Tuesday, 13 December 2005
Question 51: To ask the Minister for Finance if he will consider the indexation of tax bands and thresholds with a view to protecting taxpayers from inflationary pressures; and if he will make a statement on the matter. [39141/05]
Different countries make different choices on this matter. We choose for good reasons not to index the bands and credits and to deal with each budget with a clean slate, as it were. In this way, the Government can make unconstrained choices in determining priorities in taxation and spending and have the resources to address these appropriately. That is the essence of what government is about.
I am sure the Minister will agree that there are a number of workers who appear to be in a permanent state of confusion regarding their pay. They are earning much more money yet they are still no better off. They are constantly playing catch-up and never appear to gain any benefit from increases in pay. I am sure the Minister will agree that this is due to hidden costs, one of which is indexation. The Minister referred in his reply to other countries making different choices but Ireland should examine the way the United Kingdom operates. Its tax bands are indexed——
Will the Minister examine the position of our near neighbour regarding the benefits of the indexation order of 1987 for workers in the UK? Will he agree that order was brought in for good reason in a time of high inflation? Will he agree also that in 2002, one in four workers were in the top rate of tax but now one in three workers are in the top rate of tax? That represents an extra 160,000 people, although 40,000 of those are new jobs. Will the Minister agree also that a promise was made under Sustaining Progress that only one in five people would be in the top tax bracket and 80% would be in the lower bracket but that now 66% are in the lower tax bracket, which is unfair?
Will he agree also that the consumer price index is 8% higher now than it was in 2002 yet the threshold for the higher tax rate rose only by 5%, in addition to the fact that wages are increasing, driving people more quickly into the higher tax bracket? I am sure the Minister will agree that people are no sooner out of the higher tax bracket when they are driven back into it again. Does he agree that people are put into a higher tax bracket at a relatively low wage base and that they must sit back and watch millionaires use schemes to avoid paying tax?
I will come to that. Changes to the income tax regime since 1997 mean that the average tax rate has been reduced at all income levels. For example, after last week's budget, the average tax rate for a single person on the average industrial wage will be 15% compared with 27% in 1997. In this regard, the position is that a single PAYE worker on the average industrial wage has seen their after tax income increase by approximately 44% in real terms since 1997, of which approximately half is due to tax reductions. There has been a 44% real increase in take-home pay for those on the average industrial wage.
Another factor which can influence people's repayment capacity in terms of their commitments is that mortgage interest rates are at historically low levels of 3.3% to 3.65%, down significantly from the rates of 7.1% to 8.85% prevailing in 1997. The prospect of interest rates going higher over the medium term should be kept firmly in mind by borrowers in terms of continuing commitments.
When the Deputy mentioned the number of people, he omitted to take account of the fact that we have taken another 340,000 people on lower incomes out of the tax net. It was one in four when we came into office and it is one in three now. When we examine the structure of our income tax reforms and the move to a tax credit system rather than maintaining a tax allowance system, the Deputy will realise it is a much more difficult proposition to talk about taking people off the top rate in that respect when the tax credits assist people at the lower end, which is a far more socially progressive measure from an income tax point of view. That was the case at the time.
The other point I would make to the Deputy is that the historical problem with paying income tax was how quickly one paid at the top rate. Before we came into office, a person paid 48% tax after the first €19,400 in earnings. That person now has to earn €32,000 before he or she starts paying the top rate, which is reduced by six points to 42%. If the Deputy can find any government in Europe or any predecessor government in this State that was able to do that much that quickly, I will consider his membership of my party.
In 2002, one in four people were in the top rate of tax. Today, the figure is one in three. There was a promise that we would work towards a figure of one in five. Will the Minister not agree we are heading in the wrong direction in terms of top tax bands?
The Deputy should remember that an additional 500,000 people are at work. That is the litmus test of people's satisfaction. I am sure the Deputy knows from visiting his clinics at weekends — it is a nice, competitive constituency — how well this measure is being received.