That will continue. We have a great commitment and the Chairman of the Revenue Commissioners has stated to us at the Committee of Public Accounts particularly that the thrust for the future is in that direction. The people are entitled to know as early as possible how much they are paying. They need every bit of information. That is now starting to become available but to do that you need as least a complicated system as possible and adding an introductory or starters rate will not make it any easier. We are heading in the right direction. I would agree with Deputy Rabbitte; I cannot see any justification for plucking a figure out of the air and saying that 20 per cent are the only ones who will pay. The figure has fallen consistently. It was 44 per cent in 1987/1988. Any time I mention previous years people say it is a lesson in history. I was glad to hear somebody going back to the 1987 manifesto. It has gone down to 37.5 per cent. So we are moving in the right direction on all fronts. I would appeal that we do not complicate the matter at this stage. It has cost a great deal to get as far as we have gone and the points that are made about improving the availability of information and so on are important. There are 175,000 people who have been contacted about this exemption notice. Many of us would like to see this as an automatic exemption, that once people get into the range where there is exemption it would be automatic and they would not have to apply annually, apart from winning the lottery. That would simplify things greatly. I would appeal that the matter should not be complicated further by the introduction of a third band and that we would proceed as the Minister and his precedessor have been going.

Mr. D. Ahern

First of all, as a constituency colleague, I would like to congratulate you on your elevation to the chair. As I said to you beforehand, maybe I will be able to go down to the constituency and blame you for changes that did not take place. As someone who has been on all the Special Committees dealing with specific legislation, apart from the Companies Act, I had the misfortune of being on them — I must say I am a fan of them but I would say to the Minister that to a certain extent there is a comraderie at these committee meetings that does tend to allow amendments to be conceded at times and, perhaps particularly on a Bill like this, he should adopt a fairly strict attitude in relation to some of the amendments that are being proposed, particularly this first one by Deputy Noonan.

I would like to concur with my colleague, Deputy Roche, and to congratulate and thank Deputy Noonan for highlighting the fact that the Government and its predecessor have done quite well in taking the tax rates from quite high rates of 56 and 58 per cent down to the present rates which are fairly generous and indeed that is the road we sould be going as a Dáil. Most people would accept the fact that we should be bringing down these rates.

I would just like specifically to refer to the amendment itself and I wonder about the cost implication. As the Minister has pointed out, the figure at the moment is somewhere in the region of 37.5 per cent of people who are on the higher rate of tax. If we were to accept this amendment that would in effect reduce considerably the tax take. That is perhaps laudable but where is the money to be found to keep the resources and services of the country going? I wonder. Perhaps Deputy Noonan might come back on this. Is he saying in effect that we should be doing away with things like mortgage interest relief and VHI relief because obviously they are the only two major shelters that are left to which the taxman, as he is euphemistically called, could look to perhaps to make up the difference. Deputy Noonan might like to come back on that point.

The other practical point is that this amendment has not, in my opinion, got a place in the Finance Bill. As Deputy Rabbitte quite rightly points out, it is an effort by Deputy Noonan to get in first on the amendments. This amendment would fit much better in a policy document for Fine Gael or any party. It is just playing politics because in effect it is a policy statement. I cannot see, from a practical point of view, how any Minister or Department of Finance could determine how many or what proportion of taxpayers would fit into this. Who is to determine who the 20 per cent are and how they determine who the 20 per cent are? I do not think it is practical.

I was going to raise this on a point of order at the start of the debate but I decided that Deputy Noonan, quite rightly, would have the floor first on this historic occasion of the committee meeting here. From a practical point of view this amendment should not be here in the first place.

Miss Flaherty

Like others, I am glad to participate on this historic occasion in this historic venue. I am slightly more uneasy about it than Deputy Rabbitte. There are a number of people wondering at our haste to get in here. However, it is a great venue for doing this kind of work and I am glad to have the opportunity to participate.

I support the amendment in the name of Deputy Noonan. I listened carefully to the Minister's response and to the contributions from others. I was surprised at Deputy Rabbitte allowing Deputy Noonan to get away with this again. I thought he was a very astute politician and that he would be able to move in any one or other direction.

Mr. Noonan (Limerick East)

It was only a photofinish.

Miss Flaherty

I welcome in particular the fact that from all sides there is clearly developing a new consensus as to where the priority for improvement in the tax system should be from now on. Deputy Dennehy was very sad about the fact that insufficient recognition was being given to the improvements in the tax rates but, like all of us, eaten bread is soon forgotten and people move on very rapidly to the next priority. It is quite clear that this is the next priority. The Minister in his reply said what we require above all is certainty. If this were adopted by all sides of the House, by the Government and the major Opposition parties, than that would certainly bring a degree of certainty for a number of years. With the rates substantially improved, the Minister will have at his disposal next year the total funds for improvement in the tax system and will use them in whatever way he sees as important.

He also indicated that his own priority would be to move through the exemption limits but the exemption limits are at a pitifully low level. For a single person it is £68 to £70 per week. While I am not familiar with the exemption rates operating in other tax regimes, I am very clear that the high rates of taxation apply to Irish salaries at a far lower level of income than they do in most comparable economies and certainly in the economies with which we do most business. Certainly, for young single people it is a major disincentive and it affects them in other ways because if they start to pay tax on £68 and above there is obviously an incentive to go for every tax avoidance measure available. From the ages of 19 and 20 you have many young Irish people investing in homes, VHI insurance — any scheme that will help them to reduce their tax burden or to get better value for their income they are earning. There are many benefits for the State in improving this system. Whatever about agreeing the amendment, although obviously that would be the desirable outcome there is a certain amount of consensus arising from this debate as to the direction in which we should go. I am glad that the Fine Gael amendment, in the name of Deputy Noonan, has once again been able to set a good, positive and futuristic tone for the Finance Bill debate.

Mr. Quinn

We are starting the Committee Stage of this debate and therefore the whole broad thrust of income tax has to be dealt with. I rise, not to support this amendment because frankly I do not think it is practical taken on its own — although Deputy Noonan has said that he is not intending that it should be taken on its own — but in response to something that the Minister said about taxation policy that is, whether you go for a policy where all income is taxed or whether you raise the level of exemption so that a certain category of person does not pay income tax in the first place. I question this and perhaps the Minister, at this stage or some later stage, will come back and talk to us about it.

In effect, everybody pays tax on income. There is no such thing as an exemption because everybody pays PRSI. Whatever we in this House or, indeed, in the broad professional area of the Revenue Commissioners and the Department of Finance think, the ordinary punter in my experience, makes no distinction whatsoever between PRSI deductions and other tax deductions. My concern is that the culture of not paying tax, of not having to pay tax or of having an income that does not attract a tax liability is a divisive culture if we are to deal with the overall question of unemployment. The Minister seeks later on in this Bill to introduce the principle of taxing short term social welfare benefits, something for which many people have argued for some time. There needs to be a certain consistency.

Mr. Hilliard

Are you disagreeing with it?

Mr. Quinn

No. I am not disagreeing with it at all. I am discussing the logic of introducing it. Many of us have argued for its introduction for a long time. It is a pity we do not have the computer in the Department of Social Welfare fully integrated with the computer in the Revenue office. For some reason, this has always been put in the background. I would like to see it teased out. I do not know if anybody has the optimum answer but a system whereby everybody pays a portion of their income in tax, including the PRSI element, from the very first day that they work seems to have a certain attraction. It gets over the sort of impediment that we have frequently identified which is the barrier to employment for some categories of low pay people who will argue that they are better off not working because they will have to pay tax or, if they attract a certain level of wage above a certain minimal amount, they automatically have to start paying tax at the 27 per cent rate. That is really my point. It is a question of whether you have a sliding scale or a series of very chunky bumpy steps where people on marginal incomes suddenly find that they are paying an extra 25 per cent or 27 per cent on that. It is something that should be investigated. I do not know if the Minister has done this.

It seems that the logic behind what the Minister said is that it is more convenient to exempt large categories of persons from the tax system because administratively this means they do not have to deal with it nor do the Revenue Commissioners. In reality, given the high level of compliance that you are now imposing on employers, anybody who is employed and on the payroll is part of a bureaucratic statistic anyway and PRSI has to be deducted. The administrative saving implicit in exemptions, if I understood the Minister's contribution correctly, is pretty minimal, in my view. I am wondering whether you are articulating a very clear departmental and governmental policy which is that a certain category of low paid worker, at whatever the level happens to be, will be exempt payment of any form of income tax above a certain threshold even though the PRSI would be payable at the full rate without any distinction.

As to the entry level for persons who are unemployed and for certain other categories, including part-time workers, we have to make a choice between taking people gradually into the income tax system, within which I include PRSI, or having a threshold which in itself becomes an escape for some people but a barrier for others. That is my point.

Mr. B. Ahern

It is a threshold. The difference is that the contribution for PRSI is a contribution for services, particularly for low paid people.

It is not so much an administrative matter. I think the Deputy knows that I believe that all incomes should be taxed. A married man with four children pays tax after £8,600. I was looking at these figures in the Department. Exemptions would be the fastest way to try to correct that system. We are not dealing with a huge proportion of the people. If we were talking about unemployment benefit and disability benefit, Deputies would argue that persons are caught in the poverty trap. Deputy Noonan has raised this many times at Question Time. The exemption limits would focus on that. Where there is a low rate of tax, that tax has to apply throughout the system. A simple system would be to tax every pound, but as we know it is not a simple system.

Mr. Noonan (Limerick East)

I would like to thank everybody who has contributed to this amendment. We have now spent an hour talking but it is a very good way to begin a Special Committee, that Deputies should, at a level of principle, state their approach to income tax. If a budget and a Finance Bill is about anything, it is about taxation and the manner in which it is applied. The philosophical approach to personal taxation is a key issue. There was a certain amount of lighthearted comment and some people were playing the man rather than the ball. I think it is an appropriate way to start. I make no apology for putting down this amendment at the start. For a small fee I would advise Deputy Rabbitte on how to get in first next year. I can assure him that if he puts down an amendment in advance of section 1, I will probably amend the long Title next year.

Some Deputy said that it was not an appropriate amendment. Of course that is not the issue. The issue is whether it is in order. There is nothing in Standing Orders about appropriateness. It is in order. I also think it is appropriate for the reason I said because it gives the opportunity for people to state their policy on income tax. There is not much difference between the sides here in what has been said. The ghosts at the feast are the people who are not here. I cannot understand why the Progressive Democrats are not present.

Mr. G. Mitchell

They are at County Council meetings.

Mr. Noonan (Limerick East)

There was one position on the committee open for the Progressive Democrats and why did they not take it up? As far as I can see they are the people in disagreement. It is very peculiar to me that 160 people can, in general terms, agree across the range of divergences in this House and that the party with six members who are pulling in a different direction, did not turn up.

Deputies asked about the percentage approach and said this was inappropriate. I do not think it is inappropriate. There was a time when people paid a set rate of tax. Then a new concept was introduced where very wealthy people would pay a higher rate of tax on top of that, a surtax. We should get back to the stage where the generality of taxpayers pay tax at the standard rate and people who are extremely wealthy or who have very, very good incomes should pay tax at a higher rate.

Thank God, we still have some wealthy supporters and Fianna Fáil have wealthy supporters. Even the Labour Party have wealthy supporters. It is quite clear from the amendment that a percentage would pay a higher rate.

I would make one point on exemptions. The main disagreement the Minister has with my approach to an introductory tax rate is that the approach by way of exemption is different. Exemptions throw up a lot of anomalies too and the scope available from the exemption system is not very wide. If one computes tax liability on the basis of personal allowances and PRSI allowances and PAYE allowances, there cannot be a very big divergence between that position and the exemption limit. It makes no sense from a tax point of view to compute tax on an allowance basis and then put in an exemption limit. If the divergence between the two is very wide, then you have reached the limit of what exemptions can do. You are very near the limit of what you can gain under exemption limits at the moment. As well as that, it is not generally known that when people pass the exemption limit there is a clawback operating — it was 56 per cent two years ago and 52 per cent last year. The Bill brings it down to 48 per cent. That is forgotten. For every pound beyond the exemption limit, the very low paid worker will face a clawback of 48 per cent in this tax year. Where you have an exemption limit which diverges from the sum of the allowances to a great degree then you are in trouble. It is not open-ended and you cannot go on exempting forever. It does not work out.

I would like to make a last point. Deputy Martin says we should not put down amendments which apply to anything other than the present tax year. I do not think that is right. One of the big problems with budgets is that they are 12 month affairs. If the Department of Finance and the Revenue Commissioners and the Administration would lift their eyes from the 12 month agenda and look at two, three, four or five years ahead, there is nothing wrong with putting items into a Finance Bill which gives certainty, especially in the medium term. It might be said that no Minister wants to enter into a commitment which he has to deliver on in two budgets time. That is true but anything that is written into a Finance Bill can be taken out by the same method.

Mr. Roche

An interesting principle.

Mr. Noonan (Limerick East)

It is the principle. Anything that the Oireachtas puts into a Finance Bill, the Oireachtas can take out. What we are trying to put in is something that applies to two budgets down the line which would have the agreement of all parties in the House. If that was put in people would know where we are going with greater certainty. I would like to remind the Government party that is represented here that in 1987 you entered into commitments with your small Coalition partners about taxation for four years down the line and you object to a commitment that goes two years down the line in this House among elected Members. That does not make sense. We should start looking ahead.

I am not going to delay the House by pushing this to a Vote. I know the Minister goes a good distance in agreeing with what I am saying and he might reflect on it at Report Stage and tell us if there is any chance that he would write things into the Finance Bill.

Amendment, by leave, withdrawn.