I move:—
That Seanad Éireann is of opinion that the law relating to income-tax is in urgent need of revision and requests the Government to appoint a commission of inquiry on the subject at an early date.
I want to preface my remarks by assuring the Minister that this is an entirely non-political motion. I would move this motion whatever Party was in office and whoever was Minister for Finance. It is not meant in any way to be critical of the present administration.
The second point I want to make is that all I am asking for is an inquiry. All I feel bound to do is to make a prima facie case for an inquiry on the grounds of the injustice to large sections of the population of the present income-tax system. I am not bound to advocate any particular policy of reform. I am not bound to answer questions that would be proper before the inquiry if the inquiry was instituted. All I intend to do is to indicate the presence of a problem and the need for its investigation.
The justification for this motion, apart from what I might suggest is its inherent propriety, is twofold. In the first place, the income-tax in this country was imposed 99 years ago. I hope that next year the Department of Finance will duly celebrate the centenary of this joyful event. In the course of 100 years no inquiry of any kind has been held in Ireland into the income-tax code although more than one inquiry has been held in England, its country of origin.
The second justification is the existence of a large volume of dissatisfaction with the present income-tax system. Since this matter was first mentioned in the Seanad in the course of other debates, I have received communications from many organisations and many individuals urging me to press this inquiry forward. If I wanted any justification I have, perhaps, sufficient in a recent resolution of the Convocation of the National University advocating that the university representatives should do something to attempt to reform the income-tax system.
I am perfectly well aware that the income-tax code cannot be treated in isolation. It cannot possibly be separated from surtax and is difficult to separate from death duty; it is also closely related, especially in rural areas, to local rates on land. I am aware that any comprehensive inquiry into the income-tax code would necessarily overflow into other parts of the fiscal sphere, and that it would be impossible to make recommendations for drastically altering the code without altering other taxes as well. Having said that and having shown that I realise the inter-relation of the different parts of the tax system, I suggest that for the purposes of this motion it is possible to deal with income-tax alone in the narrowest definition of the term.
Income-tax was imposed for the first time in this country in 1853. It was imposed in Great Britain in 1799 as part of the taxation to finance the French War, and continued until 1816. Although the Act of Union was passed in the meanwhile, there was no attempt to extend it to Ireland. In 1842 income-tax was reimposed by Sir Robert Peel as part of his policy of free trade, of reducing import duties and substituting revenue from them by direct taxation.
Ireland was again excluded from income-tax in 1842. One reason was the absence of the machinery of collection. A more fundamental and relevant reason was based on grounds of justice. Ireland as the agricultural portion of the United Kingdom stood to lose rather than to gain from the free trade policy designed to advance the cause of England during the industrial revolution, and to reduce the cost of food in the interests of low wages and industrial costs. Both from the point of view of the administrative difficulties and of abstract justice, Ireland was excluded from income-tax reimposed in 1842.
Income-tax was brought a stage forward by Gladstone in the 1853 Budget. Gladstone made it perfectly clear that he regarded income-tax as a temporary expedient. In 1853 he imposed the tax for a further term of seven years with a gradual decline in rates, hoping in 1860 the Government would be in a position to dispense with the tax. As in many other cases, the course of events upset these expectations and only two of the seven years had passed when the Crimean War doubled the rate of tax. In 1860, the final year of Gladstone's seven years, the tax was fixed at 10d. in the £, and there was no mention of repeal. Since then the tax has been renewed annually.
From our point of view the 1853 Budget was peculiarly significant because in that Budget income-tax was first imposed in Ireland. The reason was that large sums advanced for relief of distress after the Famine had become irrecoverable, owing to the impoverished condition of the country. Income-tax was imposed with the object of recouping the Exchequer for part of the loans and grants to Ireland which had become irrecoverable. Gladstone stated that the tax was calculated to produce £460,000 for seven years.
It was regarded clearly as a temporary tax, as an emergency measure to recoup the Exchequer for certain advances which it could not recover in any other way. The Financial Relations Commission in 1896 referred adversely to this development and commented on the impropriety of imposing what became a permanent tax for a purely temporary necessity. These observations of the Financial Relations Commission became of increasing importance with the passage of time, because from the turn of the century the rate of income-tax rose to quite unprecedented and unforeseen heights.
In 1884 the tax was 2d. in the £. In 1902 Mr. Winston Churchill declared that an income-tax of 1/3 in the £ was the extreme limit of practicable taxation, while in 1906 Mr. Asquith, Chancellor of the Exchequer, said that income-tax at a uniform rate of more than 1/- in the £ was impossible to justify in times of peace. Year by year the tax has been renewed and the rate increased.
The present income-tax code is a patchwork of a large number of Statutes gradually added to, but the underlying structure of the income-tax code has passed through a series of great revolutions in the world with its main structure quite unaltered to meet the changing conditions of the time. Since income-tax, more or less in its present form, with the present schedules, was imposed in England over 150 years ago the world has witnessed the industrial revolution, a transport revolution, the growth of joint-stock enterprise, the nationalisation of many spheres of production, the growth of the welfare State, several wars including two great world wars, changes in the theory and practice of taxation, national borrowing and national debt. In Ireland we have gone through successive phases of political status: the Union, Dominion status and a Republic.
Throughout these changes in the world and in Ireland, the income-tax code, although it has been amended in certain particulars and the rate raised from time to time, has remained practically the same code as that introduced shortly before the end of the eighteenth century to finance the French wars. Even if the income-tax is not in need of amendment, it certainly is in need of codification. In the interests of clarity and the administration of the tax, the time has come to clear up some of the outstanding questions, to frame something in the nature of a consolidating Statute and bring together into some sort of order this immense mass of legislation and judicial decisions which concern both the collectors and the payers at the present time.
I shall have occasion to refer to the five schedules under which income-tax is assessed. These schedules emerged from the mind of the Legislature in their present form in 1803, and have never been altered since. Income-tax has been extended or copied in the meantime in the United States of America and in most of the British dominions, but in none of these countries has the system of the five schedules been adopted. It has been inquired into, and is being inquired into in Great Britain, but, in Ireland, these five schedules have taken on something almost of the nature of sacred writings which cannot even be discussed, much less altered. Therefore, I suggest that, even if there is no need to amend the income-tax, at least there is some need for a commission to consolidate and to bring the legislation up to date.
In the course of the past year, this question has been debated in the Seanad on more than one occasion. A year ago, on the Supplies and Services Bill, some references were made to the necessity of additional taxation and to the good effect of certain types of income-tax on stimulating saving and reducing consumption. The second occasion on which it was referred to was the debate on the agricultural grant in March of this year. I do not wish to reopen the difficult problems touched on in that debate, beyond saying that I suggested that there should be some relation between the amount of direct taxation levied on the land by means of income-tax and the amount levied by means of local rates.
The next occasion on which the matter was discussed was the Social Welfare Bill later in the spring, when it was pointed out that the salaried classes, to a large extent, had made provision for their own social services and that therefore the addition of the contribution they would have to make for a State scheme would really amount to an increase in income-tax. Finally, the matter was discussed in the debate on the Finance Bill in the early summer. On that occasion, the matter to which I mainly referred was the standard rate of tax which was raised in the Budget and the effect of the rise in the standard rate on saving and investment. I did not refer to the distribution of the burden of the tax, beyond saying that, if the distribution of the tax was fairer, the standard rate could be lower. That is a point to which I will return. The converse of that point is that if there are any inequities in the distribution of the tax, every increase in the rate of tax magnifies these injustices.
The concessions which were made to some of the lower group incomes in the Budget were in the direction of a fairer distribution of the burden of the tax, but I think it is only fair to say that these concessions were mainly made to compensate the lower income groups for the reduction in food subsidies and therefore did not meet the case I am trying to make this evening. The concessions reduced the yield of the tax and tended to concentrate it on the higher incomes. From the point of view we were considering here in the Finance Bill debate, the adverse incentive effect of the tax on saving and investment, that shift towards the higher incomes did, in my opinion, harm rather than good. On this occasion I am not dealing with the standard rate, with the gross burden of the tax or with the effects of the tax on saving or investment or other incentives. I am dealing in this motion with the fact that the distribution of the income-tax at any standard rate produces injustices as between different sections of the population and that it is productive of political discontent, rising in some cases to acute indignation.
The first outstanding fact to anybody who examines the income-tax in this country is the small number of people who contribute to it. The Minister for Finance on the 30th January of the present year was asked in the Dáil —I quote from the Dáil Debates of that day, column 30—the number of persons who paid income-tax for each of the years, 1948-49, 1949-50 and 1950-51 and the answer he gave was that, in 1948-49, the estimate was 148,000; in 1949-50, 167,000; and in 1950-51, 181,000. That is to say, roughly one person in 17 of the whole population paid income-tax in 1950-51. I do not think it is an unfair thing to say that it is a matter of common knowledge that more than one-seventeenth of the population have incomes of more than £140 a year. If that is the case, the income-tax does appear to be collected from a smaller number of people than the number from whom it would be collected if it were strictly and successfully assessed.
In other words, a tax which, on the face of it, is impartial between all sections of the population, is in fact unjust to some and benefits some sections at the expense of others. There is a quite irrational and unjustifiable difference between the sections who pay tax and the sections who do not. It is exactly the same as if the tobacco duty were levied at a different rate on people with dark hair and people with fair hair. A tobacco duty of that kind would offend one's sense of justice, but nevertheless the difference between the people who are included in the income-tax assessment categories and the others is quite as unrelated to their capacity to pay as the colour of the hair of the indirect taxpayer.
The complaint is made by the salaried classes in this country, the people whose case I am mainly trying to place before the Minister, that there are certain types of income-tax payers who can evade part of the tax they should pay. There are certain sections of the population whose income arises in such a way that it cannot be seen by the income-tax inspectors. It is also suggested that there are other sections who pay every penny they owe, who do nothing illegal and who evade nothing, but who, owing to the fact that the basis of the assessment applicable to their occupation is peculiarly favourable, get off with a rather light payment. If you like, we can put it this way: there are two types of evasion—there is the illegal evasion of people who succeed in making false returns, and the legal evasion of people who do nothing illegal, who, quite rightly and properly, benefit by the peculiarly favourable and—perhaps I might anticipate by saying—obsolete method of assessment.
As against that, there are other people who pay every penny they owe. Their incomes are known to the taxation authorities, they have no escape, no method of getting out of the net. If you have a population classified in that way it is perfectly clear that the third class of people have to pay a higher rate than if these legal and illegal evasions were brought to an end. The late Minister for Finance, Mr. McGilligan, in the Dáil on 10th July of the present year, at column 755, said that if everybody who should pay income-tax paid income-tax the standard rate could be reduced by 1/- or 1/6 in the £.
That is, roughly, the question which I wish to bring to your attention; that there is a class of the population who, by the nature of their income, find income-tax pressing very harshly on them. This matter has been put very well in an address by Mr. M.P. Linehan at a meeting of the Irish Conference of Professional and Service Associations held in March, 1950, and from which I wish to give a few quotations.
"It has been repeatedly pleaded," said Mr. Linehan,
"that income-tax is the fairest of all forms of taxation in that it seeks to approximate the burden of taxation to the ability of the individual taxpayer to bear that burden. In theory, this may be so; in practice, it is the direct opposite, for a big proportion of the taxation thus raised is borne by persons whose incomes bear no relation to the tax imposed when compared with persons in other income groups. How is it, you may ask, that a system of taxation, founded on such sound principles, should be so harsh and so unjust in its effects? The answer is simple. To implement the system the revenue authorities must be in a position to know the annual income of the taxpayer. Alone among taxpayers the wages of the employees and the salary of the salaried workers are readily available. The employer makes his return to the revenue. The statutory allowances are deducted and the tax due estimated. No such easy system operates in the case of tax payable under the other schedules. Before an industrial concern can be taxed, the accounts have to be audited. There are innumerable loopholes through which much of the income can escape the taxing master. There are queries and counter-queries. The case of the agriculturist presents even greater difficulties, because there is no standard system of cost accounting for farming."
I do not wish for a moment even to suggest any reflection on the administration of the income-tax code by the Revenue Commissioners. I do not think, however, that it is unfair to state that I have been told that they appear clearly to centre their attention on people already in the net rather than to getting more people into the net; that it is their practice to squeeze the last drop of blood out of people already in their grasp rather than to go looking for new victims who might be difficult to get into the net. The recent increase in the promptitude and efficiency in collecting Schedule E is admirable from the public point of view; but the efficiency of the Revenue Commissioners in this respect increases anguish of their victims.
Another matter which I have been told, and if my information is not correct I hope it will be corrected, is that the section of the population who can make false returns, who can evade in one way or another their responsibilities, are never brought to criminal prosecution. I have been informed that the practice in England is that, if a taxpayer is found to be doing something positively fraudulent with the intention of deceiving, in such cases the commissioners will not be content merely to recover the sum due, but will make the person concerned subject to criminal prosecution. I have been told that in this country no income-tax offender is ever prosecuted but is merely asked to pay up his arrears. That strikes me as being in direct contrast with the activities of the Revenue Commissioners in regard to smuggling and other offences of that kind, where, if a person breaks the customs and excise laws, not only is he prosecuted but he is heavily fined and punished. If my information is correct it is possible to evade the income-tax laws with no penalty beyond paying up the arrears of tax.
As I have stated, the one class of people who are not able to practise any of these deceits are the salaried workers. Their income is known to the Revenue Commissioners and they have no escape. There has been a great volume of opinion in recent years in this and other countries that the increased taxation of the professional workers, the white collar workers, the administrative professional classes, has very adverse social and political repercussions.
I would like to quote from some observations by Mr. John Beavan, London Editor of the Manchester Guardian on the position at the present time. He says:—
"In all the countries I have visited since the war—and they include the United States—I have found one section of the middle class having a lean time; I mean the salaried or intellectual middle class, and particularly those members of it employed in the public service. The middle class has always been regarded as an extremely valuable class, especially so in Britain where its members have been dedicated to their work, scrupulous in their conduct and ready to devote their private leisure to the public good. Upon them has largely depended the cultural life of the country and the running of humanitarian organisations. They have provided, too, most of the hard thinking and skilled advocacy that were needed to plan and attain social advance. They have been the great basis of constitutional democracy. It would, perhaps, be wrong to say that through its vicissitudes of recent years this class has lost its moral earnestness, but its moral earnestness has been weakened. It must be a serious loss to the community if this sense of public service were to go. But when private problems press so hard upon individuals it is difficult for them to be concerned about other people's hardships. To-day the middle class is the class squeezed hardest by the inflation. Below them the wage workers have their trade unions, and since inflation is usually accompanied by full employment, they are in a strong position to protect their members. By the side of the intellectual middle class there are the tradesmen whose profits rise with inflation; and above them are the entrepreneurs, for whom an inflation period is a chance to make a fortune.
The salaried middle class is not aggressive by temperament—though it may eventually be driven into aggression—and its staff organisations are not real trade unions ready to enforce their arguments by striking if all else fails. Usually middle class salaries are not increased until all hope is abandoned by their employers of a recession in prices. Salaries, then, are well behind the cost of living when it is increasing. Before the war, however, when goods were cheap the salaried middle classes had a very good time indeed: and as unemployment was prevalent and profits were harder to earn, they were envied by all other classes except the well-to-do for their security and well-being.
Now, the salaried middle classes look back upon those days before the war as a golden age which may never be repeated in their lifetime. Even their security to-day seems to have no value, since everybody has been pretty secure—up to now.
In Britain—and in some other countries too—the salaried middle classes have not only failed to keep their earnings in line with the cost of living but also have been tightly squeezed by taxation. There is no way of shielding them against the heavy taxes which, during a period of war or reconstruction or rearmament, must be levied upon the upper ranks of the workers and upon middle incomes as well as upon the wealthy. But as the incomes of these latter groups were increasing all the time, the burden was easier to bear. The salaried middle class and some of the lowest-paid workers are the only people in Britain who have a lower standard of living than they had before the war."
I do not want to delay the Seanad by giving further similar quotations.