Taxation
I will now deal with taxation matters.
Personal taxation
Total cost of personal tax changes
The total full year cost of the changes to the personal income tax rate structure that I am about to announce is £942 million, and a breakdown of the cost of the individual components is set out in the Summary.
Introduction
Last year I announced the new tax credits system. That initiative was generally regarded as the most radical innovation ever in Irish personal taxation.
This year I am proposing what can be regarded as an even more radical and fundamental change to the system.
The net effect of this further initiative will be - over this and the next two Budgets - to reduce the percentage of taxpayers on the top rate of income tax to 17 per cent, or to 12 per cent if the exempt cases on the tax file are also included. In simple language, the full effect of this initiative, if implemented in one move, would be to leave only 17 per cent paying tax at the top rate.
To appreciate the magnitude of this move, it is well to note that 46 per cent of taxpayers would be paying tax at the top rate from 6 April next before today's Budget changes. This will be reduced to 37 per cent for the next tax year as a result of this Budget. I am setting out in the Summary the relevant numbers of taxpayers involved.
Last year's radical income tax reform was designed to improve equity, to reduce the burden of tax on employment and to enable the removal of a substantial number of income taxpayers from the tax net altogether. This year I intend to build on this reform - to assist earners, reduce the level of tax for all taxpayers, exclude more on low income from the tax net and remove a large number of middle-income earners on the average industrial wage from the top rate of tax.
Individualisation of Standard Rate Band
One of the main problems we have is the low level of income at which single people become liable at the top tax rate. At present, single persons pay the top rate of tax on earnings less than the average industrial wage. One of the main difficulties with the present band structure is that the single person's tax band is doubled for all married couples.
I am, therefore, proposing the radical change of moving to individualisation of the standard rate band over this and the next two Budgets. This will ultimately involve each individual having his or her own standard rate band. As I have stated earlier, the effect of this change on completion will be to reduce the percentage of taxpayers on the top rate of income tax to 17 per cent.
This year, I am proposing to widen the standard rate tax band for a single person by £3,000 from £14,000 to £17,000 per annum. The tax band for two income married couples will be set at double this individual band, that is £34,000 per annum with transferability of the individual bands between spouses up to a maximum band of £28,000 per annum for either spouse. I propose to leave the married band for one income couples unchanged at £28,000 per annum. It should be noted that as the distribution of income earners is in the shape of a pyramid, the Exchequer cost for each thousand pound widening of the band lessens as one goes up the income scales. To illustrate this point, today's announcement of the standard rate band widening costs £310 million; whereas, the full move would have cost £839 million.
Changes in Allowances
I am also making the following changes to the personal allowances.
The basic single and married personal allowances, which apply since last year at the standard rate of income tax, are being increased by £500 single and £1,000 married per annum bringing them to £4,700 single and £9,400 married. When the PAYE allowance of £1,000 per annum is included, these changes will result in standard-rated personal allowances for single persons on PAYE of £5,700 per annum. This will remove nearly 40,000 taxpayers from the net.
Tax Rates
I have always made it clear, both in and out of Government, that I regard high marginal tax rates on income as an unacceptable feature of the tax system which, in the end, not only reduces the incentive to work but also adds to the attraction to some persons of not paying their due taxes at all.
Furthermore, there can be no doubt where this Government stands on the issue of tax rates. We draw our mandate from the will of the people who clearly favoured the Fianna Fail/Progressive Democrat prescription on taxation at the last General Election. As I have stated in my previous Budgets, I will fulfil the taxation commitments set out in our Programme for Government over the lifetime of this administration.
This year I am proposing a further cut in the standard rate of 2 per cent from 24 per cent to 22 per cent and a 2 per cent cut in the top rate from 46 per cent to 44 per cent. These rate cuts benefit practically all 1.2 million taxpayers in the State.
These tax reductions mean that single persons on PAYE on the average industrial wage will see their income tax cut next year by nearly £20 per week; and a married couple with both spouses on the average industrial wage will gain almost £40 per week.
Tax Credits
My last Budget announced the move to a tax credit system, beginning by standard rating the basic single and married personal allowances and the PAYE allowances. This year I am happy to announce that the full tax credit system will be put in place for the income tax year commencing 6 April 2001.
Changes to certain personal allowances are necessary to accommodate the transition to tax credits. These changes affect the age allowance, widowed persons allowances, the blind persons allowance, the dependent relatives allowance and the incapacitated child's allowance. In order to standard rate these allowances - while ensuring no loss to those on the higher tax rate - it is proposed to double them in all cases from their current levels. These changes are set out in the Summary.
Last year, it was not possible to standard-rate in full the lone parent's additional allowance of £4,200 per annum. As a result, £3,150 per annum of this remained at the taxpayer's marginal rate of tax. In order to facilitate the completion of the move to tax credits, it is proposed to standard-rate this remaining element of the lone parent's allowance and, so as to ensure no loss to those lone parent taxpayers on the higher rate of tax, to increase the current single income tax band which applies to lone-parents by £3,150. As a consequence, the standard rate tax band which applies in the case of lone parents, including widows with children, will be £20,150 per annum for the next income tax year.
Deduction at Source
The move to tax credits will make the system more transparent and ultimately easier to follow. To simplify matters further, I am proposing that medical insurance relief and mortgage interest relief should no longer appear on the taxpayer's tax free allowances form but instead should be deducted at source and netted off against the premium or interest paid by the taxpayer concerned. I have asked the Revenue Commissioners to move to this deduction at source from April 6th, 2001, and to make the necessary arrangements with mortgage lenders and health insurers.
Changes to Mortgage Interest Relief
In view of these new arrangements for deduction of tax relief at source from 2001 and to simplify the existing system, I propose to amend the current provisions relating to mortgage interest tax relief.
At present the maximum level of interest which can be taken into account for this relief is £2,500 single, £3,600 widowed and £5,000 married per annum. First-time mortgage holders are allowed to claim 100 per cent relief at the standard rate of income tax on interest paid up to these limits. I do not propose to change these rules, except to increase the widowed limit to the married limit of £5,000. Non-first-time buyers are entitled to claim relief on only 80 per cent of the interest but, even then, this is subject to a further deduction of £100 for single and widowed and £200 for married persons. Thus, the maximum amount of interest on which a single non-first-time buyer can claim tax relief is £1,900 per annum while the maximum for a married couple is £3,800 per annum.
I propose to abolish the 80 per cent rule and the de minimis deduction for non-first-time buyers. They will be replaced by a simple ceiling on interest of £2,000 single and £4,000 married, with widowed at the married rate of £4,000, all of which will continue at the standard rate of income tax.
There will be no losers from these changes and indeed there will be a considerable number of gainers. The total cost in a full year is £33 million.
Tax Relief for the Elderly
I have just announced an effective doubling of the age allowance for those aged 65 and over on the standard rate of income tax. I also propose to increase the threshold at which any person aged 65 or over enters the tax net from £6,500 per annum for single and widowed persons to £7,500 per annum and from £13,000 per annum to £15,000 per annum for married couples. This means that in my three Budgets I have increased the income tax exemption limits for the elderly by up to two-thirds. The increases I have just announced will remove almost 10,000 elderly persons from the income tax net.
Rent Relief
Under 55s
The second Bacon report on housing last March recommended that the rent relief for under 55s be increased to take account of the recent trends in rents across the country. Accordingly, the rent relief allowance for those under 55 will be increased by 50 per cent from 6 April next from £500 single, £750 widowed and £1,000 married to £750 single, £1,125 widowed and £1,500 married per annum. The cost of this increase is estimated at £7 million in a full year.
Over 55s
In addition, I propose to standard-rate the rent relief for those aged 55 and over, which is currently available at the taxpayer's marginal rate, while ensuring, at the same time, that no person claiming the relief at the higher rate of income tax will lose out. Consequently, the rental relief for those aged 55 and over will be doubled from April 6th next to £2,000 single, £3,000 widowed and £4,000 married per annum, and will be applied at the standard rate of income tax. Since 80 per cent of those on the relief are standard rate taxpayers, this amounts in effect to a doubling of the relief for four out of five claimants. The cost of this measure is just under £1 million in a full year.
Health Levy
As in previous years, the threshold for the payment of the health levy will be increased by £500 from £11,250 to £11,750 per annum, or from £217 per week to £226 per week.
Capital Allowances for Childcare Facilities
Last year I introduced a number of tax measures aimed at encouraging the increased supply of childcare facilities. I propose this year to allow full 100 per cent capital allowances in year 1 for capital expenditure incurred on the construction or refurbishment or conversion of premises for the provision of childcare. This effectively accelerates the capital allowances I brought in for childcare premises last year which were claimable over a seven year period. The accelerated allowance will be available for qualifying expenditure incurred on or after today. The relief applies to all childcare facilities whether provided by employers or commercial childcare operators and the reliefs can be used by owners of the facilities or by investors who wish to invest by way of leasing arrangements, subject to the normal tax rules which apply to such investors.
Profit Sharing/Gain-Sharing
A significant number of new and enhanced tax incentives were introduced in the recent past to help promote profit sharing schemes in the private sector. Various calls are being made in the context of the P2000 successor negotiations for the Government to introduce further profit and gain-sharing tax incentives to assist new initiatives in this area which would apply across the public and private sectors. No clear picture has so far emerged of what form these initiatives might take or how they would operate in terms of proposed incentives. I can say, however, that the Government is prepared to look at this issue provided that any such incentives are properly focused and justified, offer benefits to as wide a range of employees as possible, do not open the door for what may be costly tax planning schemes and do not result in substantial tax resources being taken up in relieving the remuneration of the few at the expense of the tax burden on the many.
Effect of Changes
This year's tax changes will remove 125,000 taxpayers from the top rate of tax and reduce the percentage of taxpayers who would otherwise have been on the top rate of tax in the 2000/2001 income tax year from 46 per cent to 37 per cent. The changes mean that all taxpayers up to and at average industrial earnings will pay tax at the standard rate. Examples of how the new system will work are set out in the Summary.
This new band structure is a fundamental change to the system. It will improve considerably the position of single taxpayers on middle incomes. For certain two income families, the doubling of the band will increase the reward for both spouses working.
Real Tax Reform
For many years, the phrase tax reform has been bandied about. But, for most of that time, all we really did was to tinker at the edges of the existing system.
However, the fundamental changes initiated by this administration can be described as real tax reform. Last year's move to tax credits; this year's launch of a three year strategy on individualisation of the standard rate band; and our continuation of reductions in both tax rates will finally give us tax reform.
These strategic taxation changes are a conscious attempt to remove taxpayers on average earnings from very high tax rates, which is very costly to achieve with the current structure. This real tax reform package is Exchequer costly. Neither is it possible to uniformly benefit all tax payers during the transition reform period. But, once completed and when the new overall structure is put in place, it will be relatively easy and less costly to focus and target.