Mr. Derek Moran:

It is a long question. I will try to answer as much of it as I can and perhaps my colleagues can assist with anything I have missed. The Deputy is correct that the softer first-quarter performance of income tax in particular is something that we need to be alive to. The first quarter tends to be unreliable because that is when P35s, refunds and end of year tax returns are completed. It is a little more unstable than other quarters. The figures are not worrying but they are puzzling. We have looked at the performance. It is interesting that over the first quarter, PRSI has performed about 7 % year on year. PAYE has performed at about 6.5% which tallies with the growth in employment and earnings growth. The shortfall results from non-PAYE sources, mainly the USC. That raises a number of questions.

We have done some analytical work in partnership with the ESRI, which was published in the last fortnight. It looks at how elastic these taxes are. We do this on a regular basis for forecasting purposes. Generally, we find that with income taxes for every 1% increase in earnings income tax grows by 2%. That would be the elasticity; sometimes a bit more, sometimes a bit less. We performed a detailed analysis, again jointly with the ESRI, showing that this holds for PAYE very strongly. When taken with schedule D, the average elasticity is still around 2% but it is actually significantly lower for USC at about 1.2%. For every 1% increase in income there is a 2% increase in income tax, but only a 1.2% increase in USC. Some of this has to do with the structure; the rate progression is much slower and it makes it more stable. As the economy slows down, while we do not get a big pick up when the economy grows then we would not get a big drop as it slows. There are pluses and minuses. This is one part of it. We have done a back-forecast as distinct from a forward forecast and it reconciles some of the gap on USC that has emerged over the last 12 months.

We are also looking to see if there are other aspects of USC that make it different to income taxes. The Revenue Commissioners and the Department are putting in efforts to try to explain it. Some of the more obvious structural differences in USC is that on return to employment a person can retain their medical card for up to three years. It means that they are capped in how much USC they will pay, which is at the middle rate I believe. They still pay at that rate for a combination of three years no matter how their income increases. Given the employment generation over each of the last three years, and if we accumulate that USC rate figure, it may be acting as drag on it. We are at the early stage of looking at this, but together with the elasticity it may explain some of the performance issues around that.

Reference was made to people coming in and out of employment, especially from abroad. Members will have seen in the report that the Revenue Commissioners are in the process of a consultation to modernise the PAYE system to give more real-time information. This will be a huge help in making adjustments to tax in real terms and given data for that.

With regard to the self-employed I understand that the report initiated by the committee and the Minister is due for publication shortly. I will come back to the committee with a timeline on that.