It does. The public pay salary bill will go up by at least 8 per cent this year. Lest anyone think I am attacking civil servants, we too are part of the public sector. Many people in the social partnership have their salaries and conditions linked to the public sector and they, too, are in this area.
Benefit-in-kind associated with conditions of employment in a particular area affects everyone. The apprentice working in a butcher shop can come home with sirloin beef without paying the full market price. Somebody working in the travel agent business will have access to cheaper holidays and people working in clothing shops get a chance to buy seconds. Every employment has a fringe benefit depending on the nature of the job. Politicians and civil servants have fringe benefits with regard to pensions. The provision does no just relate to cars, unless one is a Minister.
The public sector pay bill, including our salaries, increased by 8 per cent in 1990, by 9 per cent in 1991 and it will increase by 9 per cent in 1992 while inflation on average was from 3 to 3.3 per cent. If we are to go after benefit-in-kind and fringe benefits, we must be prepared to go all the way and look at the imputed cost of pension entitlements for public servants. The taxation system already does that with regard to bank officials and others who have access to subsidised mortgages and loans. If somebody gets a subsidised loan at 3 per cent, he is assesed as having benefit in kind of 7 per cent, bringing it up to 10 per cent. There is a proposal in this Bill to increase this to 11 per cent.
The Minister is no doubt aware that in relation to the Programme for Economic and Social Progress negotiations and the attitude to public sector pay and conditions there is a growing feeling in the exposed market sector that attention is being focused on only some aspects of benefit-in-kind. If we want to promote enterprise, effort and incentive, why do we have to hammer only benefit-in-kind associated with somebody only getting a 1.6 litre or a 1.8 litre motor car as part of their remuneration package? The sentiments expressed by the sales representatives on the question of benefit-in-kind go deep. The Minister should take note of what I am saying because this problem will only surface in the second Finance Bill when we look at the question of fringe benefits.
This is all predicated on the view that if one taxes all fringe benefits as income we will get a more equitable base. That is correct in theory but by introducing this measure, we may not get the desired economic effect of effort, enterprise and employment creation which in turn underpins the idea of tax reduction for personal income. The ideology of the Progressive Democrats is that if you reduce personal income tax it will release monetary energy into the economy, which will have a big employment impact, that anything that would enable us to reduce personal income tax is to be encouraged and that, therefore, no holds should be barred in the scrutiny of benefits-in-kind and fringe benefits. That seems to be the intellectual pyramid of the arguments. The base on which that pyramid stands has not been proved.
We now have lower levels of personal taxation than we had for a long time and we have continually rising unemployment. Britain, the nearest market we can look to in terms of a political economy we can evaluate, went down that road and produced a situation in which many people had a lot of cash but the spending of that money did not result in the creation of significant extra employment within that society. If the object of the exercise is the reduction of personal income tax resulting in more jobs being created, then there is no objective evidence available to me that proves that case. That is not to say that everyone of us would like to have to pay less personal income tax; of course we would. I am not saying that I am against the reduction of personal income tax but I am not arguing for its reduction on the basis that that would create more jobs because there is nothing to suggest that would be the case. Therefore, we must separate those two points.
On the question of benefit-in-kind and taxation, it is essential that the Government realise that if the object of the exercise is to promote effort and enterprise, getting people committed to their jobs and the maximisation of employment vis-à-vis their jobs, seeking markets abroad, this aspect is indeed important. For example, I can foresee a possibility that benefit-in-kind would focus on some of the fringe benefits attached to travel.
I will give an example. Most of us who have had to travel and be away from home from time to time — as part and parcel of our work abroad — have telephoned home, spoken to our wives and families, on occasions reassuring our parents; in other words just maintaining contact. Maintaining that level of personal communication harmony in our private lives is a desirable objective but it is essential if a long distance sales person is to be of a frame of mind that will enable him or her to undertake a committed day's work the following day.
That poses the question: is such a private telephone call to the wife, husband or mother deemed to be a benefit-in-kind, to be taxed, or will it be deemed to be a legitimate cost associated with the commercial activities of a long distance sales person? I suspect there is a very austere view that would separate one from the other, at which point one begins to lose the argument. Certainly one will begin to lose people's enthusiasm, those who want to go abroad to promote/sell goods and services for our economy. I use that example to illustrate a point that overall fringe benefits and their role as a motivation to perform above the odds is much more than the crude calculation of external income brought onto the pitch so that it can be quantified, given equivalent monetary value and, consequently, taxed. If the Minister's objectives are to promote private effort and enterprise, then the psychological/factual role of those fringe benefits in encouraging people toward private effort and enterprise should be assessed before the baby is thrown out with the bath water.
I welcome the changes introduced in the patent income sphere because, from my knowledge, I understand there has been a small amount of abuse in this area particularly on the part of people in the unique position of being able to control both the ownership of the patent and the distribution of the product, those who could engage in transfer pricing. The proposal to limit such activity to the coffers of the company but not enable it spill into the pockets of the individual is a good one.
However, I would warn the Minister that, in abolishing a benefit that has been exploited to the point of abuse — I use my words advisedly — albeit on the part of a very small number of people, because only a very small number are capable of manipulating the price of the value of the patent to the point at which they can actually extract in any meaningful sense — illustrates that it is a devise that clearly did not work in promoting innovation and enterprise since it has been in existence since the mid-seventies with little or no impact, but its concept theory is not necessarily wrong.
I should have thought a contravailing measure would have been inserted elsewhere in this Bill to cover that aspect. I know the Minister has not entirely abolished it and that it remains in the case of companies but, if private enterprise and effort are to be the engine that characterises the privisions of this Bill, I contend the Minister has simply knocked another element designed to promote private enterprise and it has not been substituted by anything else. Therefore, it can be clearly seen that the baby has been thrown out with the bath water.
At this moment the Government have consultants examining the possibility of constructing a science park in the greater Dublin area that would tap into the intellectual energy and creativity of people in our third level institutions, that is those in TCD, UCD and the Dublin Institute of Technology. As the House will be aware the concept of a science park is that of an industrial estate with brains, which is probably the best way one could describe it, attached to a university; that is not to assert ipso facto that always one will find brains in a university. The idea is to harness the intellectual energy of pure research into its practical application in a manner that might result in creative products that could be exploited commercially for the benefit of all.
Some of the greatest exponents of the science park concept have been the Israelis who have harnessed the intellectual energies of their universities into very productive spheres in science parks visibly associated with their universities. For example, we have one in Limerick, in Plessey, associated with Limerick University, a very progressive go ahead one. Among all the other requirements of those science parks to get up and running there will be the need for some replacement of the patent income, some incentive for the individual scientist, lecturer or researcher to pursue his or her field of study above and beyond the norm, perhaps that of a particular idea or theory that can be turned into a manufacturing success. If the Minister is committed to private enterprise and effort I contend he has closed one door but I do not see that he has opened another anywhere else. I would invite him to consider that in the context of the philosophical objective.
I have not gone into the question of petroleum taxation in any great detail because of its complexity and because there was a time constraint not merely on the Government in the production of this Bill but also on the Opposition in their endeavour to digest it. There is something extraordinary about petroleum exploration here, the fascination it has both for politicians and punters, if I may use that phrase, Sir, conscious of your occasional weaknesses in that area. One stockbroker told me that in the early eighties the Irish stock market, a very small one, was able to raise something of the order of £100 million of speculative money for oil shares. Probably they would have been better off compiling a syndicate for the national lottery; certainly they would have had better times had they gone to Cheltenham for three days or up to Leopardstown.
If one examines the figures for the various quoted shares and sees the "highs" of £6, £7 and in some cases, £10, one will realise the money was there but now the share prices are down to single figures, in pennies, and that market has disappeared. Perhaps it smacks of the national lottery syndrome. Perhaps it is associated with so much of the literature of the western world — the "get rich and strike it rich", in Klondike, in Alaskan or Californian terms.
There is no doubt but that there is this perception that there is a golden bonanza out there. We have endeavoured on different occasions in this House to devise a tax regime to promote oil exploration and investment in addition to the clear indication that there is an investment market out there that would regard oil shares with the degree of fairy-like belief that transcends all market probability, which nevertheless rushes ahead to invest. We still do not have a taxation regime that works to the point that we achieve significant levels of exploration that would reduce our dependency on imported oil and produce on-shore oil here.
Since there is at present no tax revenue or yield from this activity, I am prepared to suspend judgment on the operation of the petroleum taxation regime and the changes being proposed in this Bill because, in fairness, the previous regime did not produce any kind of activity. Therefore, any change which would result in any such activity should be carefully examined. We will have to come back to the point either on Committee Stage or at a later stage when we have seen how it functions and operates.
I wish to refer to the proposed income and capital tax changes. Contrary to most people's beliefs, expectations or hopes, income tax will increase this year in real terms and the level of tax paid by most people — there will always be exceptions — will increase. Whatever about the mandarins in the Revenue Commissioners, the Department of Social Welfare and the Department of Finance, most people regard PRSI and income tax as two similar inter-connected taxes. There is little if any distinction now made — there is certainly none made in the minds of ordinary citizens — between PRSI and tax. Our analysis indicates — this figure may be verified by the Minister in his reply — that the total revenue take for the year 1991-92, including PRSI, will increase by approximately 7 per cent at a time when inflation will be 3.5 per cent. In broad terms, the Minister is taking more rather than less tax. Consequently, the framework set out by the Minister in page 7 of his speech about giving encouragement to private effort in enterprise will not be brought about as a result of this tax proposal.
Having made that broad general point on a macro scale, I wish to focus on the aspects of the personal income tax and capital gains tax proposals. With regard to personal income tax, it is clear, and will become clear when the employment committee are up and running, that there is a severe threshold barrier for people who are currently on social welfare and who have the possibility of getting employment for a wage of between £120 and £180 per week, depending on their personal circumstances, in that the taxation barrier at the point of shifting from social welfare income to employment, albeit at low wages, is too high and the associated penalties in transferring from dependency to employment make it impossible for a large number of people to cross that barrier. For example, there will be loss of entitlement in relation to the benefits-in-kind associated with people on social welfare — access to reduced rents if you are a local authority tenant, access to medical card entitlement, etc. It would appear that the taxation system is preoccupied with people at the top end of the scale who are paying a lot of tax. The Progressive Democrats tail is not wagging the Fianna Fáil dog at this stage but lacerating it. However, when one looks at the official figures given for people paying the top level of tax this number is minuscule. Nevertheless, the concern still seems to be with them rather than with the people who pay low levels of tax. It is not sufficient for the Minister to say, as he can legitimately do in his reply, that as a result of this year's taxation provisions in the Finance Bill so many people will be taken out of the net altogether. This precisely reinforces the very point I am trying to make.
I believe we are trying to create a culture where the maximum number of people possible can be at work, where everybody who is at work pays some tax and where the more you earn the more you pay. The idea that there is a very large gap or threshold between the payment and the non-payment of tax on your income depending on whether you are at work or on social welfare is a self-imposed internal impediment to employment creation in our society; it is the engine which is driving the black economy in our society. Everyone in this House, including no doubt the Acting Chairman, have tangible and direct anecdotal experience of these things. By virtue of our job and our obligation to mix, meet and listen to people the anecdotal experience of a politician is different from that of someone who happens to be in business or a particular area of employment. It is an experience which has great statistical validity and, therefore, should be listened to. I will criticise the Bill severely in this area.
Like many other thousands of organisations, the Labour Party made a pre-budget submission. I know that these have a certain status in the Department of Finance irrespective of who happens to be Minister for Finance. We have to find a way within our taxation regime not only to reduce the overall level of personal income tax which is too high as a proportion of income, notwithstanding the alleged impact it might have on job creation, but to ease people back into paid employment and paying tax. We are not doing this at present. I am not sure I have an instant set of answers which I can offer the Minister. However, I have some ideas and the people working for the Labour Party on the research side have some ideas and suggestions about the introduction of a low level of tax. It could very well be argued that we had such a tax before. In fact, it was the Labour Party in Government who took it out. I think there was an introductory tier of 25 per cent. Perhaps in the light of our experience now — I have no hesitation about being open to learning from our experience, mistakes we have made or changes in conditions — we should be looking at such a rate of tax for the first £1,500 or £1,000 of earned income.
Unless we do something very dramatic, a young semi-skilled person in their mid-twenties with one or two dependent children is destined in the present climate to permanent unemployment in our society. Indeed these frightening figures are contained in the Minister's speech, which may not necessarily be the fault of the Government — it is too easy to lacerate them. Notwithstanding the job creation efforts of the private sector, due to the demography of our society on the one hand and the continual shedding of agricultural labour on the other we are going to have an extra expenditure of £25 million in this year's budget because of the increases in unemployment. Many of the people who will be laid off or become unemployed will be condemned to a period of long term permanent unemployment unless we change the entry point of taxation for them. Many of the jobs being created on the margins pay that level of salary and, therefore, will run into the threshold to which I have referred.
The other area of personal taxation which the Bill confines itself to is capital taxation. I am amazed at the way in which the Government, who have again asserted their commitment to the promotion of private effort in enterprise as a key feature of this Bill, have seen fit to change the sliding scale of capital taxation from 60 per cent to 30 per cent, which was the original sliding scale as I understand it. There is now a flat rate of 40 per cent which means that in some cases the incentives are not as great. I am not sure if this change is based on the review of the Government's experience or the Revenue Commissioners' analysis of the performance of this tax.
I am not sure what philosophy brought about this change. Is it a mania for mere arithmetic simplicity? Certainly I could understand it coming from anybody with responsibility for running the Revenue Commissioners in that it would make everything simple and clear, would reduce the level of computations and so on, but if that is the explanation let us hear it. There was a dynamic in the idea that if you made a quick killing on a capital gain you paid 60 per cent tax but the longer you held the investment the greater the risks and, therefore, the higher should be the reward. In that case the tax was at the rate of 30 per cent.
There is a case to be made for that argument, which I can understand. It means that people will be prepared to make a capital investment for a period of time because there is an in-built incentive and it may take a number of years for a particular project to mature. By holding the investment for three, four or five years less tax is paid. Now the tax rate is 40 per cent on a 24 hour and on a four year investment. I do not understand the logic behind that. There may be a reason that is self-evident but it is not evident to me. Perhaps the Minister can reconcile that with the comments in his speech about private enterprise and effort, but there is no incentive to private effort and enterprise in that change.
Car registration tax is one that all of us reluctantly recognise as being necessary. The revenue base of society has to be protected. As a result of the open market from 1993 we will get some tangible benefits, but we will also have to pay some costs. However, we cannot afford to pay all the costs at the one time. None of us likes to pay more than we need for certain things, but the ordinary citizen recognises that we must pay car tax. The Minister and politicians did not receive many representations in relation to this matter. That shows that people understand that this tax must be paid.
There are other points I would like to put on the record of the House. They have been highlighted by people who have assisted us in evaluating this long Bill. Many people who have watched Finance Bills progress through this House have come to the conclusion that one cannot understand the thinking behind many of the provisions unless, as it were, one understood the conditions of the labour ward at the time the Bill was born. It is true to say that the minds of the "parents" were elsewhere; there was much going on in the Fianna Fáil Party as to who was going to be leader and what would happen in that much troubled political party. We saw more evidence of that yesterday and this morning.
Professionals in the field of taxation and economic management put forward a view I invite the Minister to consider and respond to. This Bill can be characterised as a bookkeeping exercise. It has, by and large, been drafted by civil servants for civil servants because in their mind the eye was off the ball and the Minister's energies were elsewhere. Many technical complexities had to be included, some of which were referred to such as the DIRT and VAT changes. It is the largest Finance Bill we have had in a long time, if not the largest in the history of the State. Considering those factors this was an opportunity for the Revenue Commissioners and Finance officials to set the record straight and clean the slate of many minor provisions that took up much time, were an aggravation and, in some cases, a source of annoyance to some people in the public service. That view has been expressed and no doubt the Minister heard it from others. It is in the interests of this body politic that that view be refuted or responded to. Otherwise the credibility of this House will be somewhat diminished. I invite the Minister to consider this matter and respond in due course.
Last year on Committee Stage of the Finance Bill I tabled an amendment to the capital acquisitions tax code to deal with anomalies in relation to people who are in second unions, those who are living as brother and sister and those who are living under favourable private arrangements under which if the owner of the property dies the consequences of the present capital acquisitions tax regime can be quite substantial. The Minister's predecessor gave an undertaking to consider this matter in the context of this year's Finance Bill, but I regret it has not been dealt with. I am not holding the Minister responsible for that. I recognise there are many pressures on him at this time, but I am giving notice that I will again put down an amendment on this matter on Committee Stage.
I will not delay the House much longer but I would like to outline my concern about this matter in which I have a personal interest because I am partly affected. My attention was drawn to the matter by virtue of a letter from a constituent who had been married, got an annulment from the Catholic Church and entered into what was for her a second, totally bona fide sacramental marriage. She had the good fortune to have a child and was living happily in Dublin 6. It was brought to her attention by her accountants that in the eyes of the State they were a man and woman living together but for the purposes of law, and capital acquisitions tax they were strangers. The house which they jointly held was not in joint ownership, a slightly different legal tenure and was, for ease of arithmetic, valued at £100,000.
This woman was told that if her husband died and left, as any husband would, the balance of his interest in the house to her she would be deemed to be in receipt of a gift to the value of £50,000 from a taxation stranger. These people are practising Catholics and to them it was more important that they were deemed married in the eyes of the Church than in the eyes of the law. Under the existing taxation regime this woman is entitled to a gift of only £10,000 tax free and she must pay capital acquisitions tax on the remaining £40,000. Being employed in the public service on an income under £20,000 she would not be in a position to pay the tax and under the rules and regulations of the Revenue Commissioners, she would have no option but to sell the house. I do not think anybody in this House would argue that this is acceptable or should be the consequence of our law. It is a totally different case if a neighbour or somebody else dies and leaves you £50,000 in his or her will and you would then have to pay tax on £40,000 out of the £50,000 at the current rate of capital acquisitions tax. The validity of paying capital acquisitions tax in that case is totally different from people who, for all intents and purposes, are living as husband and wife. Yet the rigours of the law and the taxation system which currently prevails require the events that I have just described to come into play.
The previous Minister for Finance was very reasonable on this point because at this stage it is not a matter of philosophical dispute but the way of getting round the problem. I accept that it is a fair principle that our taxation law should reflect the legal basis of society and not try to lead it. I accept also that the law in relation to marital breakdown, separation and subsequent second unions is still in the process of being reformed. When we were discussing this very matter on Committee Stage last year, the then Minister for Finance could have reasonably anticipated that the White Paper on marital breakdown would be published shortly and this could have created a sufficient signal to enable the Minister for Finance to anticipate to a certain extent the implementation of the recommendations in the White Paper and consequently make changes in the law.
The White Paper has not yet been published and the indications are that it will be some time before it is published — I am not fishing for information — because the Minister has enough problems from the fundamentalists without driving them mad altogether with proposals to introduce divorce. There would be a stampede of cumann members from the fundamentalist wing of the Republican Party. Quite understandably until the issues of the right to travel and the right to information are resolved, the right to divorce will not be put on the agenda by this Administration. One can reasonably expect that the White Paper will be delayed until after the Final Stages of this Bill.
I ask the Minister to give serious consideration to this question, because it is not going to go away. It is becoming increasingly relevant because of the nature of our aging society. Many people who entered into these unions are now reaching the stage in life when inevitably one of the partners may die of old age, and then the taxation factors will come into play. Apropos the whole question of marital breakdown and divorce — my own personal position is a matter of public record — the trigger that ultimately brought about change in divorce laws in Italy and Spain, both Catholic countries like ourselves, was the question of property and the inheritance of property by one generation from another. Indeed the divorce rate in those countries has stabilised and is very low compared with that in the US or in Britain.
I can give another example of a problem which will have to be resolved by the Minister for Finance because he has responsibility for the public service. Should a teacher of other public servant die, her husband could apply to the Department of Education for the widower's pension but in the case of the couple I mentioned where they are married in the sacramental sense but not in the eyes of the State, the Minister for Education could not award a widower's pension because it would have to be awarded to her first partner, even though her first partner could have long since gone. That is another component of the difficulties those in second relationships have to face.
I invite the Minister to examine this problem and deal with it as best he can. I think he can act quite reasonably without breaking the convention that was understandably asserted last year by the then Minister for Finance that taxation should reflect social law rather than lead it. In this particular case for the reasons to which I have already referred it would be timely, and it would not necessarily be stepping outside the confines of our present position, if capital acquisitions tax could accommodate the circumstances I have referred to.
I now wish to raise some other points which have been brought to my attention. There are provisions to increase the powers of the Revenue Commissioners which were referred to briefly by Deputy Noonan, and I now wish to put on record my party's view on these charges. If two or three years ago a Minister for Finance had indicated that additional powers were to be given to the Revenue Commissioners there would have been an outcry. Depending on the party spokesperson, the outcry would have been hysterical, very loud or very strong, undoubtedly it would have been very loud. However, two things have happened in the meantime.
First, those who have no discretion in the amount of tax they pay have become increasingly incensed at the level of tax evasion they read about. They can read about the judgments against certain individuals for very substantial sums of money in the Sunday newspapers. Most people in business cannot understand how someone can run up a debt of between £50,000 to £200,000 to the Revenue Commissioners having regard to the regular inspections of their books and the VAT inspections they have to comply with.
Second — I made this point very briefly yesterday during Deputy Noonan's contribution — the revelations of taxation malpractice that have emerged from the various inquiries, the inquiry into the Greencore scandal, the Telecom inquiry and the Beef Tribunal, and the difficulties that officials acting on behalf of the Revenue Comissioners had in terms of access to information and documentation would not have been considered normal but now they have been recorded. This has changed the mood and the attitude of the public and therefore the political climate has changed; this disposes public opinion to allow the Minister to give the Revenue Commissioners those powers on one very important understanding — that it is the other side of the element of trust implicit in moving towards a system of self-assessment taxation.
The vast bulk of citizens will pay tax on the nail in accordance with what they legitimately assess themselves to be liable for. There will always be some area of doubt or speculation because of the ambiguity of some activities. The vast bulk of citizens want to be law abiding, want to pay their tax and want to have their accounts up to date and correctly lodged with the relevant authorities. There will be a minority who will not do that and who will avail of every opportunity to evade tax. We have seen some evidence of that.
I am very conscious of what we are doing and I am sure the Minister for Finance is conscious of what he is asking us to do. As people responsible for the administration of power we are asked to give to the Minister for Finance, and in turn to the Revenue Commissioners, what can only be described as draconian powers to intrude into the privacy of individuals for the purpose of ensuring that they pay tax. So far as the Labour Party are concerned those powers are given in the knowledge that they are necessary, based on the level of tax evasion on the one hand and the degree of obstruction that has become more widespread. Therefore, they are legitimately being given to the Revenue Commissioners to counteract those abuses. If, however, the Revenue Commissioners do not handle those powers with utmost sensitivity and confine their application, in the final analysis, to people to whom all previous types of inquiries, admonitions or directives have so far failed then the climate of political acceptability in which the powers are being given will be changed. I have to say that the language used by the Revenue Commissioners in relation to their standard communication to ordinary citizens is unbelievably heavy and abusive. In my own case I got a demand for a tax payment, the first time I had received the demand, and basically it was inviting me out to the O.K. Corral by High Noon on Friday, within about 48 hours, if I had not paid up. Subsequently I spoke to one of the officials in the Revenue Commissioners and I was given the explanation that the computer was programmed to write this type of thing. It must be the most ill-tempered computer in the world, programmed by the crankiest set of programmers one could imagine. Now that they are being given extra draconian powers, the necessity of which is not to suit them, they have to be countervailed by a recognition that the vast majority of people want to pay tax, want to pay it on time and do not want a tax liability hanging over them, particularly one they had not known about. There is a number of other points that could be raised more effectively on Committee Stage.