The Health and The Employment & Training Levies - TSG98/11 Introduction
1. The Health and the Employment & Training Levies were introduced respectively through the Health Contributions Act, 1979 and the Youth Employment Agency Act, 1981. Changes in the levies, which cannot be done in the Finance Bill, have normally been enacted through the annual Social Welfare Act. The Health contribution is currently charged at 1.25% and the Employment & Training levy at 1% on an individual's total income from all sources, with only a few exceptions, e.g. social welfare payments, BIK, the total income of Medical Card holders and of recipients of the social welfare Survivor's and Widow's Pensions, Lone Parent's allowance and Deserted Wives' Benefit/Allowance.
2. The 1994 Budget introduced for both the Health and the Employment & Training levies a low income exemption threshold of £9,000 a year for the self-employed and £173 per week (weekly non-cumulative) for employees. These thresholds were increased in each subsequent Budget - by £500 in both 1997 and 1998 - and currently stand at £10,750 pa or £207 per week. The annual cost of the existing exemption threshold is estimated at around £69 m. The revenue yield in 1998 from both levies combined (2.25%) is estimated at around £454m.
Some Difficulties with the Levies
3. There are two particular difficulties with the levies.
(i) The existence of the levies significantly increases the complexity of the combined PRSI and levies systems. The levies, while being distinct from PRSI, are collected in conjunction with PRSI and thereby greatly increase the number of sub-classes that are necessary in operating PRSI.
(ii) The second difficulty relates to the levies threshold. Once a person's income exceeds the annual/weekly thresholds the levies are liable on all her/his income from pound one. This creates a "step" at the thresholds. It causes some difficulties for people on incomes close to the thresholds or whose wages due to pay increases etc., move from being below the thresholds to being slightly over them. The thresholds may hold out the possibility of some downwards formal wage distortion combined with informal pay supplementation. However, it is considered that having a marginal relief system would introduce an unacceptable level of additional complexity into the employee's Levies/PRSI system. It is sometimes also proposed that the levies should apply only to that portion of a person's income over the £207 per week (£10,750 pa) threshold. Such a measure would be costly to implement [around £218.5 m pa] as it would benefit everyone.
TWIG's Discussion on the Levies
4. TWIG in its report discussed the levies and concluded that neither of the two levies confer entitlement to benefits and are therefore clearly taxes. Despite their low rate they generate significant resources and could not be easily abolished without increasing marginal tax rates; the Group did not favour this. The Group concluded that, in addition, as no one with income below the threshold (£10,750) pays either levy, their abolition is a low priority. The Group recommended that, over the longer term, the two levies be phased out as resources permit. The Group also recommended that in order not to worsen the "step" the levies threshold should be frozen in real terms and as a step towards phasing out the levies that, in the short term it would be a useful integration measure if the levies were more closely related to employee PRSI, through for example introducing an allowance similar to the PRSI-free allowance.