Amendment No. 1 is in the names of Deputies McDowell, Noonan and Deenihan.
Finance Bill, 2000: Report Stage.
I move amendment No. 1:
In page 11, between lines 19 and 20, to insert the following:
2.–Where a claimant proves for a year of assessment that income received by him or her consisted of dividends paid by a credit union within the meaning of the Credit Union Act, 1997, of an amount not greater than £750, the first £375 of such income shall be disregarded for the purposes of calculating his or her liability to income tax for that year of assessment.".
This amendment deals with the taxation of credit union dividends and savings. The Minister will know that, in effect, it is only partially amended in so far as the other amendments the Opposition sought to table were out of order.
The amendment looks to introduce the regime which was the result of a working party report, now over a year old. We advanced this debate considerably during the course of the Finance Bill deliberations, not least by virtue of the Minister's comments on Committee Stage. I will examine those in a few moments but it is worth mentioning some of the cogent reasons for giving special status to credit unions and to the taxation of credit union savings. First and foremost, a dividend paid on a credit union share is not the same as a dividend paid on any other type of share because a share in a credit union is not the same as any other type of share. It is of fixed value; it does not go up or down according to the market. It does not allow for the possibility that somebody will make a profit on accumulating a significant number of shares over a period of time and dispose of them. A credit union is simply a different type of lending institution, a different type of company. It is largely staffed by volunteers, it is not for profit and it lends to a different type of person, perhaps not as different as it would have been ten or 15 years ago but still distinctively different from the lending profile of other financial institutions. As we know, the amount that can be lent or saved is capped by statute. There are cogent reasons, which this House has explored on a number of occasions, for treating credit unions and credit union savings in a distinctively different way from the savings in other financial institutions.
The Minister advanced the argument somewhat during the course of Committee Stage and I want to focus on that. The Minister made it crystal clear that what he has been saying for the past 15 months or so is simply not true because he has told the House on countless occasions that he is considering the working group report. It is clear from his comments on Committee Stage that he is not considering the report of the working group but has rejected its proposals. Over the course of a half hour discussion on Committee Stage he presented a cogent argument against the proposals. For example, he said at one stage that if an exemption of £375 to £750 applied to a sum of £7,500 and £10,000 in each account, it would be a recipe for encouraging people to evade tax. He said we should have learned from what took place in the recent past and went on to say that if one is against tax evasion, one should not include in legislation provisions which would encourage this practice.
When he made those comments the Minister was specifically addressing the primary recommendation of the working group report, namely, that the first £375 worth of dividends should be exempted from tax. It is clear, therefore, that the Minister, far from considering this, is actually describing the recommendations of the working group as a recipe for tax evasion. He explicitly said that during the debate on Committee Stage. Two consequences clearly flow from that. We need to examine what happened during this famous meeting or non-meeting a few weeks ago between the Taoiseach and the representatives of the Irish League of Credit Unions because a fairly anodyne statement – the Minister would describe it as a balanced statement – was issued afterwards. It has become clear since Committee Stage that that statement was nothing more than weasel words.
The second consequence is that the position of the Independents in this House is now very stark. They know the Minister's attitude. They know that nothing will be done on foot of the working group report for as long as this Minister remains Minister for Finance. I put it to those Members that they have a straightforward choice – either they keep their word given to the Irish League of Credit Unions to support the credit unions in attempting to get a change in the regime for taxation of dividends, or they do not. In fairness to him, Deputy Healy-Rae was led into a trap by a mechanism which he did not seem to appreciate entirely at the time, but the Deputy voted against this amendment on Committee Stage. He and his colleagues on the Independent benches will have a little more warning this time. They will know that if they vote against this amendment in half an hour's time or less, they do so in the clear knowledge that they are explicitly rejecting what the Irish League of Credit Unions has asked them to do. I ask them to think seriously about that.
The amendment is in keeping with the report of the working group issued over a year ago and I ask the House to support it.
We dealt with this matter in great detail on Committee Stage and, prior to that, we debated a Private Members' motion in the House but the information given by the Minister on Committee Stage has changed the debate somewhat. It is clear now that the Minister has no intention of implementing the recommendation made by the chairman of the working group that examined the taxation of credit unions. The furthest he will go is back to the position which was rejected previously when the 1998 Finance Bill was published. That was, as the House will recall, a proposal by the Minister to apply DIRT to credit unions without any exemptions for small deposits.
The Minister is at variance with the public position taken by the Taoiseach at the recent meeting with the credit unions. The press statement which issued arising from that meeting indicated that this was still an open question, that the situation was being examined, that there were European considerations to be taken into account and that there were legal implications which the Attorney General was examining but that the policy position was still open and that, if anything, the Taoiseach and the Tánaiste were tending towards the implementation of the report of the working group chairman if they could get over difficulties in Europe and certain legal difficulties which might arise.
The Minister for Finance's position is totally at variance with that. He does not have an open mind on this issue. He has taken up a strong anti-credit union position and a strong pro-bank and pro-building society position. He has, effectively, slammed the door on the credit union movement both literally and metaphorically.
It is appropriate that this amendment be pressed to a vote. I do not know what level of knowledge the four Independent Deputies who support the Government had when they voted against the Private Members' motion. Maybe they thought that simply to arrange a meeting with the credit union movement was the primary issue but, of course, it was not. The primary issue is that the Government should introduce a fair and equitable taxation system on interest on deposits and on dividends on shares in credit unions. That is the issue and this amendment takes the key proposal from the report of the chairman of the working group and puts it to everybody in the House to state their position.
It is very disturbing that the Government is speaking with a number of voices on this issue. The Tánaiste's position is different from that of the rest of the Government and the Taoiseach's position is a fudged one where there is a pretence that he favours the credit union position, while his Minister for Finance is laying down the law in very categorical terms by saying there will be no change in the law along the lines proposed. The saga is very disappointing. It is a great pity when personal considerations are allowed to enter public debate. The bad feeling between the Minister for Finance and the credit union movement continues to fester. That is a very bad situation. A public policy should not be conducted in that fashion.
There is a growing swell of frustration among the 536 or so credit unions. They are confused as to what the Government's position is following the meeting with the Taoiseach and the Tánaiste. The Minister might clarify that further.
The Minister stated clearly on Committee Stage that he has to wait for the EU ruling before he can proceed any further on this question of credit union taxation. The word coming from the credit unions is that DG4 is positively disposed towards them and the philosophy behind them. Rather than discouraging credit unions across Europe, it is encouraging them. It would appear the UK Government has been actively promoting credit unions for that past two years, in particular. It is putting in place a number of supportive measures for its credit unions.
It is only a week since we discussed this matter on Committee Stage. Will the Minister advise the Dáil if there has been any contact with DG4 since as we may not get an opportunity again to discuss the issue of European policy on credit unions? Will he confirm that the IMSA, for example, has responded to DG4 and that The Irish Bankers' Federation has raised further questions with it? These are important questions which need to be answered before we press this amendment to a vote.
I appreciate Europe is taking more of an interest in our tax incentive measures but it has a different approach in the case of credit unions. One cannot lump credit union taxation in with seaside renewal schemes and other tax incentive schemes. When the Minister responded to the questions raised on Committee Stage, he was inclined to do that. He more or less said that the Commission is taking more notice of the various tax incentive schemes, whether in urban, rural or seaside areas, and he equated that with the interest it is showing in credit unions.
I would say the interest in credit unions has come more from the complaints made rather than from EU policy. Judging from statements emanating from John Hume and others, it would seem DG4 is very much disposed towards credit unions. Will the Minister bring us up to date on his contact with Europe and the response from DG4 and explain its present position? Has any progress been made since last week?
Before I reply, will you, a Cheann Comhairle, remind me of the arrangements on Report Stage?
The mover of the amendment has the right, like every other Member, to speak for two minutes on a subsequent contribution. The mover also has a right of reply. The Minister may speak now for an unlimited amount time and if he comes in again, he may speak for two minutes.
Deputy McDowell's amendment proposes to exempt from income tax the first £375 of dividend income on credit union shares where the total of such income is less than £750 in any year. In February 1998, I established a working group, chaired by Mr. Terence Larkin, to examine specifically the taxation of returns on credit union savings. After six meetings of the working group, it was not possible for the members to reach consensus. In the absence of an agreed position, the chairman made a number of recommendations, namely, that credit union surpluses should continue to be exempt from corporation tax, that 20% DIRT should apply to interest on all credit union deposits, that 20% DIRT should apply to all dividends from shares, except where the dividend in any year is £750 or less and, in such cases, only the first £375 would be exempt, and that there should be no reporting to Revenue of interest or dividends on credit union savings. Two of the group members did not support these recommendations.
There are important issues to be decided arising out of this report, including issues of tax equity and Exchequer cost, particularly if any tax relief given to credit union savers has to be extended to savers in other financial institutions. Deputies will also be aware that there is a very important EU dimension arising from complaints made to Brussels by the Irish Mortgage and Savings Association. The Irish Bankers' Federation also has a complaint with the Commission which I understand relates to the position of credit unions in respect of consumer credit legislation.
On Thursday of the week before last, the Irish League of Credit Unions accepted the Government's position that complaints on taxation made to the European Commission must be resolved before any further moves are made in regard to the taxation of credit union savings income. Any change in the law at this point could aggravate the situation in regard to the investigation by the European Commission.
The matter has been referred to the Attorney General for an opinion. The recommendations will be further examined in the light of whatever decision the EU Commission takes in relation to the complaints about existing tax law. I should emphasise that the Commission is not dealing with the current proposals of the Irish League of Credit Unions but rather with the treatment of credit unions under the existing law. It would not be unreasonable to assume that further concessions to the credit union movement would trigger complaints which would also have to be dealt with. For these reasons I cannot accept this amendment.
We dealt with this matter at considerable length on Committee Stage. I dealt with a number of factors there which, although highlighted by me in previous contributions, have not been given as much attention as they should. I highlighted them in various replies to parliamentary questions and during a recent debate on a Private Members' motion.
I wish to outline the position on proposals related to credit unions in the 1998 Finance Bill as initiated. Prior to meeting the Irish League of Credit Unions at its request in December 1997, I had no intention good, bad or indifferent of making any proposals related to credit unions, but having met representatives of the credit unions they requested that consideration be given to their proposals. When the Finance Bill, 1998, was published on 12 February 1998, I thought I had met their concerns, but immediately thereafter there was outcry against the various proposals and I withdrew them. The current position with regard to credit unions could not be more favourable. Deposit interest is not liable to DIRT, they do not have an obligation regarding the reportage of interest or dividends and they continue to be exempt from corporation tax.
The proposals put forward by me in the 1998 Finance Bill, as initiated, included a proposal that deposit interest be liable to DIRT, which the credit unions had sought in the first instance, although the hue and cry immediately after the publication of the Finance Bill and in the media the next day was that I intended to impose DIRT on depositors' interest and that I was attacking people with small savings, and various members of credit unions rose up in arms against that together with their political representatives and the media. The Irish League of Credit Unions had little time to point out that it had sought the imposition of DIRT on interest on deposit in credit union accounts. It was not my idea to impose it in the first place. Now the Irish League of Credit Unions is again seeking the imposition of DIRT on deposit interest and other considerations regarding dividends. The 1998 Finance Bill published in February 1998 continued the corporation tax exemption in respect of credit unions. I gave them what they wanted regarding DIRT on deposit interest, which caused all the hullabaloo afterwards. I said there could be reportage of dividends and interest. Up to that time, reportage of dividends was available to me, but I said there could be straight reportage of dividends.
What the Irish League of Credit Unions wants and what the chairman of the working group put forward is these exemptions, which are encapsulated in the amendments tabled by Deputies McDowell, Noonan and Deenihan. In replying to various parliamentary questions on this matter, I referred to the EU aspect. That was before the recent complaint by the Irish Mortgage and Savings Association and the more recent complaint by The Irish Bankers' Federation in regard to the consumer directive. In the replies I gave I pointed out that a previous complaint was made to the European Commission on the existing position on the taxation of credit unions that pertains in Irish law.
Our understanding of the EU decision in saying it is in order at present was that credit unions were exempt from corporation taxation. The complaint was that the corporation taxation exemption was illegal as it was contrary to EU rules. However, it ruled that it was in order to continue the current regime which gave corporation taxation exemption on surplus income because the flow of income out was fully taxable in the hands of the recipients. However, our understanding has always been, and it was pointed out in replies to parliamentary questions, that to have an exemption at both ends – that there would be no corporation tax on the surplus income of a credit union and at the same time create a category of exemption which would take out of the net 98 % of all depositors in credit unions – would run foul of the EU decision. That is what is being asked for by the Irish League of Credit Unions, to continue the corporation taxation exemption and at the same time create a category of exemption for credit union dividends that would effectively remove most depositors. A new complaint has now been made by the Irish Mortgage and Savings Association and this must be considered by the EU Commission, but it will consider the existing situation before we make any changes.
Deputy McDowell is a reasonable person most of the time, politics notwithstanding, but perhaps politics makes us all let on to be unreasonable and not face up to the facts for various political purposes. It would not be unreasonable to suggest that if the current situation triggered these complaints, adding to them will trigger further complaints and they will also run foul of EU rules. I emphasise that what has been decided upon by the EU Commission is the current position. If we were to add to that, that would also have to be put before the EU Commission. The current complaint is from the Irish Mortgage and Savings Association.
When representatives of the Irish League of Credit Unions came to meet the Taoiseach and the Tánaiste a few weeks ago, it was pointed out to them that a further complaint had been received by the Commission from The Irish Bankers' Federation on a separate directive, the consumer directive. We heard recently that another complaint may be made to the Commission on the bankers directive. There are a number of complaints before the EU Commission.
Representatives of the Irish League of Credit Unions at their meeting with the Taoiseach and the Tánaiste accepted that the EU dimension must be disposed of before any further matters can be considered. It was made clear in the statement by the spokesperson on behalf of the Irish League of Credit Unions following that meeting that it accepted that position. Furthermore, the statement by the Government following that meeting pointed out the Commission aspect in fairly great detail. That Government statement of 24 February indicated the Taoiseach had confirmed to me that the recommendations of the working group on the taxation of the returns on credit union savings would be further examined in light of whatever decision the EU Commission takes in the matter. It also pointed out that there are general equity aspects which would have to be considered at that stage, as well as the need to ensure the integrity of the tax system.
I referred in some detail on Committee Stage to the difficulties multiple accounts have caused in the Irish taxation system in the past number of years. If anyone has any doubt about the difficulties caused by multiple accounts and tax evasion, they should check the report of the Committee of Public Accounts, which referred to this matter in some detail.
I wish to refer to a matter with which Deputy McDowell may be conversant. It is one with which I am conversant given that I am a little older than he is and longer in a profession dealing with taxation. I will outline what happened regarding multiple accounts in the 1960s, 1970s and 1980s before there was ever an inquiry by the Committee of Public Accounts. When an investigation is carried out into the affairs of a taxpayer who is found to be evading his or her tax, it is referred to in the trade as back duty investigation. In the 1960s, 1970s and 1980s approximately 75% of back duty investigations resulted from the discovery of a deposit account which had not been returned by a taxpayer. I do not have information from the Revenue in that regard but if one were to check the record I am sure that in the 1960s, 1970s and 1980s, the majority of back duty investigations arose initially from the Revenue discovering the existence of an account of deposit interest. I will outline how that arose. Up to the mid 1980s – my officials could quote the specific Finance Act – the first £70 of interest earned in a financial institution was not reported. It was actually tax free. Therefore, if it exceeded £70 a list of names was sent to a certain section of the Revenue Commissioners in Dublin. Sometimes taxpayers put about £500 in a multiplicity of accounts all over the country. They did not drive to all the bank branches, it was done for them. Let us put it no further than that. The interest was always kept below a certain amount so it would not exceed the £70 figure and the underlying £600, £700 or £1,000 of interest never came to the attention of the Revenue Commissioners. One could have £50,000, £60,000, £70,000, £80,000 or £90,000 spread all over the country in these accounts. One such case came to light recently when some taxpayer sued a bank for bad advice – not having advised him to avail of the tax amnesty. The case was heard in court and a decision was made on it.
Sometimes the interest inadvertently slipped above the £70 figure and was returned on a list to the central headquarters of the Revenue Commissioners in Dublin. Lo and behold, the individual taxpayer would then receive a letter asking about a particular account. That often initiated a back duty investigation during the course of which most taxpayers would own up to the multiplicity of their accounts, even though perhaps only one account of 60 or 70 fell foul of the £70 interest limit.
In one famous February budget, the Minister for Finance announced that the £70 interest limit was being reduced to £50. When 5 April came it meant that before people could move all these accounts again, or have them moved on their behalf, the interest had exceeded £50. A plethora of accounts came to light as a result. That has been my experience of having tax exemptions. This matter was also dealt with by the Committee of Public Accounts, although not in the same detail as I am providing for the House. As a tax practitioner who has dealt with many back duty investigations – and I am speaking for many people in my profession – I can tell Deputies that is what the £70 and £50 limits lead to.
The Irish League of Credit Unions is advocating that the first £375 would be tax exempt. Taking a rate of 5% or 6%, that implies that a person could have up to £7,500. It is an open invitation to people to put their money in savings which will not come to the attention of the Revenue Commissioners. Let us be quite straight about this and let us stop fooling ourselves. The credit unions want to gain a competitive advantage over other financial institutions so that they would be the one group to be able to say, "The first £375 here will be tax exempt". Let us be dead honest about it. Even the credit union surveys show that people deposit their money in credit unions for more or less the same reasons that they deposit it in all other financial institutions, to get the best return. I can assure Deputies that the common bond is way down the list. If Deputies McDowell, Deenihan and Noonan do not know, I am telling them that if that occurs the credit unions will get a competitive advantage because people will automatically put their money there to get this tax exemption. We will be inviting people to evade tax. That is what will happen. It is a fact.
That is what was referred to by the Taoiseach in his statement last week when he pointed out that there were general equity aspects which will have to be considered – that means all financial institutions – as well as ensuring the integrity of the tax system.
Let me say something else, since we are being open and frank with each other this morning. I have never ceased to be amazed by the hypocrisy of the Irish political system over a long period of time, and the hypocrisy of politicians of all parties. I always put it down to the multi-seat constituency system of proportional representation. Since 1983, I have written much about the abolition of multi-seat constituencies which, I think, led to the worst of all possible worlds.
A Cheann Comhairle, I think the Minister is straying.
It makes me laugh to see the hypocrisy of Deputies who speak in the House about the common bond and who play to their constituents back home for political gain while, at the same time, advocating what they know to be a system of tax evasion.
Deputies pride themselves on knowing what their constituents want and journalists pride themselves on knowing what is going on. However, in one tiny town there were 14,200 bogus non-resident accounts, yet nobody seemed to know about them. I just do not believe it. Those accounts represent mothers, fathers, brothers, sisters, aunts and uncles of actual, real, live people who attend TDs clinics and vote. They may have been brothers, sisters, uncles and aunts of public representatives as well, but nobody seemed to know anything about them.
Nobody now wants to recognise the inevitability that what we are advocating here is a system of tax evasion. I do not mind Fine Gael because they are a bit like ourselves and move around the different stages. But the paragons of virtue who sit on the left wing of Leinster House and who preach from the high moral ground all the time, are in here advocating what they know is a system of tax evasion. It makes me want to do something which would not be appropriate on the floor of the House.
Deputy McDowell has two minutes.
We are going to have an interesting day. I will try to make a few points in the couple of minutes available.
I should remind the Deputy that he will have the right of reply to the amendment.
I think I will need it. Listening to the Minister one would think that we already had a perfect system of taxing credit union dividends and deposits which gave a realistic take to the Revenue. The reality is that we do not. At the moment most people who earn dividends on credit union savings do not pay tax, simply because in many cases they do not know that tax is payable or because they are not geared to making tax returns. We are not dealing with a perfect situation. The Minister has not given me any information about the current take, but I would happily bet that if we were to introduce a scheme along the lines we are discussing we would probably increase the take from tax rather than reducing it.
There is a central problem in what the Minister is saying and in what we have heard over the last few weeks. He used a crucial phrase, stating that what Members of the House and the Irish League of Credit Unions are arguing for is "what they know to be a system of tax evasion". Is the Minister telling us that the Taoiseach sat down for over an hour a week ago to talk to the Irish League of Credit Unions about what he knows to be a system of tax evasion? If he does, he should say so clearly and explicitly. He should tell the Independent Deputies that they have been arguing for a system of tax evasion. He should tell the League of Credit Unions that he does not have the remotest intention of doing this. If he did so, we would have had a far more honest debate before now.
But the amendment is in the Deputy's name, not in anyone else's.
I have said that I believe we would actually increase the tax take because the current system is far from perfect. The Minister seems to be suggesting that it is perfect but it is not. He is saying that we have all been debating what we know to be a system of tax evasion and we are guilty of hypocrisy. If that is the case for Opposition Members, it is also true of the Taoiseach and the Minister's own backbenchers.
No.
It is true of the League of Credit Unions and the Independent Deputies.
Yes. I agree with the last point that Deputy McDowell made.
Listening to the Minister is like watching an episode of "Startrek"; he travelled so far and showed us so many alien personalities in the Irish landscape.
Like the Deputy himself sometimes.
I agree with Deputy McDowell. The Minister's entire speech is based on the premise that the system of taxation of credit unions, which he personally designed, is perfect. In fact, every person who lives in that real world the Minister reminded us of – where we all know what our aunts, uncles, brothers and sisters are doing – knows that very few people actually pay tax on their credit union dividends.
That is correct.
The Minister designed a system in 1998 where there was no reporting. There is no cross-checking. Uniquely, there is a liability on credit union depositors to pay the marginal rate of tax, which in many cases is 46%. Everyone else pays at 24% or 20% if they have money elsewhere and that is unfair. The Minister matched that to a no reporting system, when he knows that the present system is a blueprint for tax evasion. One would think the Minister would have learnt something from the Committee of Public Accounts inquiry into DIRT. I foresee a situation where Deputies will be here saying: "Why did nobody know this was going on throughout the late 1990s? Why did they not know that the tax obligations on depositors in credit unions was more honoured in the breach than in the observance? Why did they close their eyes to it? Why did the Minister of Finance pretend in the Dáil that something was happening which was perfect and that change would make it worse?"
What exactly has been referred to the Attorney General? The Minister said a matter was referred to the Attorney General but on what exact point is he adjudicating? At some stage could the Minister tell us what procedures the Revenue has in place examining the 58 institutions which may owe DIRT? I understand random samples of accounts are being taken and that there is an attempt to assess full liability. What will happen then? Is it the intention to settle or to penalise and bring offenders to court?
Deputy Noonan asked about the matter referred to the Attorney General. I will not read out the letter that was sent to the Attorney General but I can give the general thrust of it. We asked the Attorney General if there was an arguable legal case for the IMSA complaint under the treaty, what the procedure was in intervening with the Commission on processing that complaint, whether procedurally or in equity the Government could intervene in this case on either side, about the proposals in the report of the working group on taxation of credit union members – having notified the Commission for pre-clearance, although they have no official standing – and if the exemption of credit union members on income tax dividends would prejudice the existing exemption of credit unions from corporation tax under EU rules. We also sent various documents to the Attorney General. I understand it is not appropriate to read back what was said by the Attorney General, but those are some of the specific questions.
Deputy Noonan also asked about the Revenue Commissioners audit. There was an amendment on Committee Stage – I do not know if it is repeated – but the present position is that Revenue is investigating the 37 financial institutions. Revenue is in all of them at this stage and hopes to finish this phase by June or July with a view to reporting to the Committee of Public Accounts by autumn.
How will they check individual banks?
They will deal with each bank and try to settle what are its particular DIRT liability and penalties.
They will raise an assessment and try to—
I have not been involved in this and it would not be appropriate for me to be, but when Revenue has all the information gathered I am sure they will enter negotiations with the relevant institutions and see how things go. Then the possibilities available to them in law can be explored, but that is some way down the road. It is reasonable to assume that not every financial institution will react in the same way.
If a financial institution accepts the liability Revenue says it has, can it then proceed to a settlement with Revenue?
Those powers are already with the Revenue and that is what would happen. However, this will all be reported back to the Committee of Public Accounts and the amount of the settlement will re-enter the public domain.
I realise that.
We have had a useful discussion and I hope the Independent Deputies listened carefully to what the Minister will ask them to endorse. The Minister accused us and his own backbenchers of looking to give a favourable taxation regime to credit unions which, we ought to know, is akin to tax evasion.
That is the kernel of the argument. We are looking to give a competitive advantage to credit unions and if the working group report was implemented, they would be in a better position than other lending institutions. That is the point of the exercise and is based on a number of premises which, it seems clear, the Minister does not accept. I will not go over them again, but they relate to the non-profit, voluntary nature of the credit unions. The Minister has gone further this morning in damaging the central case of the credit unions in claiming they are a different type of institution. If I were a member of any credit union, not only would I have no hope at all that the Minister intends to move on the working group report and the credit union campaign of the last year, but I would be very worried about having my case in Europe defended by the Minister and the officials who take his direction.
We have laboured long and hard on this point. I hope the Independent Deputies are listening, as the Minister is asking them to endorse a case fundamentally opposed to what most of them have been telling us they believe for the last three or four months.
Amendment put.
The Dáil divided: Tá, 66; Níl, 73.
Tá
- Ahearn, Theresa.
- Allen, Bernard.
- Bell, Michael.
- Belton, Louis.
- Boylan, Andrew.
- Bradford, Paul.
- Broughan, Thomas.
- Bruton, John.
- Bruton, Richard.
- Burke, Liam.
- Burke, Ulick.
- Carey, Donal.
- Clune, Deirdre.
- Connaughton, Paul.
- Cosgrave, Michael.
- Coveney, Simon.
- Crawford, Seymour.
- Creed, Michael.
- Currie, Austin.
- D'Arcy, Michael.
- Deasy, Austin.
- Deenihan, Jimmy.
- Dukes, Alan.
- Durkan, Bernard.
- Ferris, Michael.
- Finucane, Michael.
- Gilmore, Éamon.
- Gregory, Tony.
- Hayes, Brian.
- Higgins, Jim.
- Higgins, Joe.
- Higgins, Michael.
- Hogan, Philip.
- Howlin, Brendan.
- Kenny, Enda.
- McDowell, Derek.
- McGinley, Dinny.
- McGrath, Paul.
- McManus, Liz.
- Mitchell, Gay.
- Mitchell, Olivia.
- Moynihan-Cronin, Breeda.
- Naughten, Denis.
- Neville, Dan.
- Noonan, Michael.
- Ó Caoláin, Caoimhghín.
- O'Keeffe, Jim.
- O'Shea, Brian.
- O'Sullivan, Jan.
- Owen, Nora.
- Penrose, William.
- Quinn, Ruairí.
- Rabbitte, Pat.
- Reynolds, Gerard.
- Ring, Michael.
- Ryan, Seán.
- Sargent, Trevor.
- Shatter, Alan.
- Sheehan, Patrick.
- Spring, Dick.
- Stagg, Emmet.
- Stanton, David.
- Timmins, Billy.
- Upton, Mary.
- Wall, Jack.
- Yates, Ivan.
Níl
- Ahern, Dermot.
- Ahern, Michael.
- Ahern, Noel.
- Andrews, David.
- Ardagh, Seán.
- Aylward, Liam.
- Blaney, Harry.
- Brady, Johnny.
- Brady, Martin.
- Brennan, Matt.
- Brennan, Séamus.
- Briscoe, Ben.
- Browne, John (Wexford).
- Byrne, Hugh.
- Callely, Ivor.
- Carey, Pat.
- Collins, Michael.
- Cooper-Flynn, Beverley.
- Coughlan, Mary.
- Cullen, Martin.
- Daly, Brendan.
- Davern, Noel.
- de Valera, Síle.
- Dempsey, Noel.
- Dennehy, John.
- Doherty, Seán.
- Ellis, John.
- Fleming, Seán.
- Flood, Chris.
- Foley, Denis.
- Fox, Mildred.
- Gildea, Thomas.
- Hanafin, Mary.
- Haughey, Seán.
- Healy-Rae, Jackie.
- Jacob, Joe.
- Keaveney, Cecilia.
- Kelleher, Billy.
- Kenneally, Brendan.
- Killeen, Tony.
- Kirk, Séamus.
- Kitt, Michael.
- Kitt, Tom.
- Lawlor, Liam.
- Lenihan, Brian.
- McCreevy, Charlie.
- McDaid, James. McGennis, Marian.
Tellers: Tá, Deputies Sheehan and Stagg; Níl, Deputies S. Brennan and Power.
Amendment declared lost.
Níl–continued
|
McGuinness, John.Martin, Micheál.Moffatt, Thomas.Moynihan, Donal.Moynihan, Michael.Ó Cuív, Éamon.O'Dea, Willie.O'Donoghue, John.O'Flynn, Noel.O'Hanlon, Rory.O'Keeffe, Batt.O'Keeffe, Ned. |
O'Kennedy, Michael.O'Malley, Desmond.O'Rourke, Mary.Power, Seán.Roche, Dick.Ryan, Eoin.Smith, Brendan.Smith, Michael.Treacy, Noel.Wade, Eddie.Wallace, Mary.Woods, Michael.Wright, G. V. |
Amendment No. 2. Amendment No. 3 is related. Amendments Nos. 2 and 3 may be taken together by agreement. Agreed.
I move amendment No. 2:
In page 11, line 27, to delete "£15,000" and substitute "£16,000".
Over the last two Finance Bills the Minister has increased the exemption limits for persons over 65 years quite substantially. In his budget announcement he has increased the tax free maximum income to £15,000 for a couple, one of whom is over 65. The amendment in my name and that of Deputy Deenihan would increase this by a further £1,000 for a couple and a further £500 for a single person.
Will the Minister outline the arrangements in place for marginal relief when persons exceed these limits? Has he any proposals to change the 40% rate of marginal relief. Since his general policy envisages reducing the standard rate of tax and the higher rate of tax, does he intend to reduce the 40% rate which applies when persons exceed these limits on the clawback provisions?
The Bill as it stands proposes to increase the age exemption limits, that is, for a person aged 65 or over by £2,000 from £13,000 to £15,000 for a married couple and by £1,000 from £6,500 to £7,500 for single persons. The amendments in the names of Deputies Noonan and Deenihan seek an additional increase for a single person of £500 to £8,000 and £1,000 for a married couple to £16,000. The cost of this is estimated to cost £1.3 million in a full year on top of the £8.5 million for the change I am making. As mentioned on the Committee Stage debate on this amendment, the increase in the age exemption limits already provided for in the Bill represents a substantial increase of 15% on the current exemption limits and will remove approximately 10,000 elderly persons from the tax net. These increases are in keeping with this Government's commitment to reduce the tax burden on the elderly. Taking into account the increase I proposed this year I will have increased the exemption limits for the elderly by up to two-thirds, a very significant increase by any standard over the past three budgets. While one would like to do more, everything else being equal, I am satisfied the increases proposed in this Bill are equitable, fair and just in the circumstances. However, in accordance with the commitment in Partnership 2000 and reiterated in the Programme for Prosperity and Fairness I will keep the income tax allowances and the exemptions for those aged 65 years and over under continual review with a view to further assisting the position of age. In the circumstances I must reject the amendment.
Deputy Noonan asked a further question about marginal relief. Marginal relief which is at the rate of 40% applies to those who are just above the exemption limits. Given that tax rates have been reduced he asked if I would be review it. I will review it in light of the circumstances prevailing. On account of the way the allowances and the tax credits have been increased in recent years the number of people now hit by marginal relief is much smaller than it was, say, three years ago. I can get the figures for the Deputy later. From the recesses of my memory around budget time, the figures have continued to decrease as a result of increasing the personal allowances and tax credits. Since I moved to the tax credit system last year the number of people on marginal relief has consistently reduced. It is the stated intention of various reports that the numbers on marginal relief will decrease. Marginal relief affects people who are just above the exemption limits and it is something they should try to get out of. As the allowances increase we should be able to get out of it. It will still apply to the exemption limits for the aged. I will review the position regarding marginal relief in future budgets. I shall get the figures for marginal relief and those for three years ago. Unless my mind has gone totally askew, they are much less than heretofore.
I agree with the Minister that this is an argument we hope will be redundant in a few years' time. If we go the tax credit route and if the Minister makes good on his undertaking given on Committee Stage and repeated in the Programme for Prosperity and Fairness, the minimum wage, £10,000 per annum, will be taken out of the income tax net within two or three years. That will cover the current exemption limits and any likely increase in exemption limits. We should be able to move away from the whole notion of exemption limits, separate from the tax credits system, and should be able to do away with marginal relief as a principle and in practice. Whether we need to recognise the position of older people on top of that becomes a central policy question. My view is that we need to recognise income which older people derive from small occupational pensions. It is difficult for people to understand if they have a pension of, say, £5,000 per year, that as and when any additional pension they might have by way of PRSI contributions is increased, the income tax clawback from their occupational pension also increases. In dealing with the taxation of older people there is a case for looking specifically at pension income with an exemption limit.
The Deputy has an amendment on that later.
That is correct. I hope that in a couple of years' time this whole debate about the exemption limit will fade away and no longer be relevant.
In 1995-96 the number on marginal relief was 128,000. The figures post budget will be 13,945 – a little more than 10% of the figure a few years ago. From 6 April, it will be 13,945, so it has gone down dramatically and is continuing in that way.
I am disappointed the Minister did not accept our original amendment on Committee Stage. Had he done so, he would have made it clear to elderly people that we are sensitive to their needs. However, I accept that improvements have been made.
I am familiar with a number of former council employees who receive an occupational pension from Kerry County Council as well as an old age pension and are taxed at the higher rate. The Minister has promised to keep this matter under review. It is important that we target tax concessions at the lower paid and the elderly. These two groups of people are vulnerable in many ways. The elderly have more medical expenses and often must pay to have maintenance work done on their houses, and so on. The argument for this amendment was made on Committee Stage. I ask the Minister to consider this question before next year's budget, which will be drawn up in only six or seven months.
Amendment, by leave, withdrawn.
Amendment No. 3 not moved.
Amendments Nos. 4, 5 and 6 are related and may be discussed together, by agreement. One decision shall be taken in respect of amendments Nos. 4, 5 and 6 as they form a composite proposal.
I move amendment No. 4:
In page 12, to delete lines 27 to 48, and in page 13, to delete lines 1 to 9.
The most controversial item in the budget was the announcement of the individualisation of tax bands. While very little justification for this was provided in the Budget Statement, the Minister argued his case subsequently at length. According to the Minister, the decision to individualise rested on considerations of equity and fairness. People who work were paying an undue amount of tax, particularly at the higher rate, and the Minister proposed that they should be allowed to retain a higher proportion of their earnings because tax was onerous. He argued that in situations where the second spouse, usually the woman, re-entered the labour force she would pay tax at 46% on all her earnings. In general, I agree with the Minister's analysis of the position but not with his solution.
A second series of arguments rested on the fact that the great prosperity the country now enjoys could be put at risk if we ran out of workers and that while there are a number of sources from which we could draw additional workers, one of the principal resources of western economies is to encourage additional women to participate in the labour force. As a labour force policy, the taxation regime which the Minister proposed on budget day was designed to do this.
My party has no objection to encouraging people to participate in the labour force. However, we contest the Minister's proposition that if tax bands were not individualised the beneficial results I have outlined could not be achieved by any other method. Fine Gael published a tax policy in September last which would have provided a fairer and more equitable tax system. It would have achieved all the Minister's objectives, including the labour force objectives, without the trauma which the Minster's announcement caused throughout the country. Our policy would not have aroused the feelings of being hard done by in many households. I still receive submissions from families where one spouse works, saying that it is unfair that a couple who are both working would not go onto the higher rate of tax until their income exceeded £34,000, while a household in which one spouse is working would go onto the higher rate at £28,000.
Furthermore, the Minister's projection into the future would give rise to a position in two years' time, where the two income family would not pay the higher rate of tax until their total income exceeded £56,000 while a single income family would go onto the higher rate at £28,000. That is blindingly unfair. The Minister argued that this unfairness is necessary because of the need to give women an incentive to go out to work.
There is a better way of achieving the Minister's objectives. The Minister missed an oppor tunity to deliver significant tax relief to everybody at work, regardless of marital status, although he had the resources to do this.
Amendment No. 5 includes a table of tax rates, with a proposal for a middle rate of tax of 33%. On Committee Stage the Minister said he was not opposed to this and that he would return to this issue when his immediate tax objectives had been achieved. I have argued for a long time, not only that people enter the higher rate of tax at too low a level of income, but that the jump of 22 points from the standard to the higher rate is too steep at the level of income at which it occurs. The main emphasis of this amendment is to show that if the Minister simply increased the range of the standard rate band to £17,000 for a single person and to £34,000 for a married couple, he would get the same benefit in terms of equity and of labour force participation by women. There was no need for the trauma which the Minister caused.
The Minister may say that this solution would be significantly more expensive than his. On Committee Stage he said it would cost £130 million more. However, by raising the single person's band to £17,000 and the married person's to £34,000 the Minister would have removed the inequities and eliminated the differentiation between one and two income families.
Money does not grow on trees and any prudent Minister for Finance must take the cost of his measures into account. Immediately after the budget, the Minister argued that he would have liked to be as generous as Fine Gael proposed but that by doing it his way he had saved the Exchequer £130 million. However, a week later we witnessed spontaneous interviews by backbenchers who were lined up by an assistant in the Taoiseach's office to ensure they recited their words properly, and the Minister was undermined. In response to that initiative, at a meeting of the Fianna Fáil parliamentary party the Minister brought forward a commitment included in his election literature to introduce a £3,000 allowance for stay at home spouses in caring positions. The principal problem with this allowance – it has many – is that it will cost £125 million. The Minister argued that he would do it his way rather than my way causing trauma within and between families because it was the most cost efficient way of doing it and that he would save £130 million in the process, but this was all given away again when he had to balance his proposals.
The allowance was costed at £125 million before the Minister designed the full proposal under which the first £4,000 of earnings will be excluded from consideration. There will be marginal relief up to £5,000. While it can be argued that this will not give rise to an increase in cost from £125 million, it is also convenient that it was pegged at this sum, even though it was seriously amended after the announcement was made. It would be extremely embarrassing for the Minister if I was stating that the cost of his balancing measure was £140 million. At least the insistence that the amended proposal should cost nothing extra saves his blushes.
The net point is that the Minister had an opportunity to introduce serious tax reform in the budget but he introduced it in a way which divided the country, particularly women. His only justification was that it would have saved him £130 million but within a week he was forced into a position where he had to balance his proposals by spending £125 million of the £130 million he had hoped to save. This makes no sense and the Minister was stubborn in the extreme in browbeating the social partners into continuing with this insane proposal.
The trade unions always wanted it.
Certain individuals in ICTU for different jurisdiction had different views on individualisation from what would be the norm down here but the Minister has got himself into an almighty twist for no good reason and I presume he has received submissions similar to the ones I have received about the unfairness of the £3,000 allowance. He complicated what was a very straightforward system when he had bags of money to give the tax relief that we all wanted and which would have achieved the desired labour force effects. His only justification was to save £130 million, of which he is giving £125 million away. This makes no sense. The Minister states that it will not cost any more than £130 million as there will not be a 100% uptake but if there is it will cost about £145 million to £150 million rather than the £125 million to which he is nailing his colours. This is an extremely bad day's work.
I am trying to think of a parliamentary word to describe what the Minister has done; the words in my head are all unparliamentary. He embarked on a course of action that was unnecessary. He could have achieved all his policy objectives by extending the range of the single rate band and doubling it for married couples regardless of whether they both work. That would be a fairer way of doing it.
As the Minister is in the mood to provide additional information, what are his intentions next year when he states he will widen the standard rate tax band to £23,500 for a single person and £47,000 for two persons at work which will be increased to £28,000 and £56,000 the following year and, if I understood him correctly on Committee Stage, in line with wages after that? He indicated shortly after his Budget Statement that phase 2 and phase 3 will not cost as much as phase 1.
I did not.
I presume the estimated savings by continuing with individualisation rather than doubling the band will be much less than £130 million. What are the estimated savings in doing it the Minister's way rather than my way in the next two budgets? What balancing measure will the Minister introduce? Will the figure of £3,000 be increased to £6,000 next year and £9,000 the year after? We will all then live in hope.
The proposed rates more or less resulted from the extensive discussion which took place last year on vehicle registration tax. The Minister justified the introduction of three rates by stating it would be penal to jump from a lower to a higher rate. He was, in effect, justifying the introduction of a middle rate. From this we extrapolated the concept of three rates of income tax. This makes much sense. I am sure the Minister will agree that the jump from 22% to 44% is severe and penal and creates a shock. We are therefore proposing the introduction of a middle rate of income tax of 33%.
The amendment is skewed in favour of those on low and middle incomes who did not benefit from the budget to the same extent as the top 10% of taxpayers. The figures clearly show that the Minister's proposals favour the top 10% of taxpayers. What we are proposing would be much fairer and would not cause the same level of confusion by having too many tax rates.
Deputy Noonan covered the amendment well and we await the Minister's response. Does he support the concept of three rates of income tax? Does he have anything against it? Would it be workable? Does he accept it would not create the same level of confusion? His reaction would be welcome.
The amendment and the sections to which it refers deal with the individualisation proposal on which I wish to concentrate. For the sake of clarity and debate I wish to comment briefly on what Deputies Deenihan and Noonan said about what is, in effect, the Fine Gael tax proposal which is primarily to introduce a middle rate of income tax of 33%. My difficulty with this proposal has to do with priorities. If we are seeking to stimulate a genuine debate on the issue of income taxation there is an onus on Opposition parties as well as on the Government to be upfront, not just about what we would like to do but also about what we see as being the priorities. I have sought to make it clear that we should target almost all resources at tax credits which exempt an increasing number of income earners from income tax.
Deputy Deenihan said the proposal as set out in the amendment would benefit low and middle income earners. It would not. It would not impact on the 60% of people who currently pay at the standard rate of tax. It obviously would not benefit anybody who is exempt from tax altogether. It would exclude the top 5% or 7% and concentrate the primary benefit on the next 30% or so, in other words, middle income earners and in some cases the higher range of middle income earners. I understand why that is being proposed, but I just do not see it as being the priority. There is another way in which those people as well as everybody else can benefit and that is what I have been arguing for. Before I open up another front with the Fine Gael Party, I appreciate that it has also made proposals on the exemption of the minimum wage and that would have a balancing effect.
Over Christmas I read the autobiography of Mr. John Major, the former British Conservative Prime Minister, and I was interested to note that just before the 1997 general election in Britain he contemplated the possibility of reversing changes which had been made by predecessors so as "to do something for the family", which I think was the phrase used. I suppose that really is the core issue here, whether two individuals who are married and who perhaps have children should get a particular tax break from the State. The Minister rightly points out that that tax break or favourable treatment is inherent in the current system and he seems to regard that as being a distortion which he must undo. On a policy level, that is the central question.
My view and that of my party, for what it is worth, is that this comes down to choice. Most women who do not work choose not to work because they are looking after children – obviously there are some men who make the same choice but, for the sake of simplicity if nothing else, let us assume that it is women who are involved. Currently I suspect a significant number of them choose to do so not for the rest of their potential working lives but just for a period of years – they might choose to opt out of the workforce for four, five, six, seven or maybe ten years. The policy question is whether we give those people a tax break through the income tax system. Let us leave aside the argument about child care and caring generally because, although that is an associated argument, it is not quite the same thing. There is a cogent case for saying to a couple that if they are both working now and one of them ceases to work, they will not be far worse off from a taxation point of view and there will be an inherent benefit for them. By preserving that status quo we would have been enhancing choice. The way the Minister has chosen to proceed in individualising the standard rate band is restricting choice and in some cases eliminating it altogether.
As Deputy Noonan rightly pointed out, the Minister gives two reasons for doing this: he wants to increase the participation rate of women in the workforce and he wants to use this way of taking 83% of taxpayers out of the income tax net. I do not want to repeat what we said on Committee Stage, but I think the Minister advanced the argument somewhat by conceding, if I understood him correctly, that the participation rates in that section of the female population which is most likely to be persuaded to go out and work is already very high and that the scope for increasing that participation rate, through the income tax system or, I suspect, in any other way, is not great. Therefore, I am not sure that he can stand over the proposal he has made on those grounds alone. If he seeks to stand over it on the grounds of reducing the number of income earners paying tax at the higher rate, as Deputy Noonan rightly pointed out, other ways could have been chosen which do not involve the sort of social judgment or engineering in which the Minister has engaged.
On Committee Stage the Minister, for understandable reasons, accused people on these benches of hypocrisy and suggested that over the years the trade union movement had taken a different view. I will be upfront and honest and say that in terms of my criticism of the budget my focus was, always has been and still is on its treatment of people on lower income. The issue of individualisation was a subsidiary issue and still remains so. Nonetheless, it is an important one and one which, as the Minister does not need to be told at this stage, excites interest and strong views among large parts of the population, not least the female population.
Like Deputy Noonan, I would like some clarity as to exactly what the proposal in the Programme for Prosperity and Fairness means. I am not sure if we teased this out fully on Committee Stage. The implication, as I understood it, was that it would increase the £28,000 to £56,000 plus an additional 15.5% so as to take into account the increase in incomes that is projected over the course of the programme – that would obviously change the mathematics somewhat.
On the rebalancing measure, to which I will return later because there is an amendment tabled to deal with that, there is a problem in that it introduces an anomaly into the system which sits extremely uncomfortably with the nature of the reforms which we have been trying to carry out over recent years. It increases the disincentive to work, in particular, for women on lower income. Only a few days ago somebody earning £14,000 or £15,000 whose wife has a part-time job earning £5,000 or £6,000 contacted my office because they will be excluded from the £3,000 carer's allowance. Those people who are on fairly low income will benefit scarcely if at all from the changes the Minister has made. They are excluded from the £3,000 allowance and they are also excluded from the benefit which arises from extending the standard rate band because they are not earning enough. These are the people who are still being caught by virtue of the fact that the Minister has introduced a measure which will be seen in three, four or five years as an anomaly that must be removed.
The amendments concern the income tax rate band structure which will apply for the year 2000-01 and subsequent years of assessment. Last week we had a comprehensive discussion on this issue on Committee Stage when we considered identical amendments. The structure envisaged by these amendments is one which would contain a standard rate band of £17,000 for a single person and £34,000 for all married couples, introduce a new third intermediate rate of 33% which would apply to a tranche of taxable income of £8,000 for a single person and £16,000 for a married couple above the standard rate band and retain the standard and higher rates as proposed in the Bill with the higher rate applying to taxable income of £25,000 for a single person and £50,000 for married couples.
Acceptance of these amendments would result in setting aside the radical change which I am introducing this year, that is, a move to individualisation of the standard rate band. One of the main difficulties with the present band structure is that the single person's standard rate band is doubled for all married couples whether one or two incomes are involved. It is worth reminding the House that the pattern of work in Ireland has been transformed in the past decade. The proportion of households in which both spouses work outside the home is now above the EU average and an increasing number of these households find themselves liable to pay income tax at the higher rate on what are modest incomes. The tax system must recognise and be flexible in its response to this change.
In addition, the Government is committed in An Action Programme for the Millennium to work towards having 80% of taxpayers taxed at the standard rate. The Government believes that the introduction of a single standard rate band for each individual taxpayer is essential in order to meet that commitment.
Now that the allowances are effectively being converted into tax credits, the only way to reduce the numbers on the top tax rate and to reduce high marginal rates on average incomes, is to widen the standard rate tax band. The most effective way to widen that tax band is to put it on an individual basis and tax persons on what they earn as individuals, whether single or married. This is what the Government has set out to do and section 3 contains the first move in this direction.
Tax reform, to be meaningful, must involve making radical change, and that is what I am proposing in section 3. I will be happy to be judged on the combined effect of the five budgets which I will have brought forward by the time of the next general election. Each of my budgets – this one is no exception – must be taken as part of a sequence and not considered in isolation. The Government's tax strategy will bear fruit in terms of higher take home pay and an increased incentive to work. I am confident that the considered judgment of the electorate on this record will be favourable at the next election.
I take satisfaction from the fact that the policy of individualisation has been supported by people outside the political spectrum. Representatives of the social partners endorsed the proposal in the recently published Programme for Prosperity and Fairness. The key statement on this matter is worth repeating for the benefit of the House: The social partners support the policy of establishing a single standard rate income tax band for all individual tax payers. They also agree that the standard rate income tax band should be kept under review in the light of increases in income levels and the objective of ensuring that, over time, at least 80% of taxpayers are not subject to the higher rate of income tax.
In addition, the results of an MRBI opinion poll in January indicated that the proposal was generally well received by the public, including a high proportion of those who would normally support the parties opposite. In The Examiner last week the chief economist of Goodbody Stockbrokers was quoted as emphasising that economic growth is dependent on the implementation of the Government's current tax policy, especially the tax individualisation scheme.
With regard to the introduction of a third intermediate rate of income tax, I indicated to Deputy Noonan last week that, in principle, I would have no great objection to it. I agree with him that the jump from 22% to 44% is too much in one go. However, I do not agree with doing a little here and there but nothing substantial. I am engaged in a radical overhaul of the income tax system which, over the life of this Government, will see the introduction of tax credits and individualisation with a significant rising of the standard rate band and a substantial reduction in existing rates of tax. My attitude to a third rate tends to be Augustinian – not just yet. I will be prepared to consider a third rate when the standard rate of income tax is down to 20% and the top rate is at 42% and, if possible, at 40%. I must bear in mind that the introduction of a 33% rate at this time, as proposed by Deputy Noonan, would mean an effective cut of 11 percentage points for higher rate taxpayers at a time when the Government is trying to assist the lower income taxpayer by endeavouring to remove as many of them as possible from the tax net. As I indicated to Deputy Noonan last week, the next administration of which, hopefully, I might also be Minister for Finance, can consider the question of a third rate of income tax. In the circumstances I have no alternative but to reject the amendments.
We discussed this and other related matters in considerable detail on Committee Stage. It is a pity that, apart from the Members opposite and other Members of the committee, the broader public has not been informed of our deliberations. I know from experience it is more difficult to draft amendments when in Opposition as one does not have the benefit of the expertise of civil servants and so on, that is available to the Government. Perhaps I am mistaken but I did not see any newspaper coverage of the deliberations of the committee last week which sat for three days from 10 a.m. until 6 p.m. Perhaps this matter should be borne in mind when people talk about the amount of work done by Deputies and public representatives.
A letter that appeared in the newspapers was brought to my attention. It stated that what was occurring under individualisation was a great tragedy. Considering the abuse one gets one would not want to be thin skinned. Some of the outbursts in this area since the budget have been mind-bending in the extreme as far as I am concerned. Deputies Noonan and McDowell know that in the past I have criticised Ministers for trying to do a little here and there. Since becoming Minister for Finance anything I have done in the tax area has been dramatic, whether people like it or not. In the end the public will judge these matters. It is not my style to do a little here and there. One does not get real results that way.
Suppose I had decided to do just one thing in the budget on income tax and not do anything else on bands or rates and so on. Suppose I decided to just concentrate on individualisation. The cost of going from £14,000 to £28,000 in individualisation last year would have been £839 million. By going from the £14,000 to £17,000 cost £310 million and that leaves £529 million. This was explained in the detailed notes to the budget on budget day, but apart from the Deputies opposite, I do not think anyone else read them. If they did, it was not reflected in the debate on individualisation.
I read them while the Minister was speaking.
The Deputy did, but not many others. It and its effects were explained in very simple language. Suppose I had introduced the £839 million package and did nothing else, no-one would have been disadvantaged nor would anyone be in a worse position post the budget than before it. The people who would have gained would have been those on incomes ranging between £14,000 and £28,000. Not one single income married couple would have been disadvantaged. If I had done that, what would have been said then?
Some of the arguments made outside the House on individualisation are antediluvian, to put it at its mildest. I read articles in the newspapers saying this was a tragedy for society. Not one woman would have been forced out to work on 2 December who was not working on 1 December, if I had done that. Things would have continued on as before and the same people would have continued working. Those staying at home would have been able to make a free choice to stay at home. Other articles stated this would force people out to work. I do not see how that comes into the debate. One thing the debate threw up in relief is that over the years politicians have been critical of the catch-up mentality within the public service, whereby if the chief heart surgeon in a public hospital gets an increase it will eventually filter its way down to everyone else, despite the relativities. After the debate on the budget I realised the relativities are endemic in society. In this case, nobody was being disadvantaged. People were being advantaged. However, some seem to have big problem with the possibility that anyone could become better off and they were not going ahead proportionately at the same rate. That was an interesting insight thrown up by the debate. No single income married couple was disadvantaged but the awful possibility that the working couple next door bringing the children off every day at 7.30 a.m. to the crèche and collecting them at 6 p.m. and all the hardship involved, paying their mortgage and so on, would get a break while others were not getting as big a break seemed to be anathema to some.
I expressed the opinion a week after the budget that this debate had triggered off a debate in other areas of social policy that I had thought were long dead. I did not address these issues before. However, since everybody else did not want to debate the tax aspects of this which were set out in the annex to the budget and everyone talked about the social aspects of it, including eminent political correspondents of various newspapers, I thought I would throw up that aspect too. I have heard Deputy Noonan talk about sociology and I would like to hear him deliberate on that point which the debate threw up. I have concluded much from the debate since last December. One other conclusion I have come to now is that the relativities and rigidities in the public service are a reflection of the whole Irish being. Nobody wants anybody to catch up on them in wage terms, and this is clear not only in the public service but right throughout society. That was part of the argument, as everybody was better off under my budget in terms of individualisation. I raise this for further debate by those who wish to comment. Nobody was hard done by. Deputy McDowell asked about social engineering, but there is no social engineering involved in this. I dealt with that point—
The Minister said he wanted to give a break to certain people. That can be called social engineering.
The Minister wanted more women to go out to work.
It is social engineering in the positive sense of giving a break to people who are already hard done by.
Is social engineering something nasty which lefties do?
I think the Minister is confusing social engineering with genetics.
Deputy McDowell implied it was social engineering to force people to do something they did not wish to do in the first place – the Deputy should correct me if I am wrong about what he said. I do not understand that point. It is utter tripe and nonsense to say I am forcing people in Waterford, Kildare, Limerick and Kerry to do something they do not want to do. Are we still living in the Dark Ages or are we only pretending we saw the light many years ago? Is there anything wrong with people having equal work, equal pay and equal tax? I do not think so. I would upset all the commentators if I started describing myself as a social democrat – some would not be able to eat their cornflakes in the morning. However, I have concluded that I am a damned sight more egalitarian then some of the writers on social democracy. I think Deputies Noonan and McDowell would agree with me in this regard.
The Minister should sit down before he does harm.
Deputy Noonan made a case about the middle rate, and I explained this in some detail on Committee Stage and again this morning. In principle, I have no difficulty with having another rate of taxation, but it is not possible to do all those things at the one time. Successive Ministers for Finance over the years have been bedevilled by colleagues, lobby groups and Government asking for a little bit of this and a little bit of that, with the result that nothing ever gets done. That is why we have such a viciously unfair tax system for people who work, where a single man or woman earning up to £14,000 before my budget fell into the top rate of tax. The average industrial wage is almost £17,000 and we were taxing these people at the higher rate of 46% when their earnings reached £14,000. Over the lifetime of the Government I intend ensuring that 12% of income earners will pay tax at the higher rate, which will be 42%, and if possible, 40%. The standard rate will be 20%. This is the commitment we gave the people in the last general election. Following the election people wanted to fight it again, saying we should have ignored the promises we made and work on bands and allowances. We gave a specific commitment regarding bands and allowances and rates of tax, which I will fulfil.
It is true that lower direct taxation, be it income tax, corporation tax, capital gains tax, etc., leads to a greater yield for the Exchequer which allows greater things to be done in the area of social spending. The difference between myself and people such as Deputy McDowell and others is that they seem to regard high rates of taxation as a badge of social virility. With respect, Deputy McDowell, that type of thinking has resulted in the economic stagnation of the central European countries—
Hear, hear.
—for the past ten or 15 years, with high welfare and high rates of tax. The Irish solution of going in the other direction has led us to economic success and though this may be strange for social democrats throughout Europe, they are increasing realising this. Germany, in particular, is trying to reverse its policy. Lower rates of taxation lead to greater yields of money which allow greater things to be done in terms of social exclusion. The Scandinavian countries have learned the same lesson. I make no apologies for having long stood for this principle and I have been proved to be correct.
The other solution advocated by Deputy McDowell, his party and others on the Opposition, has led to economic stagnation in Europe, something the countries concerned have begun to realise. I remember replying to a parliamentary question on Irish corporation tax rates tabled by the Deputy about two and a half years ago. I predicted that Europe would move in the Irish direction rather than Ireland going in the European direction, and that will happen. This is the reality whether socialists throughout the world accept the principle. Lower tax leads to greater resources which can allow Government do something in terms of social inclusion, and this has been the Irish experience. The difference between myself and others is that I am prepared to say that now, and was prepared to say it ten and 20 years ago, and I have been proven to be correct. More resources can now be devoted to social welfare, health and homelessness as a result of economic prosperity, which has partially come about as a result of sane taxation policies. The central European countries are learning this lesson. Whether one is on the far left or far right of world politics, this is an inescapable fact which must be faced and it is the basis of my taxation policies.
Today Deputy McDowell, and on other occasions Deputy Noonan, asked about the commitment to individualisation in future years. As I pointed out on Committee Stage, when the partnership programme was published, Deputy Noonan said that in terms of individualisation the Minister had gone from £14,000 to £17,000 and that the £17,000 will be increased through wage increases over the coming years. Deputy Rabbitte repeated the same mantra, proving that he did not read the partnership agreement. The agreement says:
The social partners support the policy of establishing a single standard rate income tax band for all individual taxpayers. They also agree that the standard rate income tax band should be kept under review in the light of increases in income levels and the objective of ensuring that, over time, at least 80% of taxpayers are not subject to the higher rate of income tax.
As I explained on Committee Stage, that means that the £28,000 band which we will achieve for everybody will be increased by the rate of average earnings in the period.
When?
Over the lifetime of the programme.
Year on year?
I wanted to clarify that matter, and perhaps somebody will tell Deputy Rabbitte that he should read such documents. I know Deputy Noonan is well regarded, but Deputy Rabbitte should take the trouble of reading the document. I forgive Deputy Noonan as perhaps the English classes in Limerick schools were not as good the classes attended by the rest of us.
Another Limerick knocker.
That is what the paragraph means.
It was drafted by the Jesuit wing of the public service.
The Jesuits are quite close to me in County Kildare. That is what the paragraph in the Programme for Prosperity and Fairness means. If he will not take my word, he should telephone ICTU or IBEC who will tell him exactly the same.
Deputy Noonan asked what will happen in the next two budgets. In the summary of the budget measures we went to the enormous trouble – I will advise my officials and Revenue not to bother doing so again – of having an annexe explaining these matters in very simple detail regarding individualisation and what would happen, giving examples. We also set out the number of tax payers concerned, etc. If I raised the threshold from £14,000 to £28,000, the cost would have been £839 million. By raising it from £14,000 to £17,000 it cost £310 million. That is due to the pyramid effect created by the number of people paying different rates of tax and separate details were provided about that. As the threshold is raised to £28,000, the cost would be £529 million extra based on current figures. It would cost another £310 million to raise the threshold to approximately £20,000. A large group of taxpayers earn smaller levels of incomes and as the threshold is increased it does not cost as much.
I announced in the budget that in my next two budgets, I would raise the single tax rate band to £28,000. Deputy Noonan asked what I would do. No Minister for Finance has ever outlined in February, March or even September his total tax package for the next budget because the prevailing economic circumstances must be considered. All things being equal, it is my intention to proceed with the individualisation proposals as outlined in my Budget Statement and to fulfil section 1.3 of the Programme for Prosperity and Fairness, which states, "It is an agreed policy objective of the Government and the social partners that, over time, all those earning the minimum wage will be removed from the tax net". It is also an agreed objective that over the lifetime of the programme, which extends beyond the lifetime of this Government, everybody earning the minimum wage will be exempt from taxation.
On Committee Stage, I pointed out that the social partners recognise that this is not just about bands and allowances, and I have debated this issue with the Deputies in the House on numerous occasions. Over the years I have rejected the mantra, which has been uttered since 1993, that there is but one way of dealing with taxation, bands and allowances. Section 1.1.3 of PPF, which the social partners have agreed, states:
Tax benefits can be delivered through increased personal tax credits, widening the standard rate bands and reductions in the rates at which tax is levied. The Government and the social partners regard increases in tax credits and the development of a tax credit system as the priority areas for resources over the course of this Programme. It is an agreed policy objective of the Government and the social partners that, over time, all those earning the minimum wage will be removed from the tax net.
Section 1.1.4 refers to the individualisation policy. The agreement incorporates the Government's objectives which it outlined in An Action Programme for the Millennium and the tax credit proposals which Deputy McDowell wants me to pursue. I introduced a tax credits policy in the 1999 budget.
When the next election takes place another two budgets will have been implemented. At that stage only 12% of all income earners will pay tax at the top rate. If anyone said prior to the last election in June 1997 that it would be possible to do that, people inside and outside the House would not have believed it. We will have achieved that, along with a standard rate reduction from 26% to 20% and a top rate reduction to 42% from 48% and, hopefully, we can reduce that to 40%. The record will speak for itself and at the next election we will not lose on the basis of our taxation record.
It is very hard to reply to a 45 minute oration by the Minister in two minutes.
The Deputy will conclude the debate.
I call it "adoration".
Once upon a time there was a cock which used to crow every morning for a quarter of an hour before the sun rose.
I remember him well.
The sun then rose but the hens on the farm were a little lazier. They were not up that early and they sought an explanation for this racket in the morning. The cock said that the sun would not rise if he did not crow for 15 minutes. The Minister's extravagant claims about his taxation policy reminded me of that cock because his policy has as little to do with the prosperity which Ireland enjoys as the rising sun had to do with the cock crowing. While, in his delusions, he may claim that he caused all this, the facts are that he inherited a booming economy and extra ordinary tax buoyancy. It is a wonder of the world that he made such a colossal mess of the budget, when any five-eighth would have dispensed such buoyancy in a fair and equitable, user-friendly and popular way.
From the bottom up.
The mess he made on budget day is amazing, not to mention his taxation policy. He still defends the indefensible. He cannot understand the scenario regarding two couples who live side by side and have similar mortgages, expenses and household income where in one house, one individual works and in the other both work. His regime will lead to a position where in the house where one works the couple will pay the higher rate of tax when they reach £28,000 in income, while in the house where two work, they will not pay the top rate until their income reaches £56,000. Yet, the Minister cannot understand why people would get upset about that and he thinks there is begrudgery among neighbours which is endemic in the Irish consciousness.
At the end of the day, Committee Stage, which nobody attended or commented on, rumbled his regime. The only reason he did it this way was to save £130 million and it was clear on Committee Stage that he gave back £125 million and sought to implement a balancing measure. Every other objective could have been achieved with an amendment similar to mine. He saved money and was then forced to pay it back again. His big speech was equivalent to the cock crowing in the farmyard.
I feel I must defend 50 years of social democracy in Europe in two minutes, which will not be easy. We have never believed in a high nominal rate of tax for the sake of it. One should not tax just because it makes people feel bad and makes us feel good. We tax because we want to provide services and it has a re-distributive effect. That is deliberate and has always been part of the political philosophy which I support.
Does the increased tax take have anything to do with the fact that the number of people in work has increased from 1.1 million in 1992 to almost 1.7 million today? Approximately 600,000 more people are working. It would require extraordinary gymnastics on the part of any Minister for Finance not to generate a dramatically increased income tax take from any change in taxation which he or she introduced given that the number of incomes tax payers had increased by almost 50% in that time. That is the key and in so far as changes in income tax influence people to work, surely at the lower end one makes it worthwhile for people to work in the first place. That relates to the argument we have had over a number of years in regard to the integration of the social welfare and tax systems. However, that has little to do with the changes that the Minister has introduced in the taxation system in the past three budgets of which he is most proud.
With regard to individualisation the Minister, in a sense, has accepted that he has changed the accepted balance of the way in which we do business, and it was always intended in broad terms to be a pro-family measure. There is an onus on him to tell people why. He has gone some distance by saying that he wants to give a tax break to couples where both individuals work, but he has not made the case convincingly. He has not persuaded the bulk of the people that that must be done.
That is not right. The Deputy should read the opinion polls.
We are starting from a status quo. The Minister said that it should have been different in the first instance.
But it was in the Murphy judgment.
However, the Minister must make the case for changing that balance and say that in circumstances where a wife typically decides to stay at home for a number of years the tax treatment should be different to that in the past. I accept it is possible to make a case for saying that simply doubling the standard rate band was a crude way to do so. Perhaps different ways could be examined, but the Minister did not even seek to make that case before the budget. There was no discussion and there is certainly no democratic mandate for it.
I will make one point. When the Murphy judgment was issued, the Government of the day decided to implement it in a certain way. The then Minister for Finance, Deputy O'Kennedy, was at pains to point out on Committee Stage in the Dáil and in the Seanad that to meet the Murphy judgment requirements would cost only about £30 million but that he was going further and doubling up the bands. That argument got lost in the debate, however, because the Opposition successfully put the case that the Minister was implementing the measure only as a result of the Murphy judgment. That is what is stated in the Official Report. Until that change in tax policy by the then Minister for Finance, there were no double bands for married couples. I was a Member of this House at the time. Deputy Noonan entered the House in 1981 or 1982 also. It was the 1981 Finance Bill, and there were double bands for married couples in the implementation of policy subsequently. That was the change made then and it makes no sense, therefore, for Deputy McDowell to ask if that is the way we always did it.
The Minister is beginning to show his age. He is talking about 20 years ago. I was at school 20 years ago.
I just want to make that point. Until the implementation of the budget measures post the Murphy judgment, everybody had the same bands. It was a policy decision of the time to introduce double bands and that is what has got us into difficulty. I have not heard anybody pointing that out in all the debate of the past three months.
After all of that, it is still the position that the theory of taxation does not impact on people's lives. The issue is the amount they pay overall and the incidence of taxation at different levels of income. This amendment has proved beyond any shadow of doubt that if the Minister increased the range of the standard rate band from 14% to 17% for single persons and simply doubled it for married couples, he would have achieved all the policy objectives he argues in terms of equity and fairness, allowing people incentives to work by taking home more money, and in allowing the two people in the household to retain more of the income they earn individually. He would have achieved all the policy objectives also in terms of extra labour force participation. It would have cost £130 million more and if the Minister had rested his case on that, which he did initially, he would have a valid case to argue but the problem is that the balancing measure which was forced on the Minister eliminated the savings. His balancing allowance of £3,000 is costing £125 million on his own undercosted figure, and the saving is £130 million.
The Minister went around in a circle and he introduced an unnecessary complication to the taxation system. His policy objectives could be achieved if we ignore the proposal in the table for the 33% band and examine the 17% and 34%, which will cost an extra £130 million. The Minister gave that money away anyway in his balancing measure. He has arrived, via a very complicated route, at this frightful mess which will continue in the next two budgets. This issue has not gone away, you know, to liberally quote some of the people who aspire to become Members of this House.
I look forward in the next budget to seeing if we go back to the old system.
If it costs only £130 million it will be easy to make the commitment with the kind of money that is available.
Amendment put and declared lost.
Amendments Nos. 5 and 6 not moved.
Acting Chairman:
Amendment No. 7 is in the name of Deputy McDowell. Amendments Nos. 7 and 9 form a composite proposal. Amendments Nos. 8 and 10 form an alternative composite proposal. Amendments Nos. 11 and 12 are conse quential on Nos. 8 and 10, respectively, and amendment No. 14 is related. Is it agreed that we take amendments Nos. 7 to 12, inclusive, and No. 14 together? Agreed.
I move amendment No. 7:
In page 14, line 9, to delete "£9,400" and substitute "£12,940".
The amendment in my name essentially seeks to use the tax credits system to increase the standard rated personal tax free allowances up to a figure of £12,940 with consequent changes in the other allowances. I have argued before, and I do not want to detain the House too much this morning, that this is the fairest and most effective way of reducing income tax, and there is a general acceptance that we can and should reduce the income tax burden. It would have taken, by my reckoning of figures supplied to me by the Department of Finance, about 150,000 more people out of the income tax system than the Minister has done; the Minister has taken about 70,000 out of the system. This measure would have allowed us to take approximately 200,000 to 220,000 people out of the system, depending on how generous we choose to be. It is the fairest way of reducing tax and it is what we should concentrate on for the next few years.
In the time available to me I want to concentrate on one matter, that is, to allow the Minister the opportunity to express with greater clarity exactly what he intends to do over the course of the Programme for Prosperity and Fairness, which will run for two years and nine months. We debated this matter at some length on Committee Stage but three different parallel commitments have now been given by the Minister and we need to establish how they inter-relate and what will happen if we cannot afford all of them. The Minister has given a commitment which I find persuasive, not in the argument but I accept he is persuaded of it, that he will reduce the standard rate of tax to 20% and the higher rate to 42% and, if possible, to 40%. He made it clear this morning and over the past number of months that he intends to pursue the individualisation project over the next two budgets. As I understand it, both of those projects are to be completed, assuming the Minister is still in power, in the 2001 and 2002 budgets at a total cost of approximately £1.1 billion, £500 million of which will be spent on individualisation and rather less than that on reducing the two rates of tax, assuming he reduces the top rate of tax to 40%. The difficulty the Minister faces, and it is a very real one, is that he has chosen to graft on to something in which he probably does not believe, that is, the commitment to the objectives set out in the Programme for Prosperity and Fairness to exempt a minimum wage of £5 an hour, or £200 a week, from the income tax net. That will be an enormously expensive commitment, probably costing somewhere in the region of £1.25 billion. If we roll all of that up over a period of two to three budgets, we are talking about commitments already given which amount to about £2.5 billion. I have said before, and I repeat now, that that would be far too much of a commitment. It would reduce our capacity to pay for services and would be grossly inflationary in terms of stoking up domestic demand. It would be too much, it is unaffordable and I do not believe this or any other Government is likely to do it.
The question workers will ask themselves over the next two or three weeks, as they come to vote on the programme, is which of these commitments, if any, will fall by the wayside. Which of them will be incomplete in two or three budgets? On Committee Stage, the Minister gave us a fairly clear indication of what would happen because I questioned him several times on it and he stated, quite deliberately, that he intends to work towards the objective in the programme of exempting the minimum wage from tax. He said that three times, by my reckoning, with no absolute commitment that he would achieve it. He stated it more than once as an objective but he was clear in using the phrase that he would work towards it. That is fairly clear code.
I am only quoting what is in the programme. The programme states that "over time, all those earning the minimum wage will be removed from the tax net". That is what it states. I did not make it up.
I am seeking greater clarity from the Minister this morning. The programme will run for two years and nine months. It was not clear to me that the Minister will reach that objective within two years and nine months, or the three budgets of the programme. If the Minister is making a commitment to reach that target he should tell us, and if it is just an aim or an objective, or something he might do if he has enough money or time, he should say that. That is a central consideration which will decide many voters, particularly trade union members, in the next two or three weeks.
On an associated matter, I want to give the Minister the opportunity to comment on the controversy which arose at the end of last week in relation to the commitments in the programme. I have a SIPTU analysis of the programme which states clearly that, on average, most workers can expect a 10% increase in wages as a result of the reductions in income tax which will come about during the three budgets of the programme. It would be useful if the Minister took this opportunity to restate his commitment to that.
We are aware of the statement from Government and we have a reasonably clear idea of the Taoiseach's view on this. Since the Minister has, on more than one occasion, advocated his primacy in making these decisions, not least in the earlier discussion we had about credit unions, it would be useful if he made a clear statement that he regards that 10% overall reduction as a reasonable interpretation of the provisions in the programme.
There are amendments in my name and that of Deputy Deenihan which have a similar purpose to those proposed by Deputy McDowell. The figures are different but it gives us an opportunity to debate the effects of increases in personal allowances and their payment by way of tax credit. I notice the text of the Finance Bill still refers to allowances. One has to do a type of mental gymnastic to bring about a tax credit. When will the drafting changes be made where one will talk about credits rather than allowances? When will the change to tax credits be completed in language as well as in law?
Deputy McDowell rightly said we should have priorities when we make commitments on tax relief. In any set of priorities my party would have, the elimination of low paid persons from tax would be our highest priority. That was a feature of the proposals I brought forward in September when we calculated the minimum wage at around £170 per week and said we should progressively eliminate all tax on the minimum wage. The commitments on the minimum wage are now somewhat higher but as far as we, as a party, are concerned, the commitment remains. We intend giving priority to that commitment.
The arguments I made about a third rate of tax are to address a different matter. If one was arguing on grounds of equity and fairness and if that was the sole consideration, one would put all the money where Deputy McDowell said to put it. Apart from considerations of equity and fairness, there are occasions when the taxation system has to be used as an instrument of economic policy. Whatever the state of the labour force, it is self-evident that we will run out of key workers very quickly. Key workers, who are Irish people working abroad, are very responsive to the high marginal rates of tax. If one looks at the situation after 6 April when the Minister's proposals will be implemented, the top rate will be 44%. People frequently forget that, from the first pound, the same taxpayer will pay 2% on all income, in terms of the levy.
There is not much political bang for eliminating levies but it takes an enormous amount of money out of high paid and middle income people's pockets if one is to pay 2% on all income from the first pound. Many people think one only pays from the threshold up but once one passes the threshold, it is like snakes and ladders. One goes back to the tail of the snake again and pays from the first pound. I presume the Minister's officials and the Revenue people with him would have a calculation on what 2% on all income would add to the marginal rate of tax but it is certainly more than 2% which one would add on to 44%. On top of that, one must pay PRSI. I know that is subject to a ceiling but it is still a significant added penalty.
If one takes, for example, a person working in a hi-tech industry in the fields of California, around Silicon Valley, who faces the same type of housing costs as people in Dublin, although that would not be the major consideration, they are looking at a national tax rate of about 20% and a local state rate of another 6% or 7%. It is very hard to convince them when they run the numbers on the bottom line that they are making a good career move by coming back to Ireland to work in industry here. It is that tranche of people about whom I would be concerned when we talk about a middle rate of tax.
I take the point, however, that we should put our priorities on the table. My priority, if we are talking about equity and fairness, would be the low paid. However, if there are other policy considerations, other things will become priorities of almost equal magnitude. The overall priority is the sustainability of the prosperity we now enjoy. That is the policy objective we all share – how we keep the roll going, what are the things which might stop and how we eliminate them from national life. That is basically where the whole debate lies.
People looking at tax commitments are inclined to underestimate the resources available to the Minister. What historically would have been an enormously expensive commitment is not that expensive now in terms of the buoyancy which exists. When dealing with our tax policy document, I was fairly surprised when I looked at the three proceeding budgets – one was Deputy Quinn's last budget in office while the other two were the Minister's first two budgets – because the combined tax relief given in those three budgets was £1.5 billion. The interesting thing was that when one looked at the yield to the Exchequer from income tax, it had increased by £1 billion. Despite the fact that £1.5 billion had been given back, the Exchequer ended up £1 billion to the good over the three tax years. I was fairly surprised at that and when I pitched our personal commitments, I ratcheted them up on the basis that it was there. As far as I know, buoyancy has accelerated since then and continues to do so. I would be surprised if the figures at the end of the year did not show that the extraordinary tax relief package introduced by the Minister, which is about £1.2 billion, will be well covered and that the estimate for the budget surplus will be incorrect.
We will have the resources to do what is contained in the Programme for Prosperity and Fairness in terms of tax relief over three budgets and even to do the type of things about which I am talking in respect of a third rate. There will be another debate on whether it would be prudent to spend the resources and about what we are doing generating additional heat in the economy if the Minister spends £1 billion again next year and the year after. That is what we should be debating now. I do not believe it will be lack of resources which will prevent the Minister from doing what is proposed in the programme. Whether it will be prudent will be a fairly nice judgment call next autumn because it may not be prudent at that point and the Minister may have difficulties at that stage.
Coincidentally, I have been reading John Major's book over the past few days. I do not believe I have reached the point referred to by Deputy McDowell.
It is at the end.
What struck me, and what is being reflected in much of the debate from London and European capitals, was that the various decisions made about 1989 in the United Kingdom expanded the economy rapidly, although it subsequently burst, and that there were all the theories of a bubble economy. There is an echo here of much of what happened around that time and of many of the decisions taken about 1989. That is why one is getting advice from the City of London and various other cities that things might not be as good as they look in Ireland and that the advice from fund managers or people in stock broking firms to institutional shareholders is not to buy into Irish companies. That would explain why bank shares, for example, are so low at the moment. They are simply not being bought by investors in London. I understand the London disease is spreading to other European capitals.
I believe the circumstances here are totally different. I am optimistic and believe this situation will continue if properly managed. I do not believe we have a bubble economy. The issue facing the Minister when he prepares for next year's budget will be how much it is prudent to spend on tax relief rather than whether the resources are available to him. I do not intend to say any more on this point other than it completes the tax package. Unlike the Minister, I have always been of the view that to design a proper tax reform package and to give proper relief, one must use all the mechanisms available. That includes bands, allowances, rates and exemptions. One must use all four and it is the mix of the four that gives the best result.
These amendments propose to increase the standard rate of personal allowances of £4,700 for single persons and £9,400 for married couples as proposed in the Bill. Deputy McDowell's amendment will increase the allowance to £6,470 for a single person and to £12,940 for a married couple at an additional full year cost of £584.3 million. The amendments tabled by Deputies Noonan and Deenihan seek to increase the standard rate of personal allowances to £5,200 for a single person and to £10,000 for a married couple. Acceptance of these amendments would result in an increased cost of £172.5 million in a full year.
The cuts in personal income tax already provided for in the Bill come to more than £1 billion. This represents a very substantial cost way above anything that has been given in a single year pre viously. It is a very significant step in the fulfilment of the commitments set out in the Government's, An Action Programme for the Millennium. In line with that plan, this year's budget continues to concentrate on reform of the tax system, which is designed to remove as many low income earners as possible from the tax net and significantly reduce the burden on those who remain within it. The changes being provided for by me this year will remove nearly 40,000 people from the tax net.
The increase in the personal allowances of £500 for a single person to £4,700 and £1,000 for a married person up to £9,400, as announced in the Bill, which apply at the standard rate of income tax, when put together with the PAYE allowance of £1,000 will result in a standard rate of personal allowances for a single person on PAYE of £5,700 per annum. This will mean they will not pay any tax on income below £109.60 per week. When taken in conjunction with the changes in the tax rates and the standard rate band, there will be a significant reduction in the tax bill for all taxpayers. Those on the average industrial wage will see tax cuts of £20 per week. The proportion of taxpayers on the higher rate will fall from 46% to 37%.
While in common with most, although not all of my predecessors, I would like to do more and even possibly question the Deputies opposite, I am unfortunately subject to constraints to which they are not. In the circumstances I must reject the amendments.
One of the speakers asked the number of people Budget 2000 would take out of the tax net. The age exemptions would take out 9,527 people, the personal allowances would take out another 39,233 and the allowance for earners with children would take out another 22,753. The number of taxpayers who would stay within marginal relief but have a reduced tax bill is 13,945 and the number of taxpayers who would move from marginal relief to the 22% rate would be 3,432. The total of those figures amounts to approximately 88,889.
Deputy McDowell asked me a number of specific questions about what will happen over the next few budgets. I tried to answer those questions on Committee Stage. I said it would be possible in March or even in September to announce what the total budget package would be. The agreement states that the Government and the social partners regard increase in tax credits and the development of the tax credits system as the priority area for resources over the course of this programme. It is an agreed policy objective of the Government and the social partners over time that all those earning the minimum wage will be removed from the tax net. The Deputy is correct that the priority area, as agreed with the social partners, is that of tax credits. There will be three budgets under this programme and I hope to be in a position to introduce the next two. I intend over the next two budgets to move substantially towards taking more and more people out of the tax net.
For the benefit of historians in years to come, I point out that I, as Opposition spokesperson, committed Fianna Fáil to the introduction of a minimum wage. That was a policy initiative of mine, which I announced, and that was the first announcement of it. I wish to emphasise that, given that I am regarded as a roaring right-winger. I was the person who came up with that idea.
There must be some implication we have not spotted.
It is perhaps because I have been associating for too long with ordinary people that I have got to be like Deputy McDowell and others. Deputy McDowell asked me about the minimum wage. I will move substantially in that regard and I will move forward in terms of individualisation.
He also raised a question about the debate that took place last week, which was more an internal trade union battle when people in the trade union movement stood against social partnership for their legitimate reasons. They argued them well and I have got to know some of the people involved reasonably well in recent years, and I admire them for the forthrightness of their views. I always admire people for the forthrightness of their views. Those people have always opposed social partnership as against the other trade union leaders who have been pro-social partnership. The Taoiseach made a telling remark in a radio interview last Sunday when he said, he had not ever heard any of the people who opposed social partnership in a trade union movement say what the alternative would have been over the past 12 years and what they advocate. The benefits of social partnership speak for themselves. I agree with the social partners and what is quoted in some of the documents, that on average the benefits of the tax package will be in the order of 10%. As was pointed out in supplementary documentation last week, if recent years are anything to go by, we have always bettered what has been agreed in the programme for Government. There is a definite commitment in the programme to work towards removing those on the minimum wage from the tax net. I agree with the trade union leadership that the benefits of the tax packages in the budgets to come will give people an average income increase of 25%.
I am glad to note from Deputy Noonan's recent contributions, particularly since last year when he announced the new Fine Gael tax policy and from his comments here this morning, that the Fine Gael Party, particularly Deputy Noonan, is returning to a policy to which it subscribed for many years. That is more or less what I have said can be done by way of bands, allowances and tax cuts. I would disagree with very little the Deputy said in his contribution this morning. I detected this change when he published his policy document last year. All I can put the tax policy of the previous two years down to is contamination from which the party suffered when in Government with the Labour Party and Democratic Left, which influenced his Leader more than any other member to pursue this kind of—
The Minister had them fairly straightened out before we got involved with them.
I was a bit worried about reverse contamination, but we survived and proceeded.
Equity and fairness is one aspect that must be considered in framing the budget, but there are also broader policy considerations, and Deputy Noonan referred to a number of them. While we believe we are doing well to reduce the top rate of tax to 44%, to have a PRSI rate of 4.5% – the 4.5% PRSI cuts off at approximately £29,223 – and levies of 2%, the Deputy said that still appears a very high marginal rate of tax to the people we are trying to attract home from the United State or the United Kingdom. Those matters must be borne in mind as well.
Deputy Noonan also referred to buoyancy considerations and there is no point in denying them. They were partly due to the increasing numbers returning to work, a point which Deputy McDowell made earlier. That also makes the total figure better, but there are other matters to which Deputy Noonan alluded in framing the budget. Prudence is one of them. As Deputies have been so frank and open about it this morning, I had better be frank and open as well.
Acting Chairman:
Could the Minister—
Do not stop the Minister now, he is just warming up.
Acting Chairman:
That is perhaps why I should stop him.
Debate adjourned.
Sitting suspended at 1.30 p.m. and resumed at 2.30 p.m.