Deputy O'Kennedy is being allowed to raise on the Adjournment the subject matter of a Private Notice Question which he submitted to the House last Tuesday. The Deputy has 20 minutes and the Minister has 10 minutes to respond.
Adjournment Debate. - IMF Examination of Taxation System.
An Leas Cheann Comhairle
I appreciate being allowed raise this issue. I invite the Minister to make a comprehensive statement in relation to what has been announced as his decision to invite the IMF to conduct an examination of our taxation system and to make recommendations in relation to a self assessment programme. It is clear that the IMF examination is due to commence on 1 December. The Minister should clearly specify the terms of reference for this IMF examination of our taxation system. I want the Minister to place those terms of reference in the Library of the House because this is an unprecedented step. Having regard to the implications of IMF intervention it is very important from the point of view of maintaining confidence in the economy both here and among external interests who are constantly watching progress or lack of it in our economy that the Minister clearly states the exact background and the purpose of this visit. The Minister must make a statement which will allay fears. The Minister should say clearly if this IMF visit is solely on the initiative of the Government and if not the Minister should explain how it came about, at whose suggestion and the purpose of it. If it was on the initiative of the Government, why did the Government make this step? Is this an attempt by the Minister or some elements within the Cabinet to create a position prior to the preparation of the budget, which will limit the possibilities of argument and discussion on the budget even within the Government, so that the Government can point to the IMF recommendations to justify Government actions? Such constraints might be used by elements in the Government to say that certain decisions are not open for discussion. The Minister has, this evening, an opportunity to clarify this matter.
If this was a Government decision it was not justified. There are many international organisations and consultancy groups who could conduct the same examination without the implications of an IMF intervention. The OECD is one organisation which could advise and make recommendations in terms of economic co-operation and development internationally, including recommendations as to improvements in the tax system. The Minister has said that included in this delegation will be people who have experience of the US revenue system of self-assessment. It would have better suited our position had the Government decided to invite directly on a bilateral basis, people from the US federal authority to come and give their views. Self-assessment extends beyond the United States. I would refer to the final report of the Commission on Taxation which I established over six years ago. In a very comprehensive section, self-assessment, which is one of the areas that the Minister indicated as justifying IMF intervention, is referred to from Chapter 4.17 onwards. I will give an example from the report. It says at paragraphs 4.19 and 4.10:
We examined the tax system of other countries and found that self-assessment in various forms operates in many different countries including Canada, Japan, New Zealand and Sweden. However, the best known example of full self-assessment is the United States system. We studied the United States system in detail and a delegation from the Commission visited Washington D.C. to investigate the operation of self-assessment.
Our discussions with the United States Internal Revenue, the Department of the Treasury, public representatives, tax practitioners, accounttants, lawyers, economistst and members of the largest commercial ‘tax preparing' firm in the United States, gave us a very full picture of the operation of self-assessment. We raised the arguments which had been made to us concerning the system and we investigated all aspects of the self-assessment procedures.
I have not time to go into the proposals they make based on that comprehensive examination giving them that very full picture which is incorporated in the final report which was published in October 1985. If the Minister felt it was necessary to get direct advice why did he not go to the Commission on Taxation who spent months doing that examination in a very professional way? The Minister should explain why he overlooked that commission. Apart from the implications of ignoring this last report of the commission, this is a matter of extreme urgency. This was a matter of extreme urgency in 1980 when I set up the Commission on Taxation. I recognised then that tax inequity, to which the Minister referred in his recent statement, was a matter calling for the earliest possible action. I recognised that the level of taxation and the distribution of the tax burden required immediate action after the most exhaustive study. Six years later, instead of acting on these recommendations, the Minister is postponing action until he will not have responsibility for it. That will put constraints on an incoming Government because the matter should have been discussed on a bipartisan basis and, in the national interest, we could have received full information before this dramatic and stark announcement. It is reasonable to expect that the Minister presiding for the remaining short period of the Government would have consulted with those who, more than likely, will have the responsibility of introducing long-needed reform.
I will give some figures to illustrate the extent of the problem since 1983. I will read the following gem by the Minister for Finance from Budget 1983, page 21:
Some of the Commissions recommendations do not depend on the adoption of the general package put forward and can be considered on their individual merits. I am satisfied that changes should be made without further delay in a number of areas along the lines recommended by the Commission and I will refer to those later.
Instead of making changes along the lines recommended by the commission we have moved in the opposite direction. At the end of 1982 the overall tax burden amounted to £4,053 million of which £1,459 million represented income tax. In 1986 the figures for the overall tax burden are just short of £6 billion. There has been an increase in total tax of a huge dimension of 66 per cent. I know one must allow for inflation but it does not account for such a huge growth since 1982. Within that huge growth, income tax has increased from a total of 24.7 per cent to a total of 27.6 per cent now. It clearly demonstrates that the tax system has become overburdened and, as the Minister acknowledged, a penal disincentive against investment, work and everything we want to promote. It is time the Government stopped making statements of intent and setting targets that have not and will not be realised. Instead, they should present us with a little action.
On coming to office the Government set targets in regard to the budget deficit and unemployment which were as meaningless as their present targets as was demonstrated last night. They promised to reduce the burden of taxation, especially on the PAYE sector. I quoted examples in global terms but I will now personalise it. A single man earning the average industrial wage in 1980 of £5,916 — the single man is the simplest to quote — would need £3,183 more in his pay package to have the same spending power after tax as he had in 1980 when the Commission were set up. He would need about £13,500 to have the same standard of living. That figure demonstrates the burden and the growth of taxation on the economy. It is the greatest problem facing us as a direct consequence of the policies of the Government. We have already forgotten Building On Reality but we will never forget the 1983 budget when the Government introduced such high levels of taxation.
The Minister need not say that they have taken some action in accordance with the recommendations of the commission because they have reduced the highest rate of tax to a lower level. They increased the rate to 65 per cent in 1983 and they are merely bringing it back to its former level. They also increased the top levels of VAT in 1983 and that, too, has merely gone back to its former level. That is not progress.
Everyone knows that the tax system is over burdened and creaking to such an extent that it is causing immense frustration to those trying to operate the system in the Revenue Commissioners. It is equally impossible for those who are trying to cope with forms and procedures in business. People are crucified by the tax system. I will give an example which should commend itself to the Minister in terms of self-assessment which my party have adopted as a policy. It is quite clear that some self-employed professional people are not paying their fair share, which is why we want this system introduced immediately, but it is equally clear that the tax inspectors are not able to cope with the burden of proposals, allowances and other matters submitted to them by those who can afford the most sophisticated accountancy advice. Files are piled high in the tax office and individual tax inspectors cannot be expected to cope with the mountain of work generated through the current system of forms and procedures. We are getting nowhere and making it impossible for everyone concerned to cope with the system.
The system of self-assessment, whether on a computer spot check basis or on a deliberate basis to go after certain areas, would enable those with the primary responsibility to say they wish to check an individual's accounts. The public would know that those who cheat the system will be penalised. Self-assessment is a tidier way and a better way. Finally, if we are talking of self-assessment, and we have the advice of this commission based on the experience they have gained, it does not warrant the intervention of the IMF. If the Minister thinks it does, I would be obliged if he would explain to us their terms of reference, how they came here and what are the limitations on their functions?
We have a large problem in the tax system at present in respect of outstanding amounts of uncollected tax. These arise mainly because in the first place taxpayers are not obliged in all cases to submit audited accounts. Frequently the Revenue Commissioners have to issue an estimate of the tax which is due to, so to speak, frighten the taxpayer into complying with the basic requirement of submitting accounts so that the commissioners can assess his liability. Frequently also, in the absence of agreement about these accounts there is a system of appeals on the part of the taxpayer and that can be a very prolonged process.
Therefore, the situation arises that there are outstanding demands from the Revenue Commissioners for very large sums of money which are either on appeal or have been issued solely to frighten the taxpayer into compliance. When the account is finally settled, after many detailed hours of costly time has been consumed by accountants and the Revenue Commissioners, the actual amount due may well be no more than one-fifth of the amount in the estimated assessment that was issued. Therefore, we get the situation where the public assume that there is a much larger amount of outstanding tax actually due than there is and we also have the situation in which tax which should have been paid early is paid late because of the cumbersome procedures involved in deciding how much is actually due. Money is paid late and not to the amount of the estimate which is issued by the Revenue Commissioners and which very often political commentators assume to be due but which usually is only due to about one-fifth of the amount of the actual estimate issued.
This contributes to a situation of grievance in our community where those in the PAYE sector frequently assume that the total amount of the estimate issued is actually due when in fact only about one fifth of it is due while at the same time as a result of these figures being issued people in the self employed community feel that the figures being published paint those in the self employed sector as owing more than they do. Therefore, the system is not only costly and cumbersome and failing to collect money which is due but it is contributing to a sense of distrust and mistrust not only of the tax system in general but within the community as between different sections. The present system also has the major defect that it is a very costly system in terms of the cost of collection. It is very costly for the Revenue Commissioners in that they have to deploy large numbers of staff to examine every individual account including accounts of taxpayers in respect of which they discover that there is no difficulty at all and the time in retrospect is therefore wasted. In other words, valuable time which could be used to go after likely evaders is used up in checking and rechecking the accounts of compliant taxpayers. It is also a costly system from the point of view of those paying the tax. For example, it is estimated that in respect of PAYE paid over by employers the additional cost to the employer of complying with the tax regulations is 6 per cent on top of the amount of PAYE he or she pays.
Similarly, a study in the United Kingdom on the collection of VAT estimated that the compliance costs with the VAT regulations in Britain, which are similar to ours, amount to about 11 per cent of the amount of VAT actually collected in Britain of which four-fifths falls on those paying the tax, namely, the traders involved. Therefore, we have a system which is, (a), not collecting the money and, (b), is extremely costly so far as the taxpayers are concerned.
That has been obvious for years.
It has been estimated that in the United State the administrative costs involved in tax collection as a result of the use there of a system of self assessment are about half those that obtain here and also that their capacity to collect the tax is consideably enhanced. That is why I have decided that we should seek to introduce a system of self assessment in Ireland for tax purposes. I have decided that we will publish a discussion document setting out the improvements which are to be obtained and also the difficulties which are likely to arise from the introduction of a system of self assessment.
The Commission on Taxation recommended self assessment. However, in a very bulky report, a report which ran to literally thousands of pages, the total amount of space devoted to the actual implementation of a self assessment system covered only 14 pages. Fourteen pages in a document of that size does not represent a practical manual which would enable the Revenue Commissioners to administer such a system. Therefore, before introducing the system we need to take the report of the Commission on Taxation a step further. We need to bring to this country people who have practical experience in working such a system, who will work in the Revenue Commissioners for a period and who from their experience will advise the Revenue Commissioners on how the different practical difficulties which exist with regard to a self assessment system can be overcome. This is to be done with great speed.
The group which will consist of one official of the IMF plus two officials who have worked in the United States Inland Revenue will arrive here on 1 December and will present a report to me before the end of the month of December. They will work for a full period of three weeks in the Revenue Commissioners' headquarters and elsewhere. They will send in information and advice to me during that three week period at the end of which they will present me with a report. There is no question of any delay being involved.
The commission spent longer in America.
I would further indicate that this report is simply putting commonsense flesh in terms of the detailed administrative arrangements on the Commission on Taxation's report which only amounted to 14 pages on this extremely complex subject. Let me indicate the difficulties which will have to be overcome in regard to the introduction of self assessment.
What about the terms of reference? Who invited these people — themselves or the Minister? Why are they coming?
Deputy O'Kennedy, you were not interrupted.
Why are they coming? What are their terms of reference? Answer that question.
Deputy O'Kennedy, please.
I will answer the question if the Deputy keeps quiet. This is a limited debate. I have only two minutes left. Deputy O'Kennedy should keep quiet.
Answer the question.
Deputy O'Kennedy, you had 20 minutes without interruption, would you allow the Minister to reply? The Minister has two minutes remaining.
We know what the problems are. I want to know why they are coming?
The questions that will have to be answered are the following: (1) the level of deterrents which will be necessary to ensure compliance; (2) whether self assessment requires the introduction of a current year basis for the self employed as far as tax is concerned; (3) will there be an initial revenue loss in the first year; (4) what redeployment of staff is necessary and, (5), what initial additional compliance costs might there be for taxpayers. The terms of reference of the study are, first, to look at the administrative implications of the introduction of self assessment; secondly, to examine the audit procedures used in tax investigations and, thirdly, to advise on any other matter concerning tax administration and enforcement which the team feel it would be useful for them to advise on.
The genesis of this study is that the Government decided last October that there should be an expert from overseas and with experience in this area introduced to the Revenue Commissioners. We consulted a variety of international organisations, including the OECD, which we found did not have the expertise the IMF have. The IMF said they could give us the name of an individual but they felt that before so it would be better if they did an on-the-spot investigation here with a team of people. We accepted that advice quickly and they are coming here.
Now it is becoming clear.
They will give us immediate advice on what to do about self assessment and on the other questions of practical improvement in tax administration. Arising out of that advice and out of further discussions with the IMF team we will decide on any additional expertise we need. It is my intention to act very quickly on the recommendations received. As I say, they will be received before the end of December. I expect to be able to make decisions on these reports early in January and these decisions will be announced promptly so that a more efficient tax system can be implemented starting as quickly as possible. My concern in this area is to get action on this and by bringing in the best available outside advice——
At their invitation.
——which incidentally is being provided free of charge as part of our rights of membership of the International Monetary Fund, to take practical immediate steps to translate from theory and oratory, which is what we have heard from Deputy O'Kennedy, into practical reality the improved operation of our tax system so as to create a sense of social justice in our community and to ensure that tax evasion is not condoned in any way.
The Dáil adjourned at 5.30 p.m. until 2.30 p.m. on Tuesday, 2 December 1986.