As amendments Nos. 8 and 9 are alternatives to amendment No. 6, we will discuss amendments Nos. 6,8 and 9 together.
SECTION 2.
We have less than 47 minutes in which to deal with amendments Nos. 6 to 34. I suggest that we deal with section 2 by 1 o'clock and that sections 3 to 5, inclusive, be discussed in the remaining half hour.
That is a matter for the Members.
We will conclude section 2 at 1 o'clock.
Yes. However, I cannot stop a Member who wishes to contribute.
I understand that.
I move amendment No. 6:
In page 12, subsection (1), lines 30 to 41, to delete the Table to subsection (1) and substitute the following:
"‘TABLE
PART I
|
Part of taxable income (1) |
Rate of tax (2) |
Description of rate (3) |
|
The first £12,000 |
25 per cent. |
the standard rate |
|
The remainder |
40 per cent. |
the higher rate |
PART II
|
Part of taxable income (1) |
Rate of tax (2) |
Description of rate (3) |
|
The first £24,000 |
25 per cent. |
the standard rate |
|
The remainder |
40 per cent. |
the higher rate |
This amendment suggests a radically different approach to personal taxation. It suggests that the 27 per cent standard rate be replaced by a 25 per cent standard rate. It also suggests that there should be a 40 per cent upper rate instead of the current 48 per cent upper rate. In addition, the amendment suggests that the first £12,000 of taxable income should be the spread of income to which the standard rate applies.
One of the problems with our tax system is that whatever is done for single people as a result of the implementation of the Murphy decision means a multiplication by two for married people. That is not a necessary consequence and should never have been seen as a necessary consequence of that decision. The budget in 1980 or 1981 which reflected the Murphy decision could have approached the matter differently. A family allowance could have been introduced which would have reflected the reality of marriage and, at the same time, not introduced a two to one difference between single and married people. This amendment is predicated on the proposition that the situation must continue until there is a different approach to the issue.
The Culliton committee suggested that people who pay tax at the higher rate should be reduced to 20 per cent of the total number of taxpayers. A recent question to the Minister from Deputy Cox evinced the reply that £11,993 — which is where the £12,000 comes from — is the amount necessary to achieve that target. In 1973, when the national coalition of Fine Gael and Labour took office, about 2 per cent of taxpayers were paying above the standard rate of income tax. By the time that Government left office the percentage had risen to 15 per cent. After the series of elections in 1982, the figure was in the twenties. By 1987 it had risen to 43 per cent. When people say that the upper rate of tax is a problem here, we should remember that 97 per cent of taxpayers were unaffected by it in 1973. However, in 1994 the figure is significantly higher.
In the 1987 general election the Fianna Fáil party committed itself to the proposition that the figure for those who paid tax at the upper rate be reduced to one third of taxpayers. That was ten times greater than the figure for 1973. When push came to shove — and I pointed this out to the then Minister for Finance who is now the Taoiseach — the Minister was proposing to alter the tax status of 10 per cent of taxpayers. About 43 per cent of taxpayers paid tax at the upper rate. He was suggesting that the figure be reduced to 33 per cent. It was not a far reaching proposal as he merely proposed altering the tax rate payable by 10 per cent of taxpayers. However, that did not happen.
It is possible to envisage a scheme which corresponds both to the Culliton proposal and to people's sense of justice. The 25 per cent tax rate should be the lower rate of tax. People argue — and I note Deputy Rabbitte's amendment — that there should be a 55 per cent upper limit. One must bear in mind that, at present, with 7.5 per cent PRSI added to 48 per cent tax, single people who are earning less than the average industrial wage are handing over almost two-thirds of their marginal earnings in taxation and social welfare deductions.
We must face the fact that our system has grown grotesquely out of kilter during the past 20 years. Our current state of affairs is radically different from 1973 when less than 3 per cent of taxpayers were affected by the higher rates of tax. Yesterday I was told by the Minister's helpful officials that a reduction of 1 per cent in the standard rate of income tax would cost the State £71 million in one tax year. A reduction of 1 per cent in the 48 per cent rate would cost £33 million. In order to reduce effectively the top rate of tax to 40 per cent would cost in the region of £230 million and to change, even with the present tax bands, from 27 per cent to 25 per cent would cost in the region of £140 million. In that context, I asked what was the anticipated yield in terms of revenue buoyancy through other tax methods, and I was told that the rough rule of thumb on small changes in the tax system was that a quarter of the income tax reduction came back through other taxation systems. This is undoubtedly a heavy bill and is even heavier when one takes into account the increase in the standard band, even allowing for the fact that a quarter of it would come back through indirect taxation.
The Minister said earlier that he has meagre resources for tax reduction and that he must apply them to those most in need as he sees it. I do not accept the argument that there are meagre resources for tax reduction and reform. Considering the cost of the Programme for Economic and Social Progress andProgramme for Competitiveness and Work in terms of inflated expenditure on public sector pay, if one applied all of the money given in public sector wage increases since the beginning of the Programme for Economic and Social Progressto tax reductions there would be no problem with this type of tax reform. The Programme for Economic and Social Progress was partly implemented when the Progressive Democrats were in office and I stated from the wings that it was excessive. The figures eventually showed that it was excessive as public sector pay increases greatly exceeded the low rate of inflation. If we were serious about tax reform we could have a different approach to public expenditure.
One other figure which is relevant is that with an ambient rate of inflation of 2.5 per cent since this Government took office, we have had in the first two budgets an increase in public expenditure of 17 per cent. There has been a projected real increase in public spending over the last two budgets of 12 per cent. That is why there is no money available for tax reform.
Within the tax system, I make no secret of the fact that I am in favour of tax credits rather than tax allowances. The lower the top rate is, the fairer that is and the more acceptable it would be. I have repeatedly suggested to the Minister in the Dáil that there is no reason why there should not be tax credits instead of tax allowances so that whatever allowances are made for children, mortgage relief and so on are worth as much to the poor man as they are to the rich man. I believe that absolutely. There is no moral or philosophical basis for our present system of taxation and there is a saving to be made there.
On to the financing of local government, I have on two occasions in the context of the Finance Bill on behalf of my party offered to take part in an all party committee to reconsider the issue of financing local government so as to take a significant proportion of its costs off employment taxes. That offer has not been taken up and the Government seems to be trí na chéile as to how it should approach that issue. If people want to talk about broadening the tax base, there are still significant areas which have not been touched because of political lack of resolution which could be brought into the indirect tax system.
On the taxation of social welfare and the implementation of the tax reform commission's recommendation on that, the Progressive Democrats voted with the Government when it extended taxation to social welfare receipts and would support the further implementation of those policies. We have made no secret of it. Having advocated it in Government and in Opposition, we do not propose to change. If there are hard decisions to be made, at least on some tax reforms the Minister can count on support from some portion of the Opposition.
I agree with some of what Deputy M. McDowell has said but I disagree with him where he proposes a tax rate of 40 per cent on the remainder of income above, effectively, £15,436 for a single person taking into account the single, PAYE and PRSI allowances and the fact that the first £12,000 of income is taxed at 25 per cent. That equates tax reform with tax reductions for the high earners and super high earners. We will probably learn when we come to the area of residence that the super high earners do not pay any tax. If we leave them out of the equation and deal with high earners then a point must be reached — and it is a matter of opinion where that point is reached — where very high earners can afford to contribute the cost of giving the type of improvements to low earners for which Deputy M. McDowell has argued.
I have put forward a somewhat different structure in amendment No. 7 which is a three tier proposal. I too propose a tax rate of 25 per cent on the first £8,500 liable for tax. The rate for the next £25,000 would be 40 per cent and thereafter, a rate of 55 per cent would apply. That means, notionally, using the figures which I have just used for Deputy M. McDowell's proposal, that at just under £37,000 one would become liable to tax at 55 per cent. Of course, anybody earning £37,000 or more is also very likely to have mortgage, VHI and all of the other reliefs. Therefore, one is talking about earning in excess of £40,000 before one becomes liable for the 55 per cent rate of income tax or more than £80,000 for a married couple.
In professing to tackle injustice and inequity, that is not unreasonable. After all, one now becomes liable to 48 per cent once income exceeds £11,636. I do not have any time for anybody who throws their hands up in alarm and says that we have moved from 48 per cent rates of tax to 55 per cent. One becomes liable for 48 per cent tax at £11,636 after the single allowance, PAYE, PRSI allowances and the first £8,200 at 27 per cent. There is a great deal of equity in what I am saying. Anybody earning more than £40,000 can afford to pay the higher rate of tax and obviously gets the benefit of the structured lower tax at 25 per cent and 40 per cent.
Part of the problem here is that it is very frustrating having to make arguments section by section, amendment by amendment when tax reform is a comprehensive matter. Anything can be taken out of context in seeking to deal with rate bands, as in this case, exemptions which we dealt earlier or broadening of the tax base with the constraints to which Deputy M. McDowell referred earlier being imposed on the Opposition. It is a difficult problem and it is a question of whether one has a comprehensive coherent approach to it. I have put down my amendments, Deputy M. McDowell has put down his. At the end of the day, the Government disposes.
It is not possible to make a case to say that the rates of tax in Ireland are too high by European standards, as 27 per cent and 48 per cent are broadly in the middle range of tax rates across the 12 EU states. What is most striking about any comparison is the levels of income at which rates apply. That is the startling difference. The UK standard rate of tax applies between the first £3,000 and £23,000 of income for a single person. One enjoys the standard rate of tax, 25p in the pound, for much more of one's income. The real problem, particularly for single people, is that they pay the top rates of tax on very modest incomes. There is no escaping that. People are treated as middle class even though they are on low incomes.
The conference last week highlighted some startling figures on employers giving a single person a job. If one employs a person with a net pay of £120 a week, the total non-pay cost to the employer here as a percentage of take home pay is 32 per cent as against 23 per cent in Britain. If one pays somebody £200 a week, the cost in Ireland is 51.3 per cent — one pays half as much again in the tax wedge as a percentage of net pay — while it is 38 per cent in the UK. If one pays somebody £300 a week for £1 of net pay, the tax wedge is 70p in the pound whereas it is 50p in the pound in Britain. To pay an income of £26,000 a year, for a relatively good job, such as bank official, the cost to an employer here is staggering compared to in the UK in what is a regional labour market.
The changes the Minister made in widening the standard rate by approximately £500, have been entirely financed by reducing mortgage and VHI relief to the standard rate. People are not becoming any better off if they have mortgage or VHI relief. It is robbing Peter to pay Peter. Ultimately, the Minister should not be surprised that people are disgruntled.
The Minister was much less bashful about this matter in the last general election campaign. Fianna Fáil made a specific commitment that a single person on an income of up to £20,000 per annum and a married couple on an income of £40,000 would pay tax at the standard rate. At this rate of progress, unless the Government makes rapid movement in the later years of the lifetime of this Dáil, it will not achieve that objective. Neither has the Government outlined how over the next two budgets it intends to implement that pre-election commitment.
Section 2 which deals with when one clocks into the top rate of tax is critical. The first £8,200 of income for a single person or £16,400 of income for a married couple is far too low for people with commitments, who are entitled to nothing. They are paying for more and more while seeing such a huge proportion of their income evaporate in tax and which in the process makes it so costly for an employer to take them on.
We would all like the rates reduced but the implementation of Deputy M. McDowell's amendment would cost approximately £400 million in a full year. I have heard much talk about tax reform and an overhaul of tax arrangements. Attempts to tackle tax reform will inevitably hurt some people.
If finances allow it the Government should concentrate on widening the tax bands and reducing the 27 per cent and 48 per cent rates. However, nobody has pointed out the very high population dependency ratio involving the Departments of Health, Social Welfare and Education which are a major burden on the State. I do not hold a special brief for anybody but, as I see it, the middle income group and the higher income group to a lesser extent are carrying the main burden.
Many people across the political divide have said that we can make alterations to taxation and Governments and Ministers of Finance have tried to tackle it but when they tried people cried "do not hurt me in the process". Members of the committee would like the rates proposed by Deputy McDowell in his amendment.
I do not agree with Deputy Rabbitte's amendment. The three bands proposed would create administrative problems. Employers do not want it and neither does the public.
If possible, the rates should be reduced and the bands widened. However, from where will the money come to fund the Departments that I mentioned? There was a recent case on the steps of the High Court in which additional finance had to be found for social welfare. If the newspapers are to be believed there is a queue of claims in that regard. If they are all bona fide claims that will have to be paid, I am told it will cost the Exchequer £500 million. That is a staggering sum for a nation such as ours. I have no doubt that any Minister for Finance would like to reduce the tax rates, give more allowances and put more money into peoples' pockets but from where does the money come and how does he make the necessary financial arrangements for all the Departments to meet the high demands for finance?
If one was to consider this subject in depth, one would be here all day. If one wants to reduce tax rates dramatically, one has to ask who will pay or what services will be cut? There are demands for better roads and for better hospital and other services. When people talk about tax reductions they should be specific as to what services can be cut. Deputy McDowell pointed to public service pay as the area he thinks should be cut.
I did not say that. I said there should not be a constant increase.
Over time, it amounts to the same thing.
Listen carefully to what is going on.
We have two proposals here. If we accepted the Progressive Democrat's amendment somebody on the low tax rate with an income of £4,000 would gain by £80 a year and somebody who, after Deputy McDowell's adjustments, had an income of £100,000 at the high tax rate, would gain at the rate of £8,874 a year. The only justification for doing such a thing would be job creation which has not been evident in the last number of years. The people worst hit by the tax and social welfare system, taking into account loss of the medical card, family income supplement and other financial adjustments are those earning between £8,000 and £18,000. People in that range depending on family size, find that as wages rise net take-home pay reduces. If we want to straighten out the system, that is where we should start because this is where the tax wedge is really hitting people below the belt. If we have money to spend there are two obvious places to start. We should dramatically increase the exemption limits and the marginal rate of tax over the exemption limits. I welcome the move in that direction this year.
We should also widen the bands. In the first place the objective should be to ensure that those paying the full rate of PRSI do not pay the high rate of tax. At the moment although it is not often alluded to middle and not very high income people, depending on whether they are single or married, can pay 55.75 per cent tax because they are paying PRSI, but when they get out of the PRSI bands they pay 48 per cent. The idea of applying 40 per cent across the board is totally farcical unless we extend PRSI without income limit.
A much better way to deal with the problem would be to use resources to widen the bands. One fundamental principle which appears to be accepted but is not built into our tax/PRSI system, is that the less one earns, the smaller should be the proportion of every extra pound taken in tax.
The proposal to give tax relief to top paid people on an unlimited basis overlooks the fact that under various other schemes they have the greatest access to increasing their tax-free allowances. For example, BES investment is in reality only available to those with high discretionary incomes. It is ludicrous to talk about unlimited low rates of tax for the top payers. Most people want the 80 per cent of people on modest wages to pay the standard rate of tax. I have no brief for the top tax payers because as somebody who only managed to attain the privilege of paying 48 per cent this year, I know that once one gets up the scale it gets a little bit easier.
They are very laudable objectives and everybody wants to pay less tax. I certainly appreciate that the marginal tax rates are attracted at too low a rate of income. The Minister should concentrate his efforts on that aspect of the taxation system. Everything has a cost, and if we reduce the rates for high earners from 48 to 40 per cent it will have a significant impact on public expenditure. As Deputy McDowell pointed out, this would cost about £400 million. In the period 1987 to 1992 I quite vividly recall being told that a grand total of 15 houses was being allocated to our county council when we had a waiting list of 350 people. That is not very good news for people living in caravans, mobile homes and sub-standard rented accomodation.
I will stand by my principles and will defend the people who sent me to this House to defend them. One cannot speak with a forked tongue saying "cut taxation and public expenditure" without pointing out where the public expenditure axe will fall. It will fall on local authority housing on which there has been a major attack. I want more money for local authority housing which has a knock-on effect for the building industry including small builders.
The bottom line is helping people who are condemned to live in sub-standard accomodation. We should point out that if we want to reduce the tax bill by £400 million it will have a knock-on effect. We must come up with plans to fund a reduction in taxation which means public expenditure cuts. I have met people with medical cards who are unable to afford private insurance who have waited four or five years to have hip operations or to have their teeth looked after.
Deputy Penrose, we are not on Second Stage.
I want to know who will fund this cut in taxation. Are we going back——
You are taking a long road to get to the point.
I am here to defend the people who sent me here, many of whom, if they had incomes of £25,000 and £30,000 would be very proud people and would not be worried about residential property taxes. Some of them are lucky to have homes at all. People on the marginal rates are being hit at too low an income. Tax reform has to be gradual and I agree with Deputy Rabbitte that basically the Minister is looking at things in isolation instead of looking at the global picture. As economic activity picks up, the taxpayer should gradually benefit. A dramatic change, as most economists agree, would have an impact on inflation and the balance of payments. The Government has set out to gradually, reform the system and I hope, over the next two or three years it will continue along that road so that people can come home on a Friday evening with a greater proportion of their wage packet in their hands as opposed to it being in the office of the Revenue Commissioners.
With regard to the money required for taxation reductions, the Government is committed to broadening the tax base and to releasing funds for tax reform. The Government has, for a number of years, been in the process of doing that in the case of the standard rate of income tax and other taxes. Those issues were discussed earlier. In 1992 I abolished a number of reliefs and exemptions. I agreed with the argument for such action then and I make no apology for it. That aroused much criticism.
Deputy Connolly probably made the point best when he said that there is a lobby group for every relief and concessionary tax. As soon as the reliefs are touched all hell breaks loose but the Government must stick to its course. Deputy McDowell is consistent. In 1992 he supported the abolition of the reliefs although a strong lobby seeks their reinstatement. They were selective reliefs and some of them will be discussed later in this debate. We were correct in our decision because it released taxes. Those that remain are assessed annually to ensure that they benefit employment. If they do not demonstrate that they help employment we are wasting our time.
There was generous support for the patent relief. However, the problem is that if an attempt is made to target a relief to help research and development, half the offices in the city will have somebody devising some tuppenny ha'penny scheme on a computer in order to qualify for the relief. There is a constant need to monitor the relief and that requires a large number of personnel. The use of the relief must be monitored every year and we will continue to chase those who make fraudulent claims. That is how funds are released. I do not and will not neglect the issue of control of public expenditure. We must ensure that scarce resources are used in the best possible way.
Deputy Yates mentioned the tax and PRSI burden. I accept tax policy should seek to reduce the tax burden and that tax and PRSI cause difficulty for employers. I do not like hearing the United Kingdom quoted as an example because things are done differently there. There is a huge workforce in that country and the dependency rate there is not a fair comparison with the dependency rate here. I accept that it would help if we could ease the burden on employers. That is what we must do. We differ on how to do it but there is no argument about the policy.
The tax and PRSI burden has fallen steadily since 1989/90. I can offer some examples. Taking tax and the higher rate of PRSI, as was mentioned by Deputy O'Keeffe, as a percentage of constant real income, the burden on a single person earning £7,000 in 1989 was 25.4 per cent while it is 20.7 per cent now. The burden on a single person earning £10,000 was 31 per cent in 1989 and is 26.5 per cent now, while the person on £16,000 paid 42 per cent in 1989 and pays 37 per cent now. Admittedly, we would like to see it reduced faster.
I am not hung up about the rate. If I accepted the two amendments — and I realise that they were put down so that we could debate the subject — Deputy Yates's amendment would cost £164 million and Deputy McDowell's amendment would cost £620 million. The rates of 27 per cent and 48 per cent are adequate for present circumstances, although I strongly supported Deputy McDowell a few years ago when I thought the 52 per cent was too high. I would prefer rates of 25 per cent and 45 per cent if we could achieve them.
The bands are the problem. This year I tried to put money into the allowances and the bands. People who criticised that said that I should not have bothered with the allowances and put all the money into the bands. However, that creates its own difficulty. For the next few years we will try to gather as much revenue as possible through either tax reform — which means taking from somebody or expanding the tax take from some area — or controlling expenditure. We should put the funds released into the bands, with some of it being put into the allowances. That is the Government's aim and it is having an effect. That policy will ultimately result in more people paying 27 per cent tax, which is our objective.
Mr. McDowell
I accept the spirit in which the Minister has made his contribution. Of course my amendment would cost about £600 million. However, if this country had a genuine will to reform its tax system the £600 million, over five years, would mean a change of £125 million a year which is well within our capacity. It is the kind of figure produced with ease by the average tax amnesty. It is a fraction of the annual increase in expenditure on public pay and it could easily be covered by widening the tax base. I do not accept that it is unrealistic. It is a question of whether we want to achieve that aim. The Minister chose 1989 as his base year to show how things have improved. That was the great year a tax reforming party got into Government. The situation has unravelled since we left Government, unfortunately, and the sooner we are back in Government the better.
In this budget the Minister expanded the standard rate band by about 6 per cent. However, allowing for the fact that we have an inflation rate of 2.5 or 3 per cent, the real difference in the value of that band is 3.5 per cent. If he continues at this rate the volume of change will be between 10 and 15 per cent of the standard rate bands unless something dramatically changes. Listening to the rhetoric from the other side there is no desire to go at a faster rate or to achieve a different goal. We are confronted with disappointing figures. I am glad that this debate is taking place because we have heard a very conservative view on the taxation system from the Government side.
Deputy Ó Cuív said — and I agree with him — that reducing the 48 per cent band to 40 per cent means that many wealthy people will be, on paper, much better off. However, these are the people who are, at present, investing in section 23 apartments. They are being inundated with Deputy Michael D. Higgins's film brochures asking them to put their surplus income into this or that project — crazy notions. They are getting the highest value in mortgage interest and VHI reliefs. If there was a genuine desire for tax reform these people would be told they could no longer receive those sweetheart deals because they will be obliged actually to pay the new rate of tax as opposed to employing accountants to think of BES and other schemes to avoid payment.
The 48 per cent rate is too high. I make no apology for a 40 per cent rate. Anybody — whether it is Michael Smurfit or Tony O'Reilly — who earns an extra million pounds should keep the majority of that money and the community should take less than the majority of it. We should encourage people to earn more money. There is no argument — and this is an ideological view — for taking more than one half or three quarters of somebody's income in income tax because people will move their income elsewhere. When they come under pressure they lobby harder for allowances, BES schemes, section 23s and so forth. Scrap the high rates and introduce a system in which everybody actually pays.
Deputy O'Keeffe may consider it a privilege to pay tax at the 48 per cent rate. A single woman working as a typist in a solicitor's office in Dublin, earning well below the average industrial wage, does not consider it a privilege to pay the 48 per cent rate of tax. We must realise tax is not a privilege but an imposition and that it is hated. Deputy Connolly said we had a high dependency ratio in this society but the relevant ratio is those in jobs as against those who are not. Our real worry should be those who are prevented from contributing to the economy because of welfare traps. If we concentrate on bringing in a tax system which encourages them to participate many of our other problems would be solved. This has been proved to be the case in low tax economies in the Pacific rim nations, in the US and in the UK in recent times.
As someone who helped draft the schedule I am disappointed that we will not be able to discuss 14 of these amendments. Perhaps on Report Stage we can deal with them, because they cover many critical areas.
To reply to the Minister, my comparisons with the UK are made for no other reason than that over 30 per cent of our trade, both imports and exports, is with the UK. The principal competitors of most Irish manufacturers are in Northern Ireland and in the UK. Whether we like it or not, we must compare wage and non-wage labour costs with those in the UK.
If the Minister had made no changes at all in the budget, taxes would have increased by 5 per cent on the budget White Paper. The fruits of economic growth through exports and the rise in incomes give us a unique opportunity to cut taxes. The Minister's failure to do so will mean he will be judged harshly in the future.
One of my amendments to section 5 went astray, which was my fault rather than the fault of the Bills Office. It referred to the PRSI allowance. I mention it now so that it may be included on Report Stage.
That is fine. As it is now 1.30 p.m. I am required to put the following question in accordance with the Order of the Dáil of 28 April:
"In respect of each of the sections from 1 to 5, inclusive, undisposed of, that the section is hereby agreed to."
Question put and declared carried.
Sitting suspended at 1.32 p.m. and resumed at 2.30 p.m.
NEW SECTION.
I move amendment No. 25:
In page 14, before section 6, to insert the following new section:
"6.—Notwithstanding anything in the Income Tax Acts, as amended, with effect from the year of assessment 1994-95 the percentage of mortgage interest paid which qualifies for relief (subject to interest ceilings) shall be 100 per cent of such mortgage paid.".
In the time available to us, we will deal with sections 6 and 7 of the Bill. Amendment No. 25 is one of the amendments I tabled about mortgage relief. One of the more insidious changes the Minister made in the last couple of budgets was to reduce mortgage relief from 100 per cent to 90 per cent and now to 80 per cent of allowable expenses on a mortgage. Section 6 should be debated with amendments Nos. 25 and 27 and with those opposing section 6 because they are a natural grouping and it would help us to deal with the mortgage issue.
Home owners are bearing the brunt of this Government's policies in relation to tax reform. Many individuals have contacted me with their revised tax free allowances for this year and last year. They are horrified that their mortgage relief has been drastically cut. For example, a person from County Westmeath told me that last year his interest relief was £3,400, but this year it is only £1,817. Similarly, a person from County Cork told me that his mortgage interest relief had been cut from £3,048 last year to £1,675 this year. The combined effect of only allowing 80 per cent of the mortgage expenses claimable for tax relief, plus the four year ratchet in relation to standardising the mortgage relief, not from the rate of tax which one pays at the marginal rate of over 54p in the pound, down to 27p in the pound, will mean that home owners will lose in excess of £60 million.
It is no consolation that marginal changes have been made in personal allowances. Unfortunately, we did not get an opportunity this morning to discuss basic tax free allowances. It is no comfort to those people to be told that their basic tax free allowance will be increased by £175, if the mortgage relief will be cut by £1,800. People know the difficulties they face. The other change is a reduction in interest rates, which is not unreasonable, but people's tax free allowances have already been reduced. It has a triple effect because those with substantial mortgages are now worst off.
It should also be pointed out that young couples have a lifetime ambition to own a home. We are not talking about a car which one may change, but about a lifetime commitment. The average life of a mortgage is 20 years. These people, who made long term commitments, now find that their household budget has been negatively altered because of these changes. The only concessions are for people who have taken out mortgages in the last couple of years, and even those are limited.
I am not against ceilings. The maximum interest ceiling for a married couple is £5,000, £3,600 for a widowed person, or £2,500 for a single person. This means the wealthy have a ceiling on the amount of mortgage relief they can claim and the larger houses do not qualify for relief. However, if one has a mortgage expense within that ceiling, one should be entitled to 100 per cent of it. This amendment seeks to protect those in modest homes.
Successive Governments have seen fit to support the labour-intensive construction industry. That is why the new house grant and mortgage tax relief are in place. The construction industry has estimated that the total tax take on the price of a new £40,000 semi-detached house, if one includes all the costs of construction and VAT at 12.5 per cent, is 33 per cent. People in Dublin and other cities must pay land developers more money for sites because they have no choice in the matter. They are faced with a massive monthly commitment — a mortgage. These people must pay more tax by virtue of that mortgage. The Minister may argue that everyone is better off. Mortgage rates have dropped but these changes are permanent. What happens when mortgage rates go up as they did during the currency crisis? What protection will mortgage holders have? The last time mortgage rates where high, we were close to the general election.
I regret to inform the Minister that he is on record as having made watertight commitments to home owners to protect them against high interest rates. It is cold comfort to them that at the first opportunity, in the 1994 budget, the Minister sought to reduce their mortgage relief in three ways. Why should long-standing policies which have stood the test of time, which helped people to provide homes for themselves, helped people not to be a burden on local authorities and those on low incomes with the cost of private accommodation, be changed? Academic arguments have been put forward which do not take account of people's largest financial commitment in their lifetime. I know of many cases, particularly those buying new houses, where both partners must work simply to pay the mortgage. It does not involve a lot of money, it is the difference between 80 and 100 per cent for those under the ceiling. One may argue about standardisation hitting the wealthy, but this hits those on modest incomes. I ask the Minister to accept this amendment.
The Progressive Democrats view is obviously different from that of Fine Gael on this matter and there is no point in pretending otherwise. There should be a tax credit for mortgage interest payments which should be as valuable to less well off families as it is to the better off. We have consistently held that point of view and we do not propose to depart from it. By necessity it carries the implication that it is the standard rate of tax and that, therefore, the four year process in which the Minister is engaging to get the standard rate to effectively bring about a tax credit in respect of interest relief is something we cannot oppose in principle.
I do not understand how the Minister can say that in relation to mortgage interest — it makes sense to have the equivalent of a tax credit which is standard rating — and why it should not also apply to personal allowances. Even in the context of a reform programme of taxation, there is an unanswerable case for tax credits as opposed to tax allowances. From that perspective, I cannot oppose this.
Deputy Yates expressed the view that the building industry would be adversely affected by a change in the treatment of mortgages. I have doubts about that. Undoubtedly it is a worry that many members of the building industry entertain but whether it is true is another question. I note the building industry always insists that high home ownership is a value which the tax system should favour, but when it comes to section 23 apartments, it suddenly comes out in favour of non-ownership of homes, rented accommodation becomes another value which the tax system should favour.
In the context of the tax system, the argument has never been proven that people's desire to own their own home is tax driven. In so far as it is tax driven and a value, I find it difficult to understand how one can ride that horse, while at the same time say that section 23 apartments in the city centre, which are rented accommodation, are to be encouraged. One cannot have it every way on this issue.
I sympathise with Deputy Yates about the 100 per cent as opposed to 80 per cent of qualifying limits, but that is a matter of how much mortgage interest would be allowed if there was a tax credit as opposed to a tax allowance. It is a question of where the ceiling is put. I expressed the view that it does not make sense to extend allowances. We will never reach the stage of doing something decent about income tax if we constantly — I will not say pander — succumb to the temptation to treat individual aspects of taxation with kid gloves.
In this context, if there was an allowance — and this has been proposed — for either second or third level fees against taxation and anyone attempted to interfere with that, it would be seen as political suicide. It is not there at present so one may talk about it in an academic sense. If it did exist, the average middle class family would regard it as a God given right and woe betide the politician who would challenge its presence in the tax system.
We discussed tax reform earlier and I know the Minister will spend time reading Cedric Sandford's book on successful tax reform "Lessons From an Analysis of Tax Reform in Six Countries". His comments on the success of tax reform in the Irish context are interesting and I recommend that the Minister read them because the input of this party to that process is acknowledged. The only modest reforms achieved between 1989 and 1992 were accomplished because the Minister and other members of that Cabinet were willing to impart some bad news. We cannot have decent changes if everybody hypes up the down side.
The basis of our approach to this is that people will demand tax shelters and tax breaks, if they are taxed at 48 per cent or 57 per cent, including PRSI. If one brings down marginal rates, there will be less justification for demands for tax shelters and tax breaks. It is a case of the chicken and egg — I will extend the metaphor by saying that one cannot make an omelette without cracking eggs. This is one of the eggs we must crack.
If we marry the £600 million proposals we discussed earlier with Deputy Yates's figure of £60 million, being the value of this over a four year claw back period, we must remember that is one-tenth of that problem out of the way. If nine-tenths were found through public expenditure savings, public service pay control, the introduction of tax credits and the widening of the tax base, the problem would be solved and we would have a fair tax system. Unless we are willing to grasp this nettle we have no chance of achieving that.
I want to speak on amendment No. 27.
We have not yet reached amendment No. 27.
I understood the amendments to section 6 were being taken together.
Only one amendment has been moved, but Deputies may discuss them together if the Minister does not object.
Amendment No. 27 seeks to maintain the status quo. While we acknowledge the requirement to standardise tax relief in the first instance in relation to mortgages, it is contingent on the necessity for a major root and branch reform of the tax system.
We cannot continue to reduce reliefs while at the same time applying penal taxes which in many cases affect the same people. There has been an unmerciful row about the residential property tax increases, to the extent that a campaign is now underway to have the original tax abolished, so not only are the increases in that tax being fought against but now the emphasis is on having that tax abolished.
When that tax was introduced I supported it on the basis that there was no other way of getting tax off many of the people who were in very high income brackets living in expensive houses because, effectively, most of them were able to write their own tax bills. However, I did oppose the changes in it because those changes extended it to categories which I initially believed would not be included. A commitment was given at the time that they would not be included.
In its amended form that tax will bring in about £3 million, I understand, whereas what the Minister is seeking to do in relation to mortgage relief will effectively take in close to or slightly more than £80 million over a three to four year period. It seems that this is a sting which has not yet been recognised by householders generally who currently benefit from tax relief on mortgages. The problem with doing anything in relation to mortgage interest relief in my view is that for many years Government policy has forced many people who would not normally be in that market into buying houses. People were forced off local authority waiting lists as a result of the failure to build local authority houses. A £10,000 grant was introduced some years ago which sucked out of local authority areas virtually everybody who had a job. In my own constituency it left something like 500 flats vacant for years which were subsequently vandalised and which cost hundreds of thousands of pounds to repair.
There is a whole range of problems in those areas as a result which presumably were not foreseen by those who introduced this £10,000 grant and it denuded communities of organisers and of people who were active in the community. It arose from housing policy and it drove people into private houses. People bought private houses as a result of the £10,000 grant and subsequently could not afford to maintain the mortgages they were being asked to pay, particularly as a result of the increases in interest rates last year.
We need more finesse in our housing policy and related matters; mortgage relief is obviously a related matter. I favour the integration of the various assistances available for the provision of housing, as does my party. These include mortgage interest relief, the differential rent system that the local authorities run and the rent subsidy run by the Eastern Health Board for people in private accommodation or people with difficulties with mortgages and so on. It would be far more beneficial to replace mortgage interest relief with a housing benefit and these other differential rent schemes.
The big problem with mortgage interest relief is that so long as the householder is employed and paying tax he or she can benefit from it. If the householder is not employed and not paying tax the mortgage is as high as the building society chooses and depending on the market. There is a need for a root and branch reform of housing policy, the assistance it is giving to people to buy houses and people who choose for a variety of reasons either to stay in local authority houses or in private rented accommodation. Until that kind of root and branch reform is introduced I have no option but to oppose the Minister's proposal to tinker around with the system of mortgage interest relief.
Whenever we debate the Finance Bill, mortgage interest relief is discussed. Last year it was improved in recognition of the way the interest rates had soared and it was given as compensation. Over recent years the number of local authority houses that have been built here has been systematically reduced so many more people are forced onto the housing waiting list. Many of those people will attempt to build their own houses and in a situation like that the mortgage interest relief was a compensating factor in order to encourage people to own their own houses.
There was an improvement last year, maybe for the wrong reasons at the time but at least it was a improvement because it was increased from £4,800 to £5.000. This year many people came to me when they got their certificate of tax free allowances. They did not realise the financial impact of the decision until they got the certificate. Each year their certificate of tax free allowances reflects an altered situation, not alone with regard to the reduction to 80 per cent but also in regard to the systematic reduction where people have been on interest relief of 48 per cent which will be reduced to 27 per cent. This process has begun.
With regard to mortgage interest relief, many people find it extremely difficult to make ends meet. In many cases we are talking about what is classified as the middle income grouping. It has been said on many occasions that these people are the coping part of our society, they have to meet these charges but they are also paying for higher education and for all the other living expenses. At the end of the week they are left with is a reduced income. Mortgage interest relief was a positive inducement and a stimulus to people do something for themselves and build their own houses and I am disappointed it is systematically being reduced. I support our spokesperson's amendment on this, that if anything it should be 100 per cent relief. Tinkering around with the marginal interest relief is ridiculous. The Government appear to be committed to phasing out this relief over a period.
A number of points need to be made. On the general position, it is the ceiling, not the percentage restriction, that will deal with the rise in interest rates problem over the years. When we moved the ceiling up to 90 per cent relief during the currency crisis last year we put it into legislation that it was going to go back to 80 per cent when the interest rates came down. There was no surprise in that. Some Members said that tax free allowance certificates issued in recent months to taxpayers have shown large decreases over the 1993 to 1994 tax year in the allowances in respect of the mortgage interest.
Other taxpayers have seen and will see the full benefit of the budget improvements. I know Deputy Yates has been flabbergasted at the number of people who obtained benefits. All taxpayers, apart from those previously exempted on account of having a medical card, will benefit to the extent of the 1 per cent levy charge. It is important to restate what I said during Question Time on two occasions in the House, that any reductions only affect taxpayers with mortgages who represent approximately one third of all taxpayers.
There is a notion that everybody who is a taxpayer has a mortgage. Of those claiming interest relief just over half, that is one sixth of all taxpayers, are on the higher rate of tax and this the only group affected by the move to standard rate relief. We are talking about one sixth of all taxpayers.
I would be certain that all the tax free allowance forms which Deputy Yates has show reduced interest in line with the interest rate reductions. The rate of 12 per cent was used for the assessment in 1993-1994 allowances and this year the rate is 8 per cent. The reason for this is obvious, but since the obvious has not been stated by Deputy Yates I had better state it. Part of the reduction reflects an unavoidable feature of the tax relief in respect of expenditure, namely, that the relief depends on what the taxpayer spends. It would be handy if that did not matter, if the relief could be given based on some notional figure of high rates. However, it is based on expenditure. I know Deputy Yates would have explained that to all those who came to him and made it clear that it had nothing to do with the 80 per cent and little to do with the percentage of that. In case Deputy Yates did not explain, I know the media will convey the message to those who may have been misled.
I find again that I am not in too much disagreement with Deputy Michael McDowell's tax policies perhaps because——
We can get back to them when he gets rid of his partners.
A Deputy
That will be a long time coming.
In 1992 we worked together on many of these issues. Mr. Cedric Sandford in his book gives us credit, among other countries, because 1992 was a buoyant year from an economic point of view but we still managed to reduce the top tax rate from 52 per cent to 48 per cent and we widened the standard band considerably. In case people forget, since 1987 the standard band has been widened by 74 per cent and that is still not enough. It has been acknowledged by Mr. Cedric Sandford that this country is one of six western countries which have achieved tax reform in recent years. The general advice in his book, as I am sure other members of the committee are aware, is that we should achieve it by a policy of administrative measures over a number of years. The central theme of his book and the essence of tax reform is the broadening of the base, a simplification of the system and better administration. While I am prepared to acknowledge that all one would like to achieve in this regard has not been achieved, they are the principles we follow and that is the direction we should continue to follow.
I have made the point about reliefs and concessionary taxes and I do not want to restate them. Deputy Michael McDowell's point is correct as long as the base is so narrow and the people on high rates are paying a large amount. People will issue pamphlets on the eve of the budget and after it on BES schemes and film relief schemes and other schemes advising people what to do. Not many of those concessionary taxes remain; Deputy Rabbitte asked me last week to outline them in the House and there are few of them left. This year we are continuing to reduce the number and close off loopholes altogether or restrict the concession to what was originally intended.
We will have the opportunity during the debate on this Bill to talk about some of the reliefs, such as the section 35 reliefs and the film relief, the balloon leasing on which we have amendments, and the patent relief. We had to change the film relief even though we only brought it in a year ago; a smart tax practitioner worked out that if one gave a loan to somebody one could get a better benefit, so one put money into the scheme and took it out a few weeks or months later and gained from it. We have forced a reduction of the numbers of those who practice tax avoidance, which is legal. Last year a new relief was brought in and they charged into that area so we have restricted it in this Finance Bill.
I do not intend to say any more about the standard rating of relief. I looked at the areas which might be unfair. Subsection (2) (a) allows a person to claim 100 per cent relief for the first five years in respect of a mortgage and people who first claimed mortgage interest relief as long ago as the 1991 tax year benefit to some extent. They have entitlement to 100 per cent from now on and they will also get relief back to 1991. These are the people who have the difficulty; they require a break for a few years when they have bought a house and are trying to furnish it, and they often have the pressure of small loans to help them with marriage and other costs. They need a break in the first five years and this Government has introduced that. Previously the longest period was three years — which I brought in last year — and I have now moved it to five years and there is no de minimis reduction for that. It is a considerable aid for first time buyers.
Deputy Michael McDowell raised a fair point about tax credits and I am sure he would acknowledge that the points about the standard rate apply. I have no practical or ideological reasons for not moving on that issue, apart from the fact that one has to watch one's back every time one moves in this area, but since I have done that for a few years——
The Government has 100 TDs. Is it those the Minister is worried about — a hundred knives in his back?
As Deputy McDowell will appreciate, in the four or five weeks that I was in the House after the budget discussing these issues it was left to a few of us but they kindly all voted on it.
As soon as one takes anything from any category it becomes difficult to explain where it ultimately benefits. For that reason I set out from the start — and it is in the Programme for Competitiveness and Work— that the benefits accruing to the Exchequer arising out of the standard rating would go towards broadening the allowance. That is a commitment, in so far as the Minister for Finance can give a commitment, this Government has to live up to between now and 1997. If we were to take the benefits away and put them into a bottomless pit people would say that there is no benefit in it.
If two people live side by side in houses of similar value, is it justifiable that the person on £10,000 income for every £1,000 of interest paid should benefit by £270, and the person on £50,000 should benefit by £480 for every £1,000? I have yet to hear an argument to justify that. If we do not continue on in the line Deputy McDowell said, tax bands will never be widened. Every time an attempt is made to broaden the tax base, someone opposes the idea. If such thinking continues, we will never have tax reform.
I hate the phrase, "radical tax reform". I have served 18 years in this House. After the introduction of the budget or some other measure, someone will say; it is not radical enough, it did not go far enough and the Minister should have taken the final big jump. Deputy Lenihan used the same unoriginal clichés in the 1960s. We should stop using these clichés, because we have moved substantially on reform. It may not have been radical, but it merits us, in Cedric Sandford's book, as one of the best six countries in western Europe. That only takes account of what we did in recent years, and not since 1987.
On the specific question Deputy McDowell asked, tax credits on a universal basis could not readily be accommodated in the current PAYE system, which is allowance based. Tax credits would have to be converted into allowances and would make the system virtually incomprehensible for both taxpayers and the Revenue staff. It is desirable, but not easy to do. I would like to see the standing relief of interest as a start to that process. I would not rule out looking at further issues of credits in the future.
The Minister used disparaging terms about the concept of radical tax reform. I will never give up using that phrase. I am sorry to disappoint the Minister in that regard; he will have to hear it as long as I can use it.
It is not only Deputy McDowell who uses it.
What is taking place is incremental gradualism, which is a failure. If the Minister wants to know why his back is so exposed to the 100 knives every time he makes any change to the tax system, it is because——
There are often 166 knives.
There are a few Members who, if they can, plunge it from the front. The Minister is making such heavy weather of this matter because he has not fixed any targets. If the Minister wants to know why he made the progress between 1989-92 that Cedric Sandford writes about in his book, it is because he set targets. I know both the Minister and his predecessor, who is now the Taoiseach, tried to wheel away from the targets on occasions and there were major rows about it. Once targets were set, the punter on the street knew the direction the Government was taking. If one asked a person in Kildare Street to state the tax targets for this Government and if they read its programme, they would find some general flannel about widening the tax base for standard rate taxpayers but no specific targets.
If one does not set a target in the process of tax reform, the result is, as characterised by both the Minister's and the Taoiseach's tenure in the Department of Finance, the reform process becomes the residual.
What is left for reform when everything else has been worked out? The Minister would then say that there was little room for reform this year. If one sets targets and says that other matters such as expenditure become the residual, one will then achieve things. The reason the Minister is making heavy weather with the residential property and other taxes and is finding many knives coming from every direction, especially into his back, is because he is not showing where he is going and is not setting any tangible target which he could say he had achieved in four years time. That is a mistake. If the punters on the street know the direction the Minister is taking, they will support him if he reaches it. That was the attraction of issuing such reports in New Zealand; people could see the end results. If the Minister constantly hangs back from setting targets, interest groups will always feel justified in attacking him because they will claim that tax reform means reduction in money. Why should one take the downside when they do not know where the upside is going.
Deputy McDowell, by thinking we have moved nowhere on this issue, is falling into the trap I mentioned. When the Finance Bill was debated seven years ago — it was the first of the Mac-Sharry Finance Bills and as Minister for Labour, it interested me because it dealt with a number of issues that were relevant to employment — the rates of tax were 65 per cent, 58 per cent and 27 per cent respectively. The standard tax band is now 74 per cent wider. Corporation tax was 50 per cent; it is now 40 per cent. There were many allowances, reliefs and exemptions within the system; some 33 of 39 of them are gone. The widening of the tax base is substantial. It is still true that many people are entering the higher tax rate at too low a level, but substantial progress has been made, which will have to continue.
The same problems exist with every removal. Similar jitters existed among Deputy McDowell's colleagues when I was Minister for Finance in coalition with his party. In the 1992 Finance Bill, much of the business community went wild and many people thought I had gone "gaga". Deputy Rabbitte was the only person in Leinster House to support me. Deputy McDowell's colleagues had vanished.
That is because the Taoiseach was talking about, "a temporary little arrangement".
This matter must be dealt with cautiously and successfully. The idea that little has happened this year is also unfounded. The increase in tax allowances and bands this year is the highest since 1984. When increases were introduced in 1984, the tax rate was 55 per cent and the surcharge rate was around 70 per cent. Much progress has been made but more needs to be done. We have come a long way in the past five to six years.
I am disappointed at the direction the debate has taken; it has gone totally away from reality. We have gone on an academic discussion about tax reform that is very much removed from the ordinary person. The Minister said no one has put forward a good argument as to why two people living side by side should do nothing but accept these proposals. I will put my statement in terms that anyone could understand.
The maximum that anyone can claim on mortgage interest relief, including all of the ceilings, is £5,000. That is a mortgage repayment of £416 per month, which is not outlandish. The simple effect of the change in standardisation means that the value of that relief decreases from £2,400 a year to £1,350 a year. A taxpayer paying tax at the marginal rate is seeking the relief at the rate at which he is paying the tax. He loses £1,050 or a little over £20 a week. People can understand that statement. That has nothing to do with fluctuations in interest rates, but systematic standardising. It is 42.7 per cent in this year, 37.5 per cent next year, it decreases to 32.25 per cent in 1996-97 and to 27 per cent in 1997-98.
The Minister is probably dealing with people in the PAYE net, crippled with tax, trying to rear a family and provide their own home and not be a burden on the State, but they will lose out. I put it to the Minister on budget day that the annual saving to him from standardising VHI and mortgage relief at 1994 prices, was £55.4 million on mortgage interest relief and £25.4 million on VHI relief.
The Minister cannot take £80 million off the income tax reliefs without it affecting people. This is why people are upset, not because they do not understand their tax free allowances. The Minister said, and it sounds plausible, that only one in six taxpayers is affected by this. However, another way of putting it is to say that 160,000 people are affected. That number of people represents many marginal constituencies.
We can all twist the figures, but the self reliant, middle income sector which is paying for everything will have to pay more tax if people in this sector have substantial mortgage and VHI bills. That is the bottom line and it is something which people understand. It is robbing Peter to pay Peter. If one takes the increase of £175 in the basic allowance, the £500 widening of the standard rate tax band, such people are not better off. They are only better off through the abolition of the income levy which is a marginal adjustment and was last year's political banana skin, as on the outturn figures from the Exchequer it was never needed. The Minister therefore should not use this as his sole argument.
This brings the Committee back to the real Government policy, if there is such a policy. The Minister will recall that I had the good fortune to be on the "News at One" RTE Radio programme with him when he announced the changes to the Residential Property Tax. The Minister remarked that he wanted to see less investment in bricks and mortar. This represents an active policy on the part of the Government to discriminate against home ownership. This is apparent in many areas, such as in section 6 of the Bill, in Residential Property Tax, and the Taoiseach's comments in Killarney on the restoration of rates. Unfortunately I cannot be in the Dáil to question the Minister for the Environment on this. All of this systematically hits the householder.
I am far removed from this academic debate. I am dealing with people who are working hard, trying to pay their bills and their mortgages, trying to provide for health care who find that they will, collectively, be £70 million worse off. On mortgage relief alone, this amounts to £20 per week per person and £7 per week on VHI relief. To any ordinary person living in suburban Dublin this £27 per week represents quite a sum. They do not see a big upturn in the overall budgetary changes.
I regret that the Committee has made no progress on this issue and I will press my amendments to section 6 and my opposition to sections 6 and 7 as vigorously as I have in the past.
Mortgage interest relief this year will still cost the exchequer £141 million. It is the huge cost to Irish tax payers of home ownership. The figure is apart from all of the reliefs available under section 23, section 27 and other schemes that will be available and apart from the increased resources now going into public housing both through social housing and local authorities. The contribution of the Government to home ownership is still probably one of the biggest subsidies being given to anything in the State.
On 26 January 1994 I asked a parliamentary question to ascertain the saving to the Exchequer by the reduction in interest rates. In 1993, when interest rates were high on budget day, the Minister estimated the cost of mortgage tax relief. I asked about the outrun in 1993. The estimated saving was some £62 million less than the corresponding cost estimated for the 1993 budget. Thus the Minister has a huge saving on mortgage interest relief in any event because interest rates and mortgage rates are at an all time low. Why have a double effect by clawing back further reliefs?
There has been much hypocrisy here today. Deputy Yates was being honest when he raised the real issue of marginal constituencies. This is the great problem with this alleged taxation reform campaign by the Opposition.
Deputy Yates spoke of this measure affecting people. The Deputy should be honest and agree that any tax reform package, whether drawn up by his party or by the Progressive Democrats, will affect people. If the system is to be changed or replaced it will affect people in a detrimental way because it will automatically and inevitably involve the removal of reliefs in certain areas to have people taken out of tax shelters and so on.
In this respect the party which Deputy Yates represents is being less than honest in endeavouring, in the first couple of amendments before the Committee today, to take more people out of the taxation net altogether. Following on this the Deputy, in the amendment now before the Committee is attempting to undo the aim of the Minister to give himself more resources to achieve the objective he set in the budget to reduce the levels of taxation on the lower paid and to take more people out of the tax net.
The Deputy cannot have it both ways and he will oppose any attempt to introduce Residential Property Tax or rates. That, at least is the position of the Deputy's party although the Committee is not yet aware of where the Deputy stands on this issue. Deputy Michael McDowell has been less forthcoming than we would have believed, from his wonderful propaganda that it was the Progressive Democrats alone, when in Government, who were responsible for any taxation reform here.
Substantial progress has been made by Governments which did not include the Progressive Democrats in their make up.
The Deputy should read the history of the previous Government. The gun had to be put to its head constantly.
Deputy McDowell mentioned expenditure cutbacks. I should appreciate more specifics on this. That is the bottom line. It is all very well to throw out a phrase like that, but from 1987 onwards many Progressive Democrats Deputies throughout the constituencies supported the lobbyists to protect this school, that hospital, that welfare sector, opposing every cut introduced by the Government. That is the truth.
It is not.
I heard Deputy Quill in Cork North Central constituency and former Deputy Wyse in Cork South Central constituency telling the punters that they would try to get the Fianna Fail Ministers to stop cut backs in Government Departments. It is a bit much to have to take the nonsense on the Committee today that the Progressive Democrats are in favour of a comprehensive set of Government cut backs. I ask the party to spell these out and to advise the Government where it does not want the Government to spend money. Tell the Government in what areas of Education the party does not want money spent.
I have done so. Public sector pay, for example.
People have been crying out for a long time about the need for greater resources for mentally and physically handicapped people in terms of educational resources and so on. Huge arguments have been made on the lack of remedial teaching at primary and secondary level.
Ministerial responsibility.
We all accept that there is a lack of resources in that area. However, neither Deputy Michael McDowell nor his party will spell out the details of where cuts must be made to fund whatever rapid reduction in taxation the Deputy requires.
This issue is about balance, about achieving some degree of taxation reform while maintaining basic rights and services, especially in education and health to which people are entitled. At the end of the day, then it boils down to political philosophy and whether one is prepared to let people sink or swim.
Deputy Martin's contribution is fair enough but it overlooks one point made a number of times to the Deputy today, that there are 100 members of the Government. The Government is steel proofed against Deputy Yates' marginal constituencies, if the Minister wishes to address some of these questions.
It took three years to address them.
I address the situation from a different angle to Deputy McDowell in so far as I believe in wealth redistribution. There is a problem with the Committee in so far as an amendment which would impose a charge on the people cannot be moved. I have put down an amendment, for example, on, horror of horrors, a wealth tax. I make no apologies for doing so. It disturbs me that it is a matter of fashion, that something becomes unfashionable in the greedy 1980s and 1990s. However, if inordinate wealth is being made here by the workers, I see nothing wrong with their being mechanisms to redistribute some of it.
This is how I think some of the improvements for which I am arguing can be paid for. I accept the Minister has shut off some of the loopholes, shelters, and exemptions that existed. The day after the budget, on the front page of the Irish Independent, Brendan Keenan doubted if the Minister could jump the chasm in short steps. This is exactly what has happened. It has been proved at the tax reform stage we have now reached that one cannot jump the chasm in short steps. Our population has a pyramid-like structure, a large number of people depend on those at work. We have many old people and a preponderant number of young people compared to any other economy. Deputy Connolly referred to this earlier. The Minister resorts to fiddling around between those who pay tax.
Amendment, by leave, withdrawn.
Amendment Nos. 26 and 27 not moved.
Sections 6 and 7 agreed to.
(Interruptions.)
On 27 March I responded to the budget and my position has been consistent since then.
There is no need for a repeat of your Second Stage speech.
I want to give as much of a lift-off to the fight back as possible but I do not want to be misconstrued in the process.
In fairness to Deputy Rabbitte, he has been virtually on his own here today in defending the Labour Party's interest.
He will come back to us.
It is his natural home.
NEW SECTION.
I move amendment No. 28:
In page 17, before section 8, to insert the following new section:
"8.—For the year of assessment 1994-95 or any subsequent year of assessment a deduction not exceeding £1,500 shall be made from the total income of an individual in respect of payment of fees by him in respect of, and other expenditure related to, attendance by dependent children of his at an institute or other establishment of higher education.".
This amendment deals with the very high cost to parents of their children's education, particularly higher education. We have all come across cases where people have been just over the income limit to qualify for a higher education grant. They may have sons or daughters close to each other in age and may have to pay for the costs of one of them in UCD, one in Trinity and one in an regional technical college in Waterford at the same time, and this is literally bleeding them dry. I am thinking particularly of teachers, both primary and post primary, who are just over the income limit. This has imposed severe constraints on them and, in some cases, has denied people the opportunity of sending their children to third level education, because they cannot afford it.
I propose the introduction of a tax free allowance for bona fide third level education fees and directly related expenditure. I have listened to lectures from both sides of the room, which said I have not stated how measures I have advocated can be paid for. I could give detailed figures of macro-economic forecasts, pre-budget growth tables and of how extra spending is whittling away many opportunities for tax relief. In this specific case, I will nail down how I think this could be financed. There has been an attempt to pay for such cases by the back door, that is through covenanting income. This was raised during the debate on last year's Finance Bill. This system is very expensive. It cost the taxpayer £44 million last year and this is rising. A modest variation of covenants would enable the Minister to introduce a scheme of tax relief for higher education expenditure. Some of the voodoo doctors of tax reform would be appalled at this prospect and would see it as anathema to what we are trying to achieve.
The sole raison d’�tre many people have, in both the public and private sector, to work hard and seek promotion is to give their children the opportunity of a good education and career. They will never be Michael Smurfits or the chief executives of their firms. Their motivation is wholly commendable and they should be assisted in a small way. I would not make any exaggerated claims for this amendment. During the last general election campaign, the then Minister for Education, Deputy Brennan, promised that all third-level fees would be abolished, regardless of means. I am sure the Labour Party would not oppose this. No progress has been made on this. This amendment is a modest step and I ask the Minister to accept it. He could finance it by revising the covenant scheme.
I will not repeat my ideological argument against this amendment. It is a step in the wrong direction. It provides for a tax allowance of £1,500 for parents of children who attend third level education, regardless of the number of children who are doing so. This proposal is worth twice as much to the person who is paying the 48 per cent tax rate than to somebody paying the 27 per cent rate. It would favour a better off family sending their sole child to school rather than a large family with a lesser income trying to send a number of children to school. It underlines the futility of using the tax system to direct, supplement and encourage people's behavour through the tax system. The point about lower marginal rates of tax and tax thresholds is that the Revenue Commissioners and the Department of Finance give up playing God, telling people what they must and must not do and encouraging people to do what those Departments consider to be socially advantageous.
I am not convinced by the argument advocating the specific targeting of covenant relief to deal with this. In many cases covenant allowances are sought to sustain poorer relatives and have nothing to do with education. I cannot see why poorer sisters-in-law of people who have incomes should suddenly be singled out to pay for the education of the relatively well-to-do at twice the rate that those who do not have a decent income have to pay in terms of this kind of expenditure. The amendment is consistent with Fine Gael's policy of attempting to portray themselves as the party of the family. It is part of their attempt to place themselves in a Christian democrat, conservative position on the Irish political spectrum. As far as I am concerned, this does not wash. The Minister prudently quoted from Sandford's book and I was just checking the references to him. Unfortunately, he does not feature very often in it. However, it is stated in that book, having praised the Progressive Democrats——
What is its title in case we have time for light bedtime reading?
We will circulate it to all the Members in case there is a reference to them.
He concludes his discussion of the political will for tax reform by saying that whereas the FF/PD review spoke of removing economic distortions and curtailing the vast range of exemption shelters, allowances and concessionary rates—that was what we were talking about — the FF/Labour programme promised to maintain the basic tax reliefs such as mortgage interest and VHI relief and to provide further relief for mortgage holders. It also promised to extend the business expansion scheme which was due to end in 1993 and to abolish the cap on the amount which could be invested in it. He finishes off by saying — and I think that it is a QED point — that it is clear from where the main reforming drive had come. That is from a disinterested observer; he is not a member of our party, as far as I know.
We must face up to the proposition that one can either have high tax rates and hedges or low tax rates and hedges about which the Government is ambivalent. Fine Gael has gone from one position to the diametrically opposite one. Politically it makes sense. As at least it is adopting a position which we can all understand. However, I appeal to the Government not to be worried about what Fine Gael is doing but to concentrate on what the ESRI, the NESC, the OECD and the tax commission all suggested, which is to bring down the rates and widen the tax base.
Deputy McDowell offered the view earlier that the sooner his party return to Government the better, which is obviously a matter of opinion. However, I certainly would like to see Deputy McDowell in Government because I am a long time admirer of his impeccably logical positions. In this case he would introduce a new tax structure which would have a 40 per cent rate of tax on all income above £15,436. Then he said that he would prefer a system of tax credits for the rest. Therefore, it is impeccably logical that it would benefit the lower paid if the concept of tax credits was applied across the board. However, the high, very high and super high earners will do very well under Deputy McDowell's overall structure.
I do not know in the kind of economy which we operate if it is possible to let it rip like that. He accused Deputy Yates of having an eye to the constituencies. Deputy McDowell has not been above that himself, I remember the time when he was the first advocate of a residential property tax.
No, I was not.
Well, he was a very vigorous exponent of it if he was not the first. His colleagues reined him in on that. I wish to tell Deputy Penrose that way back then I opposed the tax on——
The Deputy opposed it?
That is right, I opposed the tax. I make no apologies for it on behalf of people whose homes are in hock to the building societies. That has been my consistent position.
There is some truth in Deputy McDowell saying that what Deputy Yates is doing here is contrary to the logical position which he expounded with regard to credits. However, the reality is — and I know that Deputy Yates will not want me to hear me say this — that the self employed are manipulating the higher education grants scheme in a disgraceful fashion from the point of view of the PAYE worker.
Deputy McDowell might be right that the place to address the matter is in the higher education Act rather than here. However, for example, Deputies representing farming constituencies know that the proportionate representation in higher education of the farming community — including the chairman's constituency — is totally disproportionate to their numbers in society and to the number of PAYE workers. They can contrive in the relevant year to artificially reduce their income. As a result, — and I recently got the figures from the Minister for Education — they are totally disproportionately represented and PAYE workers on middle incomes are disallowed grants under the Higher Education Authority system.
It was brought home to me in the most striking fashion when a farm manager — not from my own constituency but the adjacent one of Kildare — came to see me in my clinic three or four months ago to point out that his daughter did not qualify for the higher education grant although the farm owner for whom he was working did. That was as striking an example of this as one can get. He thought that he had arranged his income in terms of bonuses, overtime or whatever so that he was within the £17,000 limit. In the event, he was over the limit and was disallowed but the farm owner got it for his son. That is a gross inequity.
Deputy Yates proposes to tackle it by allowing a deduction here in respect of a PAYE worker. However, the higher education Act must be amended. There was a report prepared or chaired by someone called De Buitléar recently on the inequities in this scheme but the Minister for Education has sat on it, I do not know whether she will make it available to us after the European elections. She brought in cosmetic changes but I cannot say whether she will tackle the real issue identified in the report. It is a scandal that PAYE workers on relatively low incomes do not qualify and that children of the self-employed do. For that reason, I support Deputy Yates's amendment regardless of whether — with all due respect to Deputy McDowell — it is logical.
I broadly support Deputy Rabbitte's comments. I understand Deputy Yates's motivation in moving this amendment to provide some relief for the PAYE sector in terms of third level education fees and costs. Whether the taxation system is the best vehicle to address the inequity is highly questionable and Deputy McDowell made valid points in that respect. I suspect that it is not, from an equality point of view, the best way to address the imbalance.
However, it is disgraceful that the PAYE sector has been discriminated against in the allocation of third level grants and access to third level education in general. I tabled a question last year on this matter and the imbalance is very clear. The PAYE sector does very badly in terms of receiving assistance from the State, basically because the existing thresholds are far too low. I have long argued that we should abolish third level fees because often the State does not get the recognition it deserves from the public for the degree of investment which it has put into third level education. By and large, fees account for a very small proportion of the actual cost to the State and the taxpayer of sending someone to second and third level education. In many ways the fees distort the picture and the State is doing a very bad public relations exercise for itself regarding the overall figures.
I do not have the exact percentages with me but I understand that when the former Minister of State, Deputy Brennan, moved this issue some time ago, the figures were not horrendous. If one takes tax covenants into account and subtract what the State is losing in that regard from what it would cost to abolish fees completely, one is not talking about a highly significant amount of money. I favour the abolition of fees because it is the only foolproof or safe method of getting rid of the inequities that exist for the PAYE sector. Under any other system, whether it is thresholds or whatever, the PAYE sector suffers. We all know the bottom line at the end of the week or the end of the year.
I met a bus driver recently who lost out by £400 or £500 simply because he did too much overtime. Nobody told him six months previously that he should cut down on his overtime because he would go over the threshold. He had no tax consultant to advise him and he lost out. It was a tragic situation. As a student I also lost out. My father was a bus driver and as he was over a certain level and did overtime, we did not receive any assistance. Most students from PAYE families work summers. It can be galling for many of them in colleges where people of far greater wealth can go to the pictures and enjoy themselves or benefit from ESF funding, etc. I have total sympathy for what has been said in this debate. I prefer the route of the complete abolition of third level fees. Someone needs to make a Donough O'Malley type leap in that respect.
I agree with Deputy Rabbitte on this point. I gained by obtaining a scholarship because my father was a county council worker and therefore on a very low wage. He was able to qualify and without it I would not have been in a position to avail of third level education. Of all the anomalies I have encountered in public life, the basis for assessment and the eligibility criteria for higher education grants rankles most with people who pay into the taxation pot and who receive the least in terms of benefits in return. A number of categories of workers have been mentioned. Teachers figure prominently, as Deputy Yates said, in the profile of those who fail to benefit. Psychiatric nurses are afraid to work on Sundays, which perhaps is worth time and a half or double time, because it would drive them over the thresholds. Factory workers on three cycle shifts will also be excluded if they take night time shifts.
This area must be tackled and there must be a radical overhaul of the eligibility basis of assessment and the criteria involved. One should not be excluded from obtaining third level education, if one has the academic ability, because one's parents, who have already been drained by sending a child to college, do not qualify. In such cases, I know of people who went to the credit union for fees and maintenance to enable the first child to go on to third level. However, they are unable to send the second child, who has equal ability, because they cannot carry the financial burden.
We are talking about treating children equally. The situation is totally unfair and needs a radical overhaul. I am very much in favour of abolishing university fees. If one is good enough to go to college, one should get in and perhaps there should be a means test in relation to the maintenance element of the fee. Deputy Rabbitte is correct. PAYE workers have borne the brunt of this inequitable system. It is incredible that we are still basing assessments on gross income. People do not see the money at all because it is taken before it ever gets into their hands. In the medical card system, there was some recognition that one does not receive the money into one's hand when the PRSI element was deducted. It is incredible that in 1994 we are basing assessments on gross incomes.
Rather than tinkering, we should examine the second part of that report which deals with the eligibility criteria. The first part dealt with administration and changes in that area. The eligibility criteria must be examined immediately. Covenants have a cost implication for the Exchequer. Deputy Yates mentioned £40 million. If that and the cost of providing fees for all those who qualified were examined, I am sure very little in terms of revenue would be required to make up the balance. I do not want this issue put on the long finger by the Government. I will be pressing it and I intend to pursue the issue of higher education grants and access to education in general. It is time to stop the pretence. People on low incomes are precluded from attending third level education. Unless one has a deep pocket or a wealthy benefactor, one cannot go to third level.
Could we return to the subject of income tax?
I do not know if you read the amendment, Sir, but it is about third level education and the exclusion of a large number of people who are unable to attend third level. It is worthwhile initiating a debate on this topic. I hope the Minister and his colleagues will take note and examine this matter sympathetically at Government level soon.
I support the intention of the amendment. I fully agree with the comments about the way PAYE workers are treated. It is not a perception but a fact that PAYE people are badly treated regarding educational grants or fees as compared to the self employed. The cost of putting a child through third level, covering fees and maintenance, is colossal. The image often portrayed is that only the upper middle class are subject to fees and that everybody else qualifies for a grant. This is untrue because many people attend private colleges in Dublin and many of them are on the 27 per cent rate. There is no help for the people on PLC courses.
Covenants give some help and the suggestion in the amendment has much validity. There are so many rules and regulations attached to the covenants that they appear to try to rule out as many people as possible. One cannot covenant one's child until he is over 18 years of age. The result is that many people fail to benefit from covenants in the first year of college. It is an extraordinary rule. Most people might be 18 or over, but a significant number do not qualify in the first year just because the child is under 18.
The 5 per cent limit on a covenant is all right if one has one child but not if one has more. I know of one person who has four children at college this year. After a couple of months they were still being refused because it was considered that one of the children was attending a course which was deemed to be part time. It was a full time course as far as the student was concerned but it was geared so that one could do the course by getting off work at four o'clock in the evening. Some bankers did the course that way. There appears to be a million rules and regulations to eliminate people who might qualify.
Overall, there is much merit in the amendment. Whatever way it is to be tackled, I hope it moves fast because the present system of grants is very unfair.
I do not want anything I say to sound as if I am happy with access to third level education. When I was a student in UCD I worked on the registration every year with a number of other people and I saw the registration cards which every student had to produce and I saw who got grants. We discovered that the number of people getting grants — given their backgrounds — was skewed. It was only later we discovered that, in fact, 2 per cent of people in UCD at that time were coming from working class, non-agricultural backgrounds.
That is the point that I want to make about this. If Deputy Yates proposal was accepted in effect, what it would mean is that the better off one was, the lighter would be the load on ones pocket for third level education. It would not really do anything to assist the PAYE workers. It would mean that someone with an income like mine would get twice as much benefit from this in respect of one child as somebody with half or a quarter of my income in similar circumstances. It would cement in the inequality. I agree with the point that if access to third level education is unfair at the moment, which it is, and it unduly favours the agricultural community who can move their goal posts accountancy-wise to suit their purposes, whereas people who are in employment cannot. The answer is not to use the tax system to achieve reform but to tackle access to and funding of third level education.
I am by no means convinced that it was right of Deputy Brennan, when he was the Minister for Education, to ear-tag the allowance in respect of covenanted income and say "That's it", because most people think that it is available only for third level education purposes. I know many people share their incomes with relatives who have nothing to do with education, thus giving money to sustain a poor friend or relative in some kind of reasonable circumstances. They part with their income and diminish it in order to support another person at arm's length from them.
Before it becomes generally assumed that this fund is available to help third level education fees to be paid by all, I would like everyone to remember that there are many people who would suffer much hardship if that is simply chopped.
On amendment No. 28 it is well known that the Government has for some time been examining third level education grants. The Minister for Education is to publish the report of a working group which has just about completed its work. The Government will then have to examine it. My Department has already started reviewing the covenant system. There is general agreement by all members of this committee that the cost of third level education is high when one takes account of fees, transport costs, maintenance costs, tutorials and books that are all part of a three, four or five year course, depending on the faculty. Much money is being spent on that area. The Government spent £324 million on third level education and Deputy McDowell is right regarding the fact that £40 million is being spent on covenants. The vast majority of that is for third level education. Religious communities used to recommend that families with incapacitated relatives or people in need who are marginalised in one form or another, use the relief. The money is being spent by and large. In the debate so far, including the Government discussions on it, there is a feeling that maybe not all the recources required to deal with this should come from the Exchequer. I would agree with what Deputy Yates and others said on that. What we are really talking about is the circular movement of this money to make sure that it is used to target the people most in need and not, people who in one way or another can present their accounts in one way or another. I hope that that review will be available shortly.
I intended to make some changes to the covenant position this year but I thought it would be better to wait until we moved overall. It is one of the areas in which I think we would be better off doing it all together so that people can see what money is there as well as what else is needed. I do not think we will save anything for the Exchequer, because of the numbers of people in third level education and the demand for it.
Everyone has spoken on the purpose of the amendment which is to provide a tax deduction up to a maximum of £1,500 a year in respect of expenditure and fees and related expenditure incurred by dependent children of the taxpayer. The introduction of additional expenditure-related tax relief such as that proposed would narrow the tax base, there is no doubt about that. The amendment would be costly —£41 million in a full year — and it is not the direction we would be going in. It would run counter to what I have been saying all day; that the tax base is too narrow and should be widened. We must keep the current level of taxation to the minimum consistent with careful budgetary management and focus whatever resources are available for income tax relief on the lower to middle income groups. In this case we are already, as an Exchequer cost, spending what is necessary in this area.
We have to look at that and Deputy Yates clearly has a point in saying it must be targeted. I am not arguing against the principle of what he is saying. However, to make a special concession for these education expenses would conflict with the key principles and invariably generate pressure for tax relief to other taxpayers arising out of their various personal and domestic circumstances which they would regard as being equally meritorious and favourable for tax treatment. The thrust of the Government's income tax policy is to try to reduce the burden of taxation for all taxpayers, particularly those in the income groups I mentioned. I reiterate to the committee, and to Deputy Yates who moved this motion, that I hope the report will be published later this year. The review will then take place, we will simultaneously undertake a review within the Department on the covenant income and then try to make the necessary changes for 1995.
I am happy to withdraw my amendment although I may resubmit it on Report Stage. I would like to make one point regarding a matter raised by Deputy McDowell, which was that this would help better off people. However, if you are on 27 pence in the pound tax you would be getting the grants anyway. Therefore, what I am talking about would help the people on the high rate of tax.
Amendment, by leave, withdrawn.
NEW SECTIONS.
I move amendment No. 29:
In page 17, before section 8, to insert the following new section:
"8.—(1) For the year of assessment 1994-95 or any subsequent year of assessment a deduction not exceeding £1,000 shall be made from the total income of an individual registered as a full-time tutor at an institute or other establishment of higher education in respect of bona fide expenses incurred by that individual in the discharge of his functions.
(2) For the purposes of this section, the Minister for Finance, following consultation with the Revenue Commissioners shall specify those expenses and the conditions under which such expenses fall to be deducted under subsection (1).".
We need not spend a long time on this amendment. I was asked by the Irish Federation of University Teachers to table it. Lecturers and tutors incur particular expenses in the course of their work. Such expenses include copies of books and journals that are not available in libraries but which must be acquired to keep abreast of the latest technology and information, attending conferences and paying subscriptions to professional organisations. It is not a big issue but it is the job of Opposition spokespersons to put forward such arguments.
Perhaps the Minister would accept the amendment. If he cannot do so perhaps he would ask the Minister for Education to consider this demand in the form of additional expenses.
I can check this matter. If the employee vouches the expenses incurred in furtherance of their work, such as periodicals, journals or necessary books the deduction would be granted.
Tax deduction?
Yes. An administrative procedure which does away with the need for employees to verify in detail all the qualifying expenses incurred has been adopted whereby the Revenue Commissioners set flat rate deductions for categories of employees and deductions are automatically granted. Where the expenses incurred by the taxpayer are greater than the flat rate amount the taxpayer is entitled to lodge a vouched claim for the higher amount. School teachers and third level academic staff are among the categories of employees for which flat rate deductions are available.
The question is, are they aware of that arrangement and is it insufficient or are they seeking an additional reduction? Perhaps it would be best if I set out the position and Deputy Yates could then consult with the federation.
I appreciate that. The correspondence to the university teachers from the Revenue Commissioners stated that the maximum claim for a professor was £250, a senior lecturer £200, a college lecturer £170 and so on pro rata. It was last reviewed in 1990-91.
I agree with the Minister that it would be best to deal with the matter through correspondence.
Those figures are the flat rates. If they can vouch for amounts above that they can get the deduction.
We did not get a chance to debate amendment No. 26. Perhaps the Minister would send his response to that. It concerns the discrimination against Irish luncheon vouchers.
Amendment, by leave, withdrawn.
I move amendment No. 30:
In page 17, before section 8, to insert the following new section:
"8.—Section 178 of the Income Tax Act, 1967 is hereby amended, in respect of higher remuneration by the substitution of ‘£15,000' for ‘£1,500' and it is hereby provided that only sums in excess of £500 shall be declarable in form P11D.".
I am justified in proposing this amendment although the Revenue Commissioners will not agree with me. This concerns the definition of a higher remuneration earner. In the mid 1960s somebody who earned more than £1,500 was deemed to be a higher earner. However, that figure has not been increased since then. This limit is caught in a time warp and it causes people much difficulty.
The second matter concerns the P11D. If an employer gives an employee a Christmas box, for example, a bottle of whiskey, or a petty cash item, for example, a sum of money when the employee is going on holidays, the item must be declared in the P11D to the Revenue Commissioners. This requirement only encourages the black economy. We must be realistic and introduce modern thresholds in this definition.
This amendment was discussed with amendment No. 26. It concerns the level of emoluments at which employees become liable to tax on benefits in kind and the reporting of benefits in kind.
The amendment seeks to have the emoluments figure raised from £1,500 to £15,000. It also proposes that only sums in excess of £500 should be included in the P11D form. The limit of £1,500 below which employees are not liable to tax on benefits has not changed since the legislation was introduced. This has been examined in the context of the circumstances that then pertained and developments since then. The legislation was introduced in 1958 and benefits were not available to the majority of employees at that time. The exemption for employees below £1,500 was more cosmetic than real. There were no major exclusions from the charge when the limit was set.
In recent years the concept of tax efficient remuneration has played an increasing role and it is no longer confined to higher paid employees. Any measure which results in particular forms of remuneration getting preferential treatment is contrary to the principle of broadening the tax base. The experience of the Revenue Commissioners has been that where a form of remuneration is not taxed or taxed lightly such forms tend to proliferate at the expense of taxpayers. If the limit of £1,500 was increased as is proposed in the amendment, there would obviously be a switch to avail of the more favourable tax treatment of benefits and the consequent reductions in tax yields. In addition, while the income figure of £1.500 is inclusive of chargeable benefits it is very difficult to police. Any significant increase in this would probably put the yield of many of the other benefits, such as cars and preferential loans, at risk.
The proposal that only items above £500 should be returned by employers when completing the P11D form is not realistic. Any such limit would effectively become an exemption limit and would significantly affect the yield not only from benefits in kind but also from tax on ordinary wages. Such a provision would lead to a switch to this form of remuneration. That is what happens. If there was a limit of £500 in the reporting requirement many of the significant benefits and prerequisites would not be charged. Items such as club subscriptions, health insurance and individual vouchers with a face value of less than £500 — many telephone bills and life insurance — would not be returned.
What is the present limit?
It is £150.
Would the Minister agree that the definition of a higher remunerated person as somebody who earns over £1,500 per year is not credible?
It is a 1958 definition. It has not changed.
Would the Minister consider increasing it?
The last time this issue was discussed in the course of a debate it was suggested that even the most trivial benefits had to be returned. That is not the case. Small isolated benefits consumed on the premises would not have to be accounted for. A benefit provided at Christmas whose value was not significant would be considered trivial. The provision is administered in a realistic and sensible way. I assume that if the item was worth marginally more than £150 that it does not cause great difficulty.
Amendment, by leave, withdrawn.
NEW SECTION.
I move amendment No. 31:
In page 17, before section 8, to insert the following new section:
"8.—As respects the year 1994-95 and subsequent years of assessment, section 4 (benefit of use of a car) of the Finance Act, 1982 is hereby amended—
(a) in paragraph (a) of subsection (3) by the substitution of '20 per cent.' for '30 per cent.' (inserted by section 8 of the Finance Act, 1992),
(b) by the substitution of the following subparagraph for subparagraph (iv) of paragraph (b) of subsection (9):
‘(iv)the original market value of a car is the price (exclusive of Value Added Tax and Vehicle Registration Tax) which it might reasonably have been expected to fetch if sold in the State singly in a retail sale in the open market immediately before the date of its first registration in the State, under section 6 of the Roads Act, 1920, or under corresponding earlier legislation or elsewhere under the corresponding legislation of any country or territory.'.".
This is a genuine issue which affects many people. It relates to benefit in kind tax treatment of people who need to use their car for their jobs. The matter goes back to the Finance Bill, 1992, the first such Bill introduced by this Minister.
The Minister may have received representations from the Sales and Marketing Administrative Union of Ireland; I have received their representations and I consider them reasonable. They set out a table from 1992 to 1997. Over that period there was a sliding scale which meant people had to pay more tax on their cars. Most sales representatives who use their cars would drive 30,000 miles in a year, which involves driving 600 miles per week. That means the car is used full time for work purposes; such a level of driving cannot be explained as being Sunday family outings.
In 1991 such people did not have to pay any tax, nor did people only driving 25,000 miles a year. In the tax year 1996/1997 people who drive between 20,000 and 25,000 miles per year will be rated at 50 per cent for benefit in kind tax purposes. This year, people who travelled 30,000 miles were assessed at 30 per cent; next year it will be 35 per cent; and after that it will rise to 40 per cent and then 50 per cent.
The entire value of some people's pay increases under the Programme for Economic and Social Progress and theProgramme for Competitiveness and Work has been wiped out by this tax table. They are being butchered and they have a good case. This matter does not concern the general benefit in kind tax scheme; it refers to full time professionals who travel on the road selling products in an increasingly competitive environment. Many of them work on a commission basis and find it hard to keep going. They have been greatly affected by this tax.
The purpose of my amendment is to ask the Minister to look again at this scale of assessment for benefit in kind. Sales representatives feel they get no sympathy from the Revenue Commissioners or the Department of Finance because the public sector work on a mileage expenses basis, whereas the private sector is caught by the tax system. The culture is different and they feel there is no understanding of how they are affected. This may not be a fair perception but it is how they see it.
I cannot speak for my colleagues in Revenue or the Department of Finance but having looked at the costs I imagine public servants would opt for company cars because they would be far better off. Mileage allowances never equal the value of a company car in any comparison I have seen. That is not to say I have no sympathy with the Deputy's point.
My experience as a county councillor and as a Member of the Dáil is that I have no complaints about mileage rates. Perhaps TDs receive a much higher rate but it is not ungenerous in comparison with what one spends on one's car. I am not asking the Minister to cut the rate.
Deputy Yates would know the system is slightly different and there are also differences between the sliding scale and the county council rates.
I am a Dublin Deputy and I live 2,000 yards from the House. I receive nothing for my motoring expenses as a Deputy. I feel badly disadvantaged by the present system and rural Deputies are getting away with murder.
From those remarks it seems Deputy McDowell is losing money simply by being here. I can well understand how he feels aggrieved.
The Minister has ingratiated himself with the motor industry through some of the changes he has made in this year's budget. However his lack of flexibility on benefit in kind is a matter of ongoing disappointment. He will be aware the principal sector of new car sales is the company car sector. There has been a decline in new car sales over recent years. I appreciate this is an exceptional year because there is pent-up demand and hire purchase costs are down, which means car sales will increase dramatically in any case.
The motor industry employs 38,000 people and they have had a difficult time. New car sales in 1993 are at their lowest levels for six years and the figure is much lower than that for 1981. There is a case for relaxation of benefit in kind assessment. One of the reasons for the influx in car imports is because employees do not want new company cars because they will be penalised in their tax bills. They would prefer imported second hand cars and to have the difference made up in salary instead of the benefit in kind. This has led to a drop in new car sales.
I appreciate the changes made in vehicle registration tax, but for the small group of sales representatives there is an undeniable case that their quality and standard of living has been greatly affected by this sliding scale up to 1997. I ask the Minister to accept the amendment, although he has not accepted any as yet. He should also consider altering the sliding scale.
I may not have accepted any amendments but I have not seen any which would be cheap to implement. I am not without sympathy for the category of people mentioned by Deputy Yates and I have met the distributive workers on many occasions. I have discussed this issue with many people. We tried to find a definition of commercial travellers over the last 18 months and I would certainly examine such a description if it was devised.
I acknowledge Deputy Yates's comments about vehicle registration tax and other factors which have helped the car market. I also accept the pent-up demand will not last forever. Other factors will also not last, such as low interest rates and replacement of fleets. That will return us to a lower level.
I believe there were 92,500 company cars in the State before we changed the system. Half of those were paying no tax under benefit in kind; the figure was of the order of 45,000. Of the rest, half of those were claiming some relief and few people were paying the full amount in benefit in kind. At that stage we had the highest number of company cars per 1,000 in the OECD, according to a Financial Times survey in 1992. We were receiving returns for high mileage rates because people were claiming for driving from home to the office and thereby paying no tax. That was not right. If they were to be allowed to do that, so should everyone and we would have to change the tax system so that everyone would be able to claim for cars.
Sales representatives were aggrieved by this. I acknowledge that rural Deputies such as yourself, Chairman, and Deputy Yates have to do a good deal of driving. Sales representatives may be on the road from Monday to Saturday. I accept they may not be getting any compensation for that — when I was in their position I did not get anything either. These people drive many miles and I acknowledge that it is not easy to sell goods in four or five counties in the same number of days. It is a difficult job at the best of times. To assist this category of sales people amendments were made in 1992 and if the car is not available for private use, there is no BIK charge. Some sales people were able to restructure their work but the argument is that if they arrive home late on Saturday night it is not always possible to return the van to the yard and collect goods. I accept it is not always simple to do that. I am told there are approximately 4,000 workers in this category and if one includes repair workers there are approximately 8,000 people. We could deal with this if we could stand over the figure.
In the past, people who did not need a car for work were using it as a perk, increasing their mileage and paying no tax. That is an abuse. I spoke to the trade unions and representative groups about this during the year and they are trying to find a definition for this category. Next year, because of the five year phased-in amendment this becomes an issue for some of those categories. I am prepared to look at the category of full-time sales people on the move, but I could not find a definition which would adequately categorise a representative who parked the car in the Ilac Centre and walked around all day, who said he needed a car as much as a person who drove around the west coast for a week. That is still the position.
The Minister referred to people who must return their vans at night to the yard. How did he manage with to his own van?
That is not a relevant question.
Sales representatives have told me that the changes mean their tax bills will be increased by up to £850 per annum. The Minister has asked how to define this category of workers, but I thought the Minister had already established criteria in order to produce this table. For example, someone who drove 25,000 miles in a £13,000 car in 1991 paid no tax on benefit in kind. The amount assessible to tax at the end of the five years is £1,950. They must pay £936 extra at the rate of 40p in the pound. One can see how a tax increase of £200 a year is wiping out their pay increases, especially if they move to a higher tax rate. This could be critical for them.
We changed that in 1992. There is a minimum charge regardless of the mileage done. Under the old system, if one went over a certain limit, the BIK charge was wiped out. Now there is a minimum charge. When the 1992 amendments are fully implemented, those commercial travellers who travel over 30,000 miles will only be charged 25 per cent of the 30 per cent rate, which in effect is 7.5 per cent. I have sympathy for this group. I changed the system to help them at the time and they are now receiving a benefit. If the Deputy could isolate that group from the 92,000 car owners it would help, but this became a way of paying people rather than paying them an income.
Amendment put and declared lost.
NEW SECTION.
I move amendment No. 32:
In page 17, before section 8, to insert the following new section:
"8.—Where payments made by the Department of Agriculture, Food and Forestry under various European Union headage or premium schemes are delayed to beyond the accounting year or tax year of the year of entitlement, they shall be assessable to tax in the year of assessment in which they were eligible for payment and not the year of assessment in which they were paid.".
I have no doubt this amendment is close to Deputy Rabbitte's heart because it relates to headage payments to farmers. I am sure it is a big issue in Tallaght and Dublin in the European elections.
In north County Dublin.
It is not a significant amendment. Perhaps the Minister could clarify whether all EU payments, including headage payments, ewe premiums and slaughter premiums are liable to income tax, because they should be. I assume that farmers declare them for income tax in the same way they would declare a cheque from the mart. However, there are seven and eight month delays in issuing these cheques. This could be due to standardised delays and cash flow difficulties in the Department due to errors made by farmers, or excessive pressure on staff in district veterinary offices.
If the cheque for the 1992-1993 tax year is not paid until after the 5 April 1993, and the entitlement for 1994 is paid on 1 January 1994, the two payments are made in the one tax year. The marginal rate of tax will apply to the year in which both payments fall due. Individuals have asked me and my party colleagues to table an amendment to ensure that income for a certain year is taxed in the year of entitlement. Farmers in disadvantaged areas rely on the sheep headage payments for their income and the set aside money may be their principal income under the CAP reform. I ask the Minister to ensure that income for a certain year, although not paid in that year, will be taxed in the year of entitlement.
I support Deputy Yates' amendment because it is fair to allow people to spread their income on an accruals basis to avoid paying the high tax rates because all their payments arrive in the same year. I am amazed that Deputy Yates's amendment got past the Bills Office. I thought it would have said the amendment could adversely affect people and that it amounted to the imposition of a charge. Undoubtedly what Deputy Yates said is fair. Those in receipt of these payments should be able to opt to treat them on an accruals basis and to average out their income over a period rather than have all their money coming within one accounting period.
The purpose is to provide payments to farmers under the headage scheme or the other schemes mentioned by Deputy Yates, which are paid in a particular tax year. Those due in an earlier year should be charged the tax for the year to which they relate rather than the year in which they are paid. I understand that the normal accounting practice is that when a farmer's accounts for a particular year are being prepared amounts received in that year are included in the account, although they may not be paid until a later period. On that basis, the aim of the amendment is already provided for under accounting and taxation procedures.
Deputy Yates may be referring to farmers who avail of the farm profile, which is a simplified form of accounting designed for the benefit and use of farmers, if they so wish. It is based on cash receipts and expenses. In those circumstances, headage payments or other payments must be assessable in the year of receipt, not by reference to which the payments relate because that is the principle of the system — it is one of receipts and expenses. If Deputy Yates is referring to normal accounting and taxation, that is already covered.
Would that equally apply to the profile?
No. Because the profile is based on receipts and expenses, payments in that instance would be accessible in the year of receipt and not by reference to the years to which the payments relate.
If the Minister accepts the validity of that argument for one, it should apply to both.
The profile system is based on a simpler method of receipts and payments — it operates on a cash basis.
Based on that interpretation, someone could come into the tax net by virtue of a double premia payment in one year on the profile. This person may never have come into it before and may never do so again.
The profile is not mandatory.
Amendment, by leave, withdrawn.
Question proposed: "That section 8 stand part of the Bill."
Deputy Rabbitte and I oppose this section. It is the most niggardly and hardhearted section in the Bill. It trebles the threshold for medical expenses relief for those paying medical expenses. Those with medical cards, one-third of the population — in my health board area it is over one-third — do not have to pay for medicines. However, those just over the limit who earn £140 per week take home pay, for example, a postman, a building worker, a machinist or fitter, depend on this relief for medical expenses. When a son or daughter must visit a doctor, these people pay £15 or £20 and then a further £40 or £50 in the chemist.
They receive no relief because they are below the threshold to claim anything back from the health board. These thresholds have been systematically raised. The VHI abolished the drug refund scheme and it gives little relief for primary health care. Having paid their medical expenses, these people expect something in the form of marginal tax relief — over £50 for a single person and over £100 for a family. The threshold is now £150 for a single person and £300 for a family.
An elderly 87 year old widow living alone, for example, with bad varicose veins and other problems who is in need of regular bandaging and other treatments probably cannot get a medical card if her husband was a county council worker because she will receive a small superannuation pension which is £4 per week over the limit for a medical card. It is an insult to raise the threshold.
The Minister will argue that this threshold has been there since 1969 and that it is time it was raised. If anything it should be abolished because people are entitled to this relief. Those trying to help themselves, those in the VHI, paying a mortgage and pharmacy and doctors' bills, have again become a prime target. Because of the small print in the budget, most people have not noticed this change, but they will when they claim — if they are lucky to get a receipt from their doctor as many naturally prefer cash customers — because they will find the receipt is worth less. Last year we had a tax on death, the probate tax, and this year we have a tax on illness.
As the Minister will raise only £7 or £8 million, I ask him to reconsider. Exchequer returns for the first quarter from January to the end of March show that the Minister will exceed his tax forecasts, this will give him leeway to show consideration to this committee and families affected. I ask the Minister to revert to the situation which existed before Budget Day and to delete section 8.
I also oppose this section. It is untypically mean minded of the Minister to bring forward such a proposal. I suspect many people were not aware that this relief was available in the first instance. Therefore, no argument can be made concerning its abuse. I doubt if it has been abused because I am advised in my constituency clinics that one must ask a doctor for a receipt. However, that raises a separate question relating to broadening the tax base.
This relief was minimal but it was important to those who constitute the backbone of the tax paying classes. The Minister trebled it overnight. It is not a discretionary payment because people may avail of it only if they, or someone in their family becomes ill. It is not a discretionary expense. It is an expense that they must incur and to treble it overnight rather than abolish it entirely as Deputy Yates has recommended is the wrong way to approach this. I do not know why the Minister has done this. It is untypically mean minded and I ask him to agree to the deletion of the section concerned.
This arose when we were looking at the standard rating; the logical thing would be to move it back to the standard rate, because it was within the same group. There was a decision initially to move to 27 per cent. At that stage I did some of the figures. If you move a person with high bills to 27 per cent the increase is quite hard on them. A person with bills of £1,000 — bills of £1,000 are quite usual — can get relief at £480. When I saw the effect of that it seemed far less harsh to move the threshold up. The threshold had not been moved since 1967 so the logical step was to go to the standard rating.
How much was it worth?
In money terms it is not huge but more and more people are using this provision. Something over 12,000 people used this in the last year I looked at it. To standard rate it would have been more harsh on the cases I was looking at; relief would go from the 48 per cent rate to 27 per cent and so I updated the figures. Members may feel that it would be better to standard rate it but I feel that it would not. There would be no benefit in bringing the rate of relief down to the standard rate. Leaving it at the higher rate, is a concession. It is of far more benefit at the higher rate so the increase is from £50 to £150 for a single person. That is where the change came from.
Does the present system disregard the first £50? Is it a threshold?
We disregard the first £50. You have to show you spent it.
Yes, because I had arranged with my GP that I give him a cheque for £100 or £120 per annum. Maybe this is because my wife is an accountant and she has it all worked out. For that he treats the children as and when required. It is a flat rate for the year. I would say many people do something similar. The effect of this would be to wipe that out.
Can I have that doctor's name?
Instead of going to £150 and £300 could you not go to £50 and £100 on Report Stage if you want to disregard a portion of expenditure?
It is £50 and £100 at the moment.
Sorry, I mean £100 and £200.
When I was driving up this morning to the Dáil from Wexford I heard that President Clinton had appealed to some administrator of justice in Singapore to reduce the sentence on some 18 year old.
He was sentenced to four lashes instead of six.
Yes. The Minister reminds me of the administrator of justice in Singapore who said "Be thankful that you are only getting four lashes. You could have got six." I was surprised that the logic of standardisation would be diminished by what would be considered in the Minister's words "quite harsh".
The initial decision was to move to standard rating because that was consistent. When I worked out the figures in some of those cases I could see the hardship that would cause. Then I looked at the inflation rate and I came to the conclusion that Deputy Rabbitte came to a few minutes ago. It seemed miserly because the inflation rate put the threshold at £500 and I could move it from £50 to £500, so I picked a small increase and left it at the higher rate. It is not one that I would fight here all day about.
What is the revenue implication? How much extra revenue will you raise?
Under £2 million.
Would this fit into the affordable category of Opposition amendments?
If all the Opposition spokespersons were to ask me to think about it between now and next week it might be one I would put into that category.
Certainly we would all ask you to think about it, even though harsh logic would dictate that we get six lashes.
Question put and declared carried.
Earlier on today we were notified of a typographical error in amendment No. 171. Reference to the 17th day of January should read the 7th day of January 1994. This will not be reached today but I mention it for the benefit of Members of the Committee.
Section 9 agreed to.
NEW SECTION.
Section 10. Amendment No. 33, amendment No. 1 to amendment No. 33 and amendment No. 45 are related. These will be discussed together. Is that agreed? Agreed.
I move amendment No. 33:
In page 18, before section 10, to insert the following new section:
"10.—(1) In this section—
‘day of unemployment' has the same meaning as it has in section 42 of the Social Welfare (Consolidation) Act, 1993;
‘period of interruption of employment' shall be construed in accordance with section 42 of the Social Welfare (Consolidation) Act, 1993;
‘short-time employment' has the same meaning as it has for the purposes of the Social Welfare Acts but also includes such an employment as is referred to in section 79 (2) (b) of the Social Welfare (Consolidation) Act, 1993.
(2) Notwithstanding the provisions of section 15 of the Finance Act, 1992, and the Finance Act, 1992 (Commencement of Section 15) (Unemployment Benefit and Pay-Related Benefit) Order, 1994 (S.I. No. 19 of 1994), the said section 15 shall not apply or have effect, as respects the year of assessment 1994-95, in relation to unemployment benefit paid or payable to a person, employed in short-time employment and who was so employed on the 5th day of April, 1994, in respect of a day of unemployment forming part of a period of interruption of employment which commenced on or before that day.".
As the Members of the Committee will no doubt be aware, section 15 of the Finance Act, 1992 contains enabling provisions for making certain short term social welfare benefits reckonable for income tax purposes. These are disability benefit, injury benefit, unemployment benefit and pay-related benefit. The section can go into operation by way of ministerial order on a general basis in respect of different benefits of categories of recipients and following the approval of the Dáil of the relevant commencement orders the taxation of disability benefit and injury benefit came into operation on 6 April of last year while the taxation of unemployment benefit and pay-related benefit came into effect on 6 April this year. Notwithstanding that the Dáil has on three separate occasions confirmed the decision to tax short term social welfare benefits, Deputy Yates appealed against the taxation of unemployment benefit but not the other benefits, while Deputy Rabbitte seeks to repeal section 15 in its entirety.
I have indicated and stressed on many occasions over the past three years both inside and outside the Dáil that the taxation of short term social welfare benefits is essentially a matter of equity which has been recommended by a number of authoritative groups over the years. There is no reason why two people with the same level of income should pay different amounts of tax just because one of them happens to have some portion of his income paid under social welfare benefit. The benefits that have been brought into charge to tax are in essence a substitution for employment income which no one argues should not be taxable. The extent to which taxation will arise in any given case will of course depend on the amount of other income the recipient or the recipient's spouse has in the particular year. Where the total income is a social welfare benefit, no liability for tax can in general arise because of the generous income tax exemption levels. As I said previously, the 1991 ESRI study refuted the argument that the taxation of short term benefits would impact unfairly on those on low incomes. A study, which was carried out in 1987, found that 70 per cent of those tax units affected by the taxation of short term benefits were in the upper half of the income distribution, and less than one in ten affected by taxation would be in the lower income ranges. Increases in exemption levels since 1987 would mean that the effect on lower income groups would be even less today.
Under the circumstances, I cannot accept the amendments which seek to repeal in whole or in part the taxation of the short term social welfare benefits. However, since the budget and the making of the order providing for the taxation of unemployment benefit and pay related benefit on 6 April last, the Government has been examining again the different ways in which the interim system of taxation will impact on various groups. Due to the special circumstances that obtain in their case the Government has decided, as announced on the publication of the Finance Bill, that the taxation will be deferred temporarily in the case of those workers who on 5 April last were engaged in systematic short term working arrangements recognised by the Department of Social Welfare. The type of arrangements concerned are those where employees systematically work a short week, for example, three days on and two days off, a week on week off basis or a fortnight on fortnight off basis. The deferral will be for the tax year 1994-95 or to the end of an employee's current unemployment benefit claim or current period of short term working, whichever is the shorter. The reason for the deferral is that the people concerned, having been in full time employment, entered into systematic short time working arrangements in agreement with their employers on the basis that their employment benefit would not be taxable. In addition, people on systematic short term working are paid at a lower level of benefit compared to persons who are not on short time.
Amendment No. 33 gives effect to the Government's decision. Deputy Yates would have me defer indefinitely the taxation of unemployment benefit in the case of systematic short term workers. As indicated earlier, the taxation of short term social welfare benefits was to introduce equity as between taxpayers and Deputy Yates's proposal would introduce a permanent difference as between different categories of unemployment recipients in the way they would be treated for tax. I am not prepared to do that.
I move amendment No. 1 to amendment No. 33:
In the seventh line of subsection (2), after "1994-95" to insert "or subsequent years of assessment".
In the grouping of amendments Nos. 1 to 24 before lunch we lost amendments Nos. 20 and 21 which dealt with this matter. I am glad to have an opportunity to talk on the matter. Deputy Michael McDowell and I would take different approaches to this matter because hard logic — which I understand — will dictate that all income, no matter from what source or whatever its nature, should be taxed. That is reasonable and sensible. However, I meet my local traffic warden in Enniscorthy who has three children and was on the dole for seven years — long term unemployment assistance. He found that when he got his revised tax free allowances he was much worse off. He contacted the tax office and was informed that he is no longer on class A3 PRSI but class A1 because he no longer has a medical card. That is the first "knock"— incidentally, his rent has gone up and he loses many other fringe benefits. He then finds that his wife is on unemployment benefit so he is worse off than if he was not working.
All of the theories are fine until it comes to the real world and ordinary people. I am aware of a number of cases where people have been devastated by the decision to tax unemployment benefit in a blanket way. In the case I referred to, the husband is in a relatively low paid job and the wife is on unemployment benefit. Heretofore, the £62 a week she was getting for herself — she could not claim for her spouse and her children — was not taxed. However, in their amended tax free allowances, the allowance he was claiming for her has been exhausted because the social welfare income has used it up. He is now, in effect, taxed at the marginal rate of tax on the loss of that allowance, because it is all effectively taken in tax. They are now paying tax on the £62 at their marginal rate.
I hold a clinic in New Ross and I meet people who work in New Ross port. There are seasonal working arrangements in the port as it is particularly busy at harvest time when a lot of malting barley goes out to the Continent. The workers work six months and draw unemployment benefit for another period. People tell me that they should never have gone to work; they were on long term unemployment assistance, they might have an 18-year old child doing the leaving certificate and they have lost the child dependant's allowance; the winter is coming and they used to get free fuel on the long term unemployment assistance, but not any more. They now find that they are to be taxed on their unemployment benefit, which means that while they used be able to claim a refund of tax at the end of the year, after the summer season, they get no refund now. The difference between getting a refund or not was that the tax treatment of their social welfare income left them in a position where they were not liable to tax with their total earnings in the port.
Another case is a person who came to my clinic in Gorey. He works for a security firm on a week on week off basis; he gets £92 a week on unemployment benefit for himself and his children for the week he is off and he takes home £114 a week for the week he works. He was advised of his revised tax free allowances and for the week he is at work he almost gets less money than the week he is not at work. It would not pay him to work as a security officer anymore.
I appreciate that the ESRI is right, that logically all income should be considered equally. It is cold comfort to the seasonal worker in New Ross, the security worker, the Pretty Polly worker in Killarney, or the traffic warden and his spouse to tell them what the ESRI says. It is part of the role of public representatives to bring some understanding of the application of this to the public. I welcome amendment No. 33; I can see that the logic ran aground when it hit systematic short time workers.
Another difficulty I have had is with employers and I can speak from my own experience. I am involved in a business which employs a lot of people on a part time basis. In the budget the Minister introduced a lot of concessions for low paid workers — reliefs from levies, for example — who might be married women working three days a week and bringing home £100 a week or so. The changes in the tax treatment of unemployment benefit mean that the employer now has to remit a lot more in PAYE and PRSI with the combined effects of the budget changes, simply because the unemployment benefit has altered the tax free allowances of the workers and, therefore, the income has to be taxed at the marginal rate. I know employers who looked forward to information from their accountants that they would be better off after the budget changes only to find that because an employee has a spouse who is on social welfare or are themselves on short-time working, the PAYE and PRSI to be remitted is greater.
All of this defies logic and cannot be sustained in logical debate. What we are dealing with is a recipe for people to go into the black economy and that is detrimental to what we are trying to achieve. One must remember the dynamic of the labour market, that at the fringe there is a thin line between it paying to go to work rather than stay at home, or, even more so, where it pays to go to work, not declare it and draw benefit. These changes make the situation worse. It means that employees will have to ask for cash as wages from their employers, which is the wrong way to approach the question.
There are unintended implications from this measure which were never realised before. There is a difference between taxing unemployment benefit and disability benefit. If someone goes on disability benefit, he may be genuinely indulging in absenteeism. At the end of the tax year, he may say "Hump it, it's a frosty February morning, I am going to stay in bed for the day" and can be genuinely absent from work under this legislation. Being unemployed does not require absenteeism but collusion between the employer and employee, which would not happen in the practical and real world.
For all these reasons, this matter needs to be reviewed. My amendments deal with deleting unemployment benefit from this blanket taxation. The Minister's recognition of reality in bringing forward amendment No. 33 on Committee Stage would apply as much in 1995-96 as it does in 1994-95. There are clothing factories in this country hanging onto survival by a hairsbreadth, trying to keep their order books full and make a profit. The only way to keep their books profitable is by adopting short time working arrangements. The State, through the Department of Social Welfare, is in effect subsidising their labour costs because they cannot afford the full time costs of these people. Therefore, half a job is better than none at all. After hearing some of these practical examples, I appeal to the Minister to have some second thoughts on this matter. I do not know the best outcome, but this issue is not as straightforward as originally thought. There should be a full scale review of this area in the context of next year's budget.
Chairman, I have sympathy with what Deputy Yates said about the side effects of taxing social welfare benefits. Again, as in third level educational allowances, the Deputy's difficulty is not with the tax system but with the poverty traps which he referred to and our grotesque employment market, which means that those in the textile industry are, in effect, employing people for three days a week on the basis that they will not be working for the other two days.
I accept the "logic" of Deputy Yates' statements, but if we are to break out of this madness, some of the components will have to be made right rather than getting every component completely wrong. Part of the solution is to get a pro-work tax system. Unfortunately, we currently have an anti-work tax system. I am not suggesting that this provision will dramatically change the situation, but at least one of the pieces is being put in place to make the system more pro-work and participation.
In the last analysis, one will never have logic in this area unless a system of community employment for the long term unemployed is introduced which would allow, and requires in certain cases, people to work for two or three days a week in community employment programmes. They would then be free to work in other jobs on a tax basis for the remainder of the week. The logic of the ESRI position is not flawed. There may well be some side effects to this of the kind referred to by Deputy Yates — I am certain there will be — but it puts it up to the State to get its act together on the labour market question and to stop using fictions such as three days a week unemployment effectively as a subsidy to the labour market in certain sectors.
While I accept the genuineness of the examples Deputy Yates referred to from touring his constituency clinics, there are people who do not go near either Deputy Yates or myself — lorry drivers who, at the end of nine months coming to the end of the tax year, give up and go on unemployment benefit to get their tax back. That issue has never been adequately examined.
Because self-employed persons such as myself are obliged to produce taxation and do our accounts annually, the same is assumed to be correct in every respect for employed people. It is a matter of administrative convenience that I operate on an annual basis. I could be asked to produce biannual accounts, but that would bring about significant chaos. One matter that strikes me about taxation of employment, as opposed to self-employment, is that it is not necessarily the case that one should always allow either a full year's or six months' tax to be made available for the purpose of repayments. I have never seen the logic of that. Once that money is paid in, it should stay there. The idea of giving payments back to those who literally opt out of the employment market because it suits them defies all logic.
There are grotesque distortions in this area in that at a certain time of the year some people will say "That's it" to their employer and their employer knows it makes sense. They agree with the idea of getting out of their job, getting their tax back claiming unemployment benefit. Those people will never darken a clinic doorstep. The answer to the undoubtedly genuine issues Deputy Yates raised lie in other areas, such as the payment of long term unemployment benefit, whether we require people to work for it and whether we substitute a long term community employment scheme for it. It would be a mistake to falter on this issue. If one compares two people earning £8,000 per annum, one of whom has £3,000 of that figure coming from social welfare while the other does not, to tell the latter that they must pay more tax than the other person is equally grotesque.
I acknowledge what Deputy Yates said about systematic short term workers. If a person goes off the systematic short term list and go back into full time employment, they are caught in the net. They only remain systematic until next year on the basis that they entered into a particular employment contract——
It worsens their situation.
——and they do not work for three or two days. In fairness, at least they have some certainty on where they stand.
Non-taxation of unemployment benefit was leading to inequities and distortions. People in similar circumstances earning the same amount of money who are not working and getting unemployment benefit should pay the same tax. The liability to tax depends on other income, not unemployment benefit.
I accept what Deputy Yates said in regard to the statistics. The Deputy put forward an individual case to bear out his argument; I also know of individual cases. Deputy Yates made eminent sense when he said that we should try to remove any obstacles and impediments to work. Individuals who are working are paying tax while others are sitting at home or on a barstool or are doing illegal part time work. The latter were better off while those earning income had to pay additional tax for working overtime. I am totally opposed to having one person working all day paying tax on any overtime while a person who is not working can get another benefit. If all income is taxable and there are anomalies — Deputy Yates says that we should keep a watch out for them — I will have no difficulty with that if distortions show up. All of these benefits and pensions are already being taxed. In many places where I worked, it was remarkable how, in the last three months of the year approximately 90 per cent of illnesses took place, and we do not want to see that position arise. We were a country that only got sick from mid January to the beginning of April every year. That statistic appeared in all organisations. I recall as Minister for Labour that I faced this difficulty continually because at that stage I was associated with being a friend of the unions and answering for the unions, as that was my job as Minister for Labour.
The Chairman will recall that members of my party raised this issue with me and asked me to justify the fact that 90 per cent of the illnesses in the country took place after Christmas every year and that everyone appeared to be in good health, bar 10 per cent, for the remainder of the year. These are the distortions to work on. There are some problems and I have no difficulty in agreeing with Deputy Yates that we have to watch these matters as they go through the system, but we cannot continue with a system which was full of inequities.
This is one area where I see a problem because people entered into contracts based on working three days, off two days, with the employer using the social welfare system. There were many justifiable reasons for that, but if a person is working five days, surely that person should be treated no worse than the person who works three and is on welfare for two. The arrangement is fair and naturally I would be conscious of anomalies which arise during the year.
The logic holds good in the defence of the measure. I prefaced my remarks by saying that I was aware of abuse regarding disability benefit and so on, and I made a distinction between that and unemployment benefit which would require the collusion of the employer to make the person redundant. This is an important difference.
One of the dubious pleasures of being a spokesperson for Finance, as the Minister is aware, is that colleagues advise that this or that issue is a live one in their constituency. I have been approached on this issue more than any other by my colleagues, so much so that they wish to table a Private Member's motion when work on this Bill has been completed. They see this as a key political issue in terms of disgruntlement in the sticks.
This is a real runner because——
Some people say there should be a procedure whereby individual proposals would be brought to the Dáil. On this issue, a proposal was made in the Dáil last year, and again with regard to changes in the Finance Bill, 1993. The same proposal was made in the Dáil this year and, once again with regard to this Bill. On each occasion another debate arises, but let me advise Deputy Yates that I did not, in the recent debate in the Dáil, read out the statistics that I have available regarding various illnesses in various work places, because I was Minister for Labour for long enough to know that it is not always the best course of action to knock the hell out an institution because a certain section of it plays ducks and drakes.
I do not believe that any of Deputy Yates's colleagues can defend the kind of nonsense that goes on, where an individual works out his position at the end of the year. There is talk of poverty traps, anomalies and so on, but this was one of the biggest cons in the game.
I can see the Minister's logic on this and over the years my party was a proponent on this issue. However, the difficulty arises because it deals with people on relatively modest incomes and if they have £10 a week which the Minister takes from them it results in a worse situation for them than if they never had that money.
These people read about barristers on huge incomes, different professionals doing well and they see Deputies' salaries increase and so on. They then say to me: "How dare anyone take £12 per week off my net take home pay because my wife is on unemployment benefit?". "How dare they deny me a tax refund because I am a seasonal worker?". "How dare they reduce my take home pay because I am a short-time worker in Pretty Polly in Killarney?". A politician cannot simply dismiss that argument and tell them that they do not know how lucky they are because if they are earning £8,000 per year or £160 per week and this is increased, then they will pay more. People on £8,000 per year are not well off and they do not consider themselves to be well off.
They may become better off by not working.
Logic cannot be dismissed in so far as the Exchequer is taking £30 million. People who are well off are not on social welfare. People only draw unemployment benefit if they need it. Many people are upset at having to queue up and sign on. It is time to introduce an element of human nature into this debate.
Given the constituency I represent Deputy Yates will appreciate that I have listened to this argument for a long time.
The Minister has listened with an anaesthetic.
There is no such thing as that. The criterion I use — and even though it is a social welfare matter I introduced it last year by Special Order in the Finance Bill, 1993 — is that it is not the source of the income, it is not the fact that people are on unemployment benefit or that they are working part time with tourism in Rosslare, O'Connell Street or elsewhere that is significant but the level of the income.
I understand the political point made by Deputy Yates, that people are upset. The Deputy is arguing the point well and putting forward real cases to support his views. However, it is not a question of declaring that the Government, the system, the politicians or the Minister for Finance is out to get those on unemployment benefit but that the level of income which a person receives in total is treated in a certain way regardless of whether that income comes from one source or another source, or partially from one or more sources.
This is the issue. For many years we have asked why is it that poor Joe and Mary Soap get up in the morning, take off with the sandwich under the arm and get the bus to the other side of the city or a rural area, work all day, come home and meet the Joe and Mary Soap coming out of the local or the betting shop or sitting in the sun and they appear to have more money. It is not a question of liking the idea of taxing such people, it is a question of whether the level of income to you, Chairman, is the same as the level of income to me, regardless of where it was obtained.
This is a defensible system of equity. There are, as always, technical difficulties and I am sure that I or others will have to fine tune the matter. However, the principle involved, which is equity, is very sound.
We have all met people who have said to politicians that they are only being made a joke of going to work and that they would be better off not working. However, it must be remembered that the people affected by this are those who are at work, or who have one spouse at work or who work at some stage. If a person's total income is from social welfare he or she will not be affected by this measure. This issue relates to the area where work interacts with social welfare, where there is a bit of social welfare in the family income and a bit of work and the Minister's argument will not hold up on this. I have listened to his argument and understand its logic and I have applied it in my mind to people's comments. Given this, the Minister will find that, where social welfare interacts with work it will make people worse off and they do not like it one bit.
I am not saying that they will like it.
I am not saying they like it either. They are not convinced it is fair, especially when their standard of living is cut. I have made a specific case about three types of workers, those in low paid jobs whose spouses are on social welfare, those in seasonal employment and those who are working short-time. The Minister would say that below a certain level of income, be it £6,000 or £8,000 a year, there would be hardship provisions to ameliorate the worst effects of this. It is far from me, in conjunction with the Department of Social Welfare, to consider the best and fairest way to do this which would not have knock-on effects.
I can tell the Minister — this is the only time in the debate I will render political advice to him — that at the sharp end of this it is not the unemployment benefit of bank managers' wives which is being taxed. It is people who have paid and valued their stamps who are being taxed in this way. They see unemployment benefit as a way of getting back their own money, after having paid stamps; A7 PRSI and short term workers have faced huge cuts. Previously, one could go on to short term unemployment benefit in perpetuity. Now, if one is working three days a week and drawing unemployment for three days, after a year one has to return to working two days a week and go on a sliding scale. Short time workers' entitlements have been cut systematically from 1 January 1993. I can see that this had to be done because of the huge social welfare cost involved. However, the cuts about which I have been speaking come on top of this and affect tens of thousands of people who could be living in marginal constituencies. I ask the Minister to introduce some threshold below which there would be some discretionary element.
I certainly would not ignore political advice from Deputy Yates or any other Member. Last year we had to make changes to the disability benefit scheme and had to monitor it during the year. I assure Deputy Yates that we will monitor how this operates this year. I have already agreed with the trade union movement, through the ICTU, that both my Department and the Department of Social Welfare will devise a system to deal with cases which create difficulties. The Department of Social Welfare and the Revenue Commissioners are already involved in this. We do not intend to make life difficult for those who may be in need. Deputy Yates proposed a threshold at a particular limit. These people would already be entitled to avail of the exemption limit of £7,200 and child relief of £450 for the first two children and £650 for each child thereafter. They will also benefit from marginal relief. The same threshold applies to everyone. Is Deputy Yates seeking a threshold above this?
I do not have the figures from these cases to hand to the extent that I could say real hardship exists above one exemption limit and below another. The people who will pay £30 million more in tax by virtue of this change consider themselves to be working class and low paid. The Minister's mandarins should find where they are. They are in three categories, low paid workers whose spouses are on social welfare, those in seasonal employment and those working short-time. It is in these categories that hardship arises.
The only authoritative study of this is the ESRI report, which shows they are not in the category of the low paid. I would rather watch this work through the system than to rely solely on the ESRI.
The ESRI was in love with an RPT extension.
Is the amendment to amendment No. 33 being pressed?
Yes.
This will be put at 6 p.m.
If there will be a vote on all the amendments to sections 8 to 18 at 6 p.m.——
Deputy McDowell can pick and choose.
—— I will abstain because I do not want to vote on a load of propositions on which I have views which differ from those of Deputy Yates.
The Deputy will not be misinterpreted. The amendment is an improvement on the position heretofore. It does not go anywhere towards meeting what we want but I will not oppose it.
NEW SECTION.
Amendments Nos. 34, 35 and 37 are related and may be discussed together.
I move amendment No. 34:
In page 18, before section 10, to insert the following new section:
"10.— Notwithstanding anything in the Income Tax Acts, payments deducted under Chapter III of Part I of the Finance Act, 1987 shall be considered a credit against current tax liabilities in the same tax year in which they are deducted.".
Deputy McDowell and I might agree on this as it affects professionals and those from more wealthy strata of society. It relates to the withholding tax. This tax is a deduction at source from gross income and has no regard to the real tax liability of a taxpayer in a current year. Now that the self employed are on a current year assessment basis, it is only reasonable and logical that they be given credit for tax deducted under withholding tax in the same year it is deducted. At the moment withholding tax paid is credited to one's previous year's tax liability. This can inflict cash flow difficulties on people who have incurred expenditure in earning their professional fees, which means that in the current year they would not have the tax liability to justify this deduction. I am, therefore, seeking that the tax credit be applied in the current year of assessment.
In recent years we have seen in the Exchequer returns that revenue from direct taxes has been greater than the amount estimated on budget day. Buoyancy has been given as the reason for this. My street sense tells me that increased compliance, particularly among Schedule D tax payers, is one of the reasons for this buoyancy. When withholding tax was introduced in 1987, it was common practice for professionals to avoid tax. Things have changed vastly in the last seven or eight years. The Revenue Commissioners are greatly on top of the yield from Schedule D taxpayers and, therefore, the context for withholding tax is now completely different. A very significant difference is that a number of years ago we moved from a past year assessment to a current year assessment. Therefore, while there was in the beginning a reasonable, justifiable case for this withholding tax on income paid out by the State and so on, many of those factors and circumstances no longer apply.
We are dealing here, for example, with doctors in the GMS. Doctors have contacted me from areas such as Tallaght — Deputy Rabbitte is no longer here, I am sure that he is out on the hustings gathering whatever support he can for 9 June — where 99 per cent of their income is GMS income. In other words, a doctor in Ailesbury Road would receive the majority of his income from the private sector. We are talking about people who are more or less in the public domain but on a Schedule D basis such as public sector architects and so on.
In that context, I ask the Minister to do a general review of the withholding tax because many of the factors which justified its introduction do not justify its continuation in its present form. The specific amendment to give a current year credit is reasonable and I ask the Minister to accept it.
I support Deputy Yates's amendments completely in so far as they are directed towards the allowance of tax withheld against current year tax liabilities. I have an interest in this as I am a barrister and I am affected by the withholding tax. My experience among my colleagues in the Law Library is that they do not really mind this tax very much because they are self employed sole practitioners. They do not have very sophisticated means of putting money aside for taxation and many of them find it a useful means of providing for the evil day in October in every financial year. A number of colleagues have said to me that they actually like the withholding tax. The one aspect to which they are opposed is the fact that it is put against another year's income. From that point of view, it is undesirable that it should operate against previous year income only.
Apart from barristers and doctors, I am much more concerned about people for whom withholding tax is deducted on a gross payments basis in respect of services which are supplied involving employees. That is the crucial point. The income of a barrister or doctor is effectively their own, although it is worse for a doctor than for a barrister because they have very expensive outgoings to set against any year's income. However, it is much more serious for an engineers' firm or an architects' firm which employs 30 or 40 people. Why should withholding tax be applied to them? It is not personal income for the architects. It could be that the practice in question is loss making. For them, a deduction of 27 per cent of their cash flow is crippling at a time when their expenditure is at a maximum.
An example to which I ask the Minister to pay particular attention is if an engineers' or architects' firm is engaged on a State project. They have to bring on teams of young architects and engineers, draftsmen, new secretaries and so on, whose wages they have to pay during a given year. If they are lucky enough, by some miracle, to be paid the fees due for this project during that financial year, then they are faced with having 27 per cent taken off it to be counted against next year's tax liability. That is a cruel thing to do in terms of employment.
I make no case for barristers on this matter because they are more or less indifferent to it; most of them can live with it and it does not affect them. However, in terms of employment and taking 27 per cent off the cash flow of a large company providing professional services, the situation is very different. In that context, the tax should be abolished. If the Minister wants to keep it for people who are suspected of large scale evasion or capacity to engage in evasion then so be it.
It has been argued that there are many appeals mechanisms. In 1989 I tabled a question asking how many people had availed of the appeal procedure under the 1987 Act. I was told that nobody had bothered because nobody got a ha'penny back at that stage. Deputy Penrose will probably agree with me about the barristers.
There is a great deal to be said for a large scale root and branch re-evaluation of this withholding tax. The reasons given at the time were that there was no self-assessment; that the tax was paid on an actual year basis rather than the previous year basis, which was not the case in relation to self-employed people and at the time a large number of people were taking the money and disappearing. The reality now is that right across the public sector there is a huge amount of tax clearance certification; also, the self employed are on a present year accounting basis; this is a major problem for many people who are offering employment.
It should be phased out over a number of years. If the Minister can make the case that this will lead to a loss in that people will disappear owing large tax debts to the Revenue, then let us look at that on a case by case basis. However, there is a considerable argument for phasing it out.
Deputy Cox left me a note in relation to this in which he suggested that there should be some kind of four year phasing out of the tax which I did my best to translate into a phasing out procedure in amendment No. 37. I did not want to be met with the accusation that we wanted to give a huge tax boost to the self employed which, no doubt, would have been thrown at me immediately.
In most State work, one must prove that one is tax compliant anyway. The DPP recently sent out a circular to barristers who are prosecuting for the State saying that they had to prove that they were tax compliant in order to get his work. If all this is being done to start with, the argument for also taking 27 per cent off people — forgetting about barristers as they are not a good case — who are giving employment to others is a very weak one. It has now come down to a matter, effectively, of cash flow. The real question is whose cash flow should we hit — the Exchequer's or a large firm of architects or engineers who are offering employment? The balance is wrong at the moment.
Doctors are very mindful of this withholding tax. They have to run surgeries and they have outlays. Their gross and net incomes are not as directly connected as those of barristers. They should at least be allowed, as Deputy Yates is suggesting, to have their withholding tax against their current year's tax liability. It would make sense to require doctors in the GMS service to produce tax compliance certificates. They would opt for that rather than the 27 per cent system. Life would be much fairer if tax compliance certification was favoured rather than withholding tax because it affects employment and creates problems.
This is a reasonable amendment. In common with Deputy McDowell, I will not speak on behalf of barristers or others who are happy with the deduction system in so far as some of the liability is discharged. They do not have to worry about putting much by for a rainy day.
If I was a doctor, I would think of challenging the current system in relation to the medical profession. If one takes the example of doctors in rural areas, their deductions are at the standard rate. As Deputy McDowell outlined, there is a huge body of compliant taxpayers on the self-assessment system and an actual year's basis of accounting. The mechanism in relation to deduction is no longer required and has passed its shelf life date. It was for a different era. If one takes the example of a doctor's deductions at 27 per cent, with no account taken for heating, insurance, lighting and secretarial costs, he or she is penalised very severely. It is grossly unfair and could be legally challenged.
The Minister should look at this measure because it severely impacts on the cash flow of a person in that position. Doctors have indicated to me that they often had to borrow to keep the ship afloat in relation to outgoings while money was taken which was not credited against the current year tax liability. There is a case for the Minister to answer and I urge him to consider this amendment favourably. There is no great cost involved to the Exchequer. The money will come in but at present it is coming in too soon. The Minister is imposing the possibility that people will have the added burden of borrowing to meet everyday commitments while he has 27 per cent, or £270 of every £1,000 that they earn, safely stashed away. Some have to borrow to meet that requirement. The Minister should consider this favourably and perhaps he should introduce an amendment on Report Stage which would incorporate the thrust of this amendment.
I will not introduce an amendment on Report Stage in relation to this matter. The cash flow loss to the Exchequer would be over £70 million.
£70 million of other people's money that cannot be given back.
All taxation authorities agree that where withholding tax can be applied, as in PAYE or the professional services, it is the most efficient and foolproof way to collect tax. If the withholding tax system is not used, the money must be chased long after the event. There is much truth in what Deputy Yates said in that the system is far better now.
There have been a number of changes. When withholding tax was introduced in 1987 it was at a level of 35 per cent and now it is 27 per cent. Interim refunds arise when the amount of withholding tax deducted exceeds the tax liability of the previous accounting period. This is an important point and should not be over-looked. Tens of millions of pounds are refunded on that basis. I had the data for a question Deputy Yates put down some weeks ago but I cannot recall the exact amount. A separate section in the Revenue Commissioners deals with the refunds and this is done within four weeks.
The Finance Act, 1987, contains the provisions for the withholding of income tax from payments for professional services by accountable persons — Government Departments, local authorities and other such bodies. Its scope was extended in 1992 to include such payments made by commercial State bodies. Section 10 of the Finance Bill, 1994 will add a number of additional accountable persons to the list in the Second Schedule of the 1992 Act. Tax is deductible at the standard rate and is credited against the taxpayer's liability for the year of assessment following that in which the deduction was made.
The purpose of Deputy Yates's amendment, as I understand it, is threefold. First, it seeks to abolish the withholding tax with effect from next year. The period 1994-95 would be the final year for which withholding tax would apply. Second, it proposes to have the credit for tax withheld granted against the current year's tax liability instead of the liability for the following year of assessment. Third, it aims to have the withholding tax deducted on net income rather than the gross amount of the payments. The amendment proposed by Deputy McDowell calls for the phased abolition of the withholding tax system or scheme, commencing the year 1994-95 and leading to its disappearance in 1998-99.
Withholding taxes are very effective in securing the payment of revenue that might never by paid or might not accrue to the benefit of the Exchequer until much later. The Committee will be aware of the real contribution that the PAYE system makes to Exchequer finances. Similarly, the withholding tax for professional fees has proved to be most satisfactory and effective. We have no plans in Government to discontinue it on any basis.
Another element mentioned by Deputy Yates in the amendment concerns the scheme of withholding tax. This was also introduced in 1987 and provides for the deduction of tax at the standard rate by Government Departments and semi-State bodies when making payments for professional services. The tax withheld is credited against a person's liability for the year of assessment following that in which it was withheld. The purpose of the amendment is to have the credit for tax withheld granted against the current year's tax liability instead of the liability for the following year. I assume the amendment has been proposed having regard to the change made in 1990 from the previous year basis to the current year basis. That was done for self employed taxpayers.
The operation of the withholding tax system in the context of the move to a current year basis assessment was examined in some considerable detail at that time. The move to the current year basis meant that while self employed taxpayers remained chargeable for all years, one year's income dropped out to the charge for tax. In other words, it was the basis on which the taxpayer was to be charged that changed.
The Government of the day decided to continue with the operation of the credit for withholding tax on the preceding year basis. If it had been removed to a current year basis it would have led to a situation where the tax credit available against the assessment to be based on the drop out period would not have been given because the income from which the tax was deducted would not form a basis for any year of assessment. This would have frozen the amount of withholding tax for all time and it would never have been available to set off. It would also have led to a situation where the tax credit in respect of the income dropping out could have been added to the tax credit for the year 1990-91. Effectively, that would have doubled the amount of credit available for that year. This option was ruled out because of the high costs it would have entailed at the time. Considering that, a continuation of the withholding tax on the same basis as previously seemed to be the fairest option. No additional relief arose to the taxpayer and no additional tax accrued to the Exchequer as a result.
Regarding the point of Deputy Yates' amendment, it is true that the tax is initially withheld from the gross amount of the relevant payment but the interim refunds arise when the amount of the withholding tax deducted exceeds the tax liability of that previous accounting period. This is important and it should not be overlooked because in calculating the amount of any interim refunds, Revenue retains only the amount equal to the liability and repays any excess withholding tax deducted. So it is an important feature of the system from the point of view of the individual, as Deputy McDowell points out, having to wait long periods without the cash flow.
I accept that the Exchequer should not be allowed to sit there for months on end. It was for that reason that a separate section was set up so that a person could make a demand for an interim refund and it would be dealt with quickly. The interim refunds, and the tax retained for credit later against tax liability, are determined by reference to taxable income, not to any gross amounts of fees payable. The taxable income would, of course, reflect all the allowable deductions in respect of trading expenses, including payments to staff, travelling expenses, heating and lighting, and all the normal costs as well as particular tax reliefs such as personal allowances and retirement annuities. The availability of interim refunds substantially reduces the impact of withholding tax on the cash flow basis of business. Certainly if there was a delay on that then Deputy McDowell's point would be fair.
There used be a delay.
There was. As I understand it, the Deputy's amendment proposes the abolition on a phased basis and this would have a dramatic effect on the Exechequer cash flow. I have already said I have no plans to continue this because it would be horrific.
As it is now six o'clock I am required to put the following question in accordance with an Order of the Dáil of 28 April 1994:
That the amendments set down by the Minister for Finance to sections 8 to 13, inclusive, of the Bill and not disposed of are hereby made to the Bill; and in respect of each of the sections 8 to 13, inclusive, undisposed of, that the section, or, as appropriate, the section, as amended, is hereby agreed to."
The Select Committee divided: Tá, 18; Níl, 9.
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Tá |
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Ahern, Bertie. |
Ó Cuív, Éamon. |
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Ahern, Michael. |
O'Keeffe, Batt. |
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Ahern, Noel. |
O'Leary, John. |
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Broughan, Tommy. |
Penrose, William. |
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Ellis, John. |
Power, Seán. |
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Fitzgerald, Liam. |
Shortall, Róisín. |
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Kenneally, Brendan. |
Smith, Brendan. |
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Kenny, Seán. |
Upton, Pat. |
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Nolan, M. J. |
Walsh, Eamon. |
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Níl |
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Connaughton, Paul. Currie, Austin. Finucane, Michael. McGrath, Paul. Nealon, Ted. |
Rabbitte, Pat. Sheehan, P. J. Timmins, Godfrey. Yates, Ivan. |
Question declared carried.
The Select Committee adjourned at 6.13 p.m. until Thursday, 5 May 1994.