Consolidation & Reform
Until 1967 the income tax legislation was the Income Tax Act 1918 (UK statute) as amended annually. An Income Tax consolidation bill was introduced and became the income Tax Act 1967.
The Income Tax Act 1967 consolidated the law and continued to divide income into categories which is reflected in the current legislation
- trade and professions
- investment income
- employment income
- rental income
- miscellaneous income
In 1969 the tax charge under schedule A in respect of the ownership of property and schedule B in respect of the occupation of land were abolished. Earned income relief was abolished. Personal allowances were introduced together with banding. High rates of income tax applied.
Prior to 1969/70 income from buildings was tax on their notional value either based on rateable valuation or the valuation itself. This was charged under schedule A of the income tax act which apply to income derived from the property and income imputed to an owner occupier property or an occupier who paid less than annual value rent. This was allowed as a deduction from property rates,
The Commission on Income Tax in its second report in 1959 recommended the premises exceeding £30 valuation should be exempted. Schedule A taxed the owner occupier of the dwelling house, and it was particularly onerous for persons living on fixed income pensions. By the late 1970s the tax structure had changed with considerable benefit for owner occupiers including
- imputed income abolished 1969
- relief on interest for the main residence up to £4,800 for a married couple
- relief on life assurance premium which could be used to fund house purchase
- no capital gains tax on principal private residence
- stamp duty exemption for new houses below grant size
- grant of £1000 first-time buyers
- £3000 mortgage interest subsidy payable over 3 years for first-time buyers
- rates exemption since 1978
The 1974 legislation provided at all farming income was be treated in the same way as trading income. However, did not apply to an individual whose rateable valuation of all farm land occupied was less than £100. An individual who was charged on farming profits might elect to pay tax on the basis of 40 times the rateable valuation.
Increasing Income Tax Burden
In 1977 an initial rate of 20% was introduced. This was abolished in 1979. There was a single reduced rate of 25% on the first £1000 (£2000 for jointly assessed married couple). In 1981/ 82 marginal rates increased from 0% up to £2,000 increasing through 20%,25%, 35% ,45& , 55 to 60% on salaries on income over £11,216 per annum. This was doubled for a married person.
In 1981 6% of taxpayers paid at the marginal rate of 20% 5% at the marginal rate of 25% 71% at the marginal rate of 35% 10% of the marginal rate of 45% percent of the marginal rate of 55% and 3.2% at the marginal rate of 60%.
By the late 1970s 81% of all income tax was paid by schedule E (PAYE) tax payers. 17.9% was paid by schedule D (trades) and 0.7% was paid by farmers.
In 1982/83 the marginal rates of income tax ranged from 25% on the initial £1000 to 50% in excess of £8,000. For married couples these figures were doubled. The rates applies cumulatively so that the amount over the marginal rate only, was taxed at that date.
There were personal allowances and exemption limits. In the case of income in excess of the exemption limits there was marginal relief to ensure that there were no anomalies.
From 1977 the due date for payment became 1st July and 1st January in each year. Income tax is payable on income from investment rents on 1st January. After 1977 they were payable in two instalments on 1st January and 1st July in the year of assessment. The tax year commenced on 6th April.
Demand for Reform
The overall tax burden had increased significantly in the previous decade. The property tax had decreased from 12% to 5% and was to fall further. The percentage of tax raised from excise on specific commodities had fallen from 36% to 28% and would fall to 20% by the mid-1980s. Value-added tax comprised 16% of tax revenue at the time. Corporation profits tax had fallen from 8% to 4% as a percentage of the entire take..
There was narrow base for income tax and high rates. PAYE workers believe they paid more than their fair share of tax. Before the 1980 budget almost 750,000 people marched advocating tax reform.
The high rates of inflation meant that allowances did not keep pace with inflation. There was bracket creep by which a greater percentage of tax was paid by reason of inflation even where wages kept pace with inflation because the higher nominal amount was subject to the higher nominal taxation rates and lower allowances.
Commission on Taxation
Against this background the government established a Commission on Taxation in March 1980 to enquire generally into the present system of taxation and recommend viable and practicable changes so is to achieve an equitable incidence of taxation with attention being paid to the need to encourage development of the national economy and maintain an adequate revenue yield.
Over the following five years, the Commission published five reports dealing comprehensively with all issues relating to the Irish tax system including direct tax, tax incentives, indirect tax, special tax and tax administration. It proposed a radical scheme of reform for a more equitable and efficient tax system.
Ireland was subject to a chronically bad budget position in the 1980. Latterly, almost all of income tax was being used to service interest on an escalating national debt would have doubled in the 4 years to 1987.
Recommendations Personal Tax
The Commission recommended a wider tax base with a single rate. Income would include labour income, trade income, dividends, fringe benefits, gifts, inheritances capital gains, pensions, winnings, social welfare payments and everything that increased net wealth. The category of income earner was irrelevant employee farmer unemployed or self-employed. The family was to be the unit for tax purposes.
Income tax would remain the major source of government revenue. The rate would be substantially less than the then standard rate of 35%.
The final report recommended widespread self-assessment, retention of PAYE and deduction of tax at source in so far as possible. It recommended increased revenue powers of enforcement. If recommended that tax bands would be indexed to move it inflation.
Self-assessment was introduced in 1988. Controversially a tax amnesty was introduced.
The Commission in a radical proposal recommended a direct expenditure tax on the highest income earners. Taxpayers would be required to record total income for the period and non-consumption outgoings, the difference being taxable expenditure.
The Commission recommended elimination of significant amounts of the various tax expenditures/special allowances allowance. There would be a tax credit for individuals which would be doubled for families.
It recommended targeting with direct payments over tax expenditure and allowances. It recommended the abolition of PRSI and its replacement by a flat rate social security tax of 5%. The employer’s contribution will be based on profits rather than payroll.
It recommended a level playing field in relation to the taxation of savings. It would eliminate different treatments of savings based on type. It would discourage the use of housing as an investment. Mortgage interest tax relief should be replaced by a system focused on first-time buyers. Property tax should be reintroduced. It recommended individual retirement accounts along the lines of those in the United States.
Recommendation Corporation Tax
It proposed that Corporation tax would be set at the standard rate of income tax with full imputation/credit. Advance corporation tax was proposed.
Allowances for true economic depreciation only would be allowed. Tax expenditures by way of incentives should be replaced by direct aid. Debt servicing would not be allowed as a deduction so that the corporate tax system would be neutral as between debt and equity.
A system of advance corporation tax was introduced following the recommendation of the report. Accelerated depreciation allowances were eliminated 1992. Section 84 loan stock relief was curtailed.
Recommendations Indirect Taxes
The Commission recommended a single rate of value added tax on all final purchases. With a comprehensive base, a 15% rate was envisaged less than the 23% lower rate (and 35% higher rate) that applied.
It recommended continued excise taxes on alcohol tobacco motoring and betting on the as justified by the negative externalities involved. Stamp duty was recommended to be abolished as well as bank levies.
The fourth report recommended a property tax with neutral treatment of property, natural resources and charities. The residential property tax would be abolished. Economic rent accruing to the exploitation of Irish natural resources would be taxed to the greatest extent possible compatible with the development of the resources.
The Commission’s more radical recommendations were not implemented. The budgetary position remained difficult.
Some of the tax reliefs that existed in the 1980s were withdrawn. However, in the early 1990 significant new reliefs were introduced including unrestricted EES urban renewal section 27 relief on rented residential accommodation
Significant exemptions for corporation tax continued. Expert sales relief was abolished in 1980. International financial services Centre and manufacturing was subject to 10% tax.
Falling Marginal Rates
Significant tax reform, in particular rate reduction was taking place internationally in particular in US and the UK in the mid-1980s under the governments of Ronald Reagan and Margaret Thatcher. A key part of their reforms was a greater role for the market and removals of disincentives to work.
In Ireland Between 1985 and 1988 the highest rate tax had fallen from 54% to 44% on average across the OECD.
Between 1983 and 1993 the highest marginal tax rate was reduced from 60% to 48%. In 1993/ 94 the lower rate was 27% on £7,675 with the balance taxed as 48%. In 1983 it was as follows, £1000 at 25%, next £2000 at 35%, next £2,000 at 45%, next £2,000 at 55% and the balance at 60%.
Little changed in relation to PRSI. The PRSI side standard rate remained 5.5% with 1% health levy and one percent employment levy. The PRSI ceiling was increased from £9500 to £20,000 over the ten years to 1994.
In 1993 budget witnessed a 1% income levy due to financial difficulties. The effective rate of tax for those on the average industrial age in 1982 was 20% and in 1993 it was 25%. For those on twice the industrial wages it was 30% in 1982 and 33% in 1984. For those on five times the average industrial wage it was 46.9% in 1982 and 44% in 1993.