Pat Rabbitte (Dublin South West, Labour)

Expectations around a budget have never been so high and the reasons for this are straightforward. The revenue yield from taxation as compared with forecasts at the time of budget 2006 were further out than a lighthouse. No Minister for Finance since independence had so many resources available to him.

The Government deliberately and calculatedly leaked its substantial contents in the days immediately preceding the budget. Different audiences were targeted day by day. The rhetoric was downbeat but the headlines were large. The pension would be increased to €208, the top tax rate would be reduced by 1%, mortgage interest relief would be increased and social welfare recipients would get an additional €20 per week. It is scarcely surprising that expectations were so high. Hard-pressed families believed they were getting the trailer. It turns out, however, that it was a matinee showing.

The end product lacks sparkle. There is no innovation, nothing novel and nothing risky. There is no imagination, just a safe targeting of interest groups that might show an electoral dividend. I welcome the positive features but I cannot help regretting what might have been achieved with €4 billion, a growth rate of more than 5% and a debt to GDP ratio of 25%. Once again, this Progressive Democrats-Fianna Fáil Government has favoured super-high earners in our economy and has failed to use the resources to relieve the strain on our society.

The Labour Party welcomes any reduction in taxation that will improve the living standards of people on low and modest incomes. Economic growth in our economy, coupled with wage and price inflation, means the tax code can and should be adjusted each year. That is the natural order of things. The question is not whether the tax code should be changed but how best to use the resources available. Fianna Fáil and the Progressive Democrats have made their choice. They have chosen to target resources at the better off and the super-wealthy. For years, they have delayed, obfuscated and delayed again in closing off tax loopholes that allow millionaires to pay no tax. In this budget, they have gone a step further by introducing tax cuts which skew resources to the better off.

Let us be clear. A 1% cut in the top rate of tax delivers more than €2,000 to a person with an annual income of €250,000. It gives nothing to someone on €32,000. The ready reckoner published by the Department costed a 1% cut at €228 million in a full year. This money is disproportionately targeted at people on high incomes. It provides some €2,000 extra for the person earning €250,000 but nothing for the person on the average industrial wage.

The budget tables tell their own story. Regrettably, the fictional families no longer have names; we all miss Duncan and Mary. Taking all the tax, PRSI and levy changes together, a married couple with one income of €30,000 gets €530 from the budget. The same couple on €200,000 gets €1,953. A married couple with two incomes on €30,000 gets €680, while the same couple on €200,000 gets €3,370. A single person on €30,000 gets €400, while a single person on €200,000 gets €1,913, almost five times more than his or her counterpart earning €30,000.

The motivation is purely political. There is no efficiency case for this cut. Where reform is needed is in the standard rate tax band, where people on or just above the average industrial wage are this year paying tax at 42%, PRSI at 4% and the health levy at 2%. Last year, a single person with a salary between €32,000 and €46,600 faced a marginal tax rate of 48%. The budget has increased the standard rate band by €2,000, or 6%, and the PRSI threshold by €2,200, or 4.7%. Wage inflation next year is forecast to be some 5.5%. This problem, therefore, remains unaddressed. The Minister's estimate for the average industrial wage for next year is €33,000. This means a person who earns only 3% more than the average industrial wage will next year again pay nearly half of any overtime or bonus in tax and PRSI.

Of the 50 stealth taxes introduced or increased by the Government after the last election, the non-indexation of the standard rate band was the greatest of them all. Psychologically, this means people have limited incentive to add to their income because almost half of any overtime or bonus is paid in tax. That is bad economics. It is a pressure point which directly results from the Government's need to hoover up money in 2003 and 2004 to pay for the last pre-election splurge. It is a pressure point which is not addressed by cutting the top rate of tax.

If cutting the top rate of tax is so important and helps to reward work, why not reduce the bottom rate also? Why was it so important to cut the top rate of tax but not the bottom rate? Why were the available resources not focused on increasing the standard rate band? One of the most striking elements of the budget is that the Government has decided to completely jettison its promise to the electorate that only 20% of taxpayers would pay tax at the higher rate. This was a promise made in the programme for Government and to the social partners in the recent partnership agreement. It has now been simply dumped. Instead, we are treated to a magnificent piece of sophistry which runs to six full pages, C23 to C28. This is fantastic stuff that merits close reading. There are two wonderful pages of dense, learned-sounding exposition and a further three pages of sums. It is complete balderdash; first-class, grade A, 18-carat balderdash. Let us reduce this to the simple arithmetic that it is. Average tax rates equate to one's tax bill divided by one's income. Marginal rates are the amount one pays on the last euro of one's earnings. The Government promised, clear as crystal, that only one in five would pay tax at the top rate. This promise was not made in terms of average tax rates, effective tax rates or anything else. It is that simple.

Before the budget, it was expected that 34% of taxpayers would pay at the top rate. Since the standard rate band increase is close to the expected rate of wage inflation, that position will not change after the budget, no matter what balderdash is cooked up for the Minister. I find it disappointing that the Department of Finance would go along with this kind of deceit. The Department has rewritten the time-honoured presentation of the different categories of taxpayer to meet a political purpose — a broken political promise.

I hope we have not reached the stage that because of one-party Government the Civil Service is beginning to feel the pressure and the need to bend the knee to every political whim of its masters. For as long as I have been a Member, the presentation was simple. There were essentially three categories of tax band — those exempt, those paying the standard rate and those at the top rate. This year the entire presentation of the tax bands in the Budget Statement has been changed. There has been a redesignation of the categories — those exempt, those paying at 20% or less and those paying at greater than 20%. The fiddling of the presentation allows the political promise that only one in five taxpayers would be paying the top rate to continue. Will a person above the average industrial earnings of €34,500 be liable to pay tax at 41%? The answer is "Yes". No amount of dividing it into income changes will alter that. If I have the wealth I can pay €50,000 to my pension scheme. What is my average tax payment? This is a fundamental misrepresentation. The Government promised only one in five taxpayers would pay at the top rate. The figure is closer to 34% or one third. The Department of Finance protects itself of course in carefully argued sophistry in the Budget Statement. For example, it states:

Based on the latest historical data ... an estimated 31.7% of income earners ... are liable to income tax at the higher rate for 2006. [That is my understanding too.] The corresponding projected figure for 2007 on a pre-budget basis is that 34.7% of income earners are liable to tax at the higher rate...

Given that the amount of increase in the standard rate tax band is approximately the same as projected price and wage inflation, about one third of taxpayers will continue to pay at the top rate. Some Members have been around long enough to remember Gene Fitzgerald and Mr. Haughey. I hope having one party permanently in office does not bring us back to the ways of the ancien régime.

One feature of the budget that has received little attention is the continuing progress of the individualisation agenda. Before individualisation, a married couple could fully transfer their tax allowances or bands to reduce their tax bill. It meant a couple could pay tax at the 20% rate, up to €68,000. Today, they pay tax at the high rate on €25,000 of their income, up from €23,000 last year. This issue is a real source of annoyance to many couples, including those with young children. Where one partner makes the decision to take time out of the workforce to care for children, they feel discriminated against by the tax system. It is, or should be, a principle of child care policy that we respect the choices of parents in how they care for their children. If a parent makes the choice to reduce their income in order to spend time with their family, the State should respect that decision.

Last year, the Minister for Finance pretended to the House that he was tackling the phenomenon of millionaires who do not pay tax, a matter which Deputy Burton raised consistently. The Budget Statement contained a heading, A Minimum and Fair Tax, in which the Minister stated:

We cannot stand over a situation in which some high-earning tax residents, through the use of incentive reliefs, can reduce their taxable income to nil. This is simply not fair...

I agree with those laudable sentiments. The Labour Party, and my colleague Deputy Burton, made the case for years. We were delighted that we had finally pressurised the Minister into acting.

It turns out, however, that he had a twin-pronged strategy to tackle the problem of millionaires who pay no tax. First, he produced a new way of presenting the data, ensuring no one could be reported as paying zero tax in future, partly by including DIRT in the calculation of income tax. Has one ever heard such a blatant contrivance? It is as if these millionaire tax avoiders were the little old widows with a few bob in the post office and were liable to DIRT. They are not paying zero tax anymore, they are paying tax on DIRT. Many of them were not paying tax on DIRT when they should have been but that is another story. Second, the Minister produced a complicated formula to restrict the extent to which individuals could avail of reliefs. The spin was that it was essentially a minimum effective tax rate on people earning €250,000. Of course, it was nothing of the sort. The formula, when the detail appeared in the Finance Bill, does not apply to all reliefs, and particularly not to the much favoured relief for super private clinics. In any case, the formula would not apply until 2007. So, once again, the super wealthy will get to pay no tax.

In that context, we should be cautious about the range of incentives being opened up by the changes to the business expansion scheme. I do not want to be in any way dismissive as there is a need to look at the available sources of venture capital, particularly for high-tech start-ups. There is a new breed of entrepreneur who has worked in the high-tech sector, perhaps in a multinational. They understand the enterprise culture of the high-tech area and are willing to make a go of it on their own. My colleague, Deputy Quinn, has been concerned for some time that there may be an issue with early seed capital for such ventures. If the Minister's proposals address that problem, then I will welcome them. However, if this is simply another way of opening up tax breaks to replace those he is talking about shutting down, then I will not.

Those fears could be simply allayed by introducing a minimum effective tax rate of 20% on incomes over €250,000. The tax code could be used in a selective way to promote socially desirable ends. It should not allow, however, individuals the chance to avail of those schemes to the point where they pay little or no tax. Equity is an important principle in taxation. The system should be fair and seen to be fair. As Fianna Fáil has systematically undermined the fairness of the tax system, we are entitled to consider the changes to BES in that light.

We also look askance at the proposals on mortgage interest relief. The further anticipated increase in interest rates today will wipe out the effect of yesterday's mortgage interest relief measures.

The Labour Party welcomes the increases in social welfare announced in the budget. Progress has been made on the adequacy of payments, which is important. However no attention has been given to reforming the social welfare system, which is badly needed. We have gone from having Deputy Dermot Ahern, whose lack of interest in the portfolio was manifest, in charge, through the savage 16 cuts of Deputy Coughlan, to Deputy Brennan. He talks a superb game and I have admired his PR for more years than anyone in the House.

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