Analysis: the introduction of the PAYE system in 1960 transformed the State's finances, but it faced opposition from a surprising source

The Commission on Taxation and Welfare, which recently published its report, is the fifth such body to make recommendations to Government on the structure of the tax system. The Committee on Industrial Taxation was established in 1953 to examine issues relating to the taxation of industrial production. However the first statutory tax commission was the Commission on Income Taxation, established by Fine Gael Minister for Finance, Gerard Sweetman in February 1957. It was on the recommendation of this commission that the Pay As You Earn (PAYE) tax system was introduced in Ireland.

There was a growing consensus by the mid 1950s that a comprehensive review of the tax system was long overdue. In 1953, Fianna Fáil called for the establishment of a select committee to examine the income tax code and bring it into line with modern requirements, though Sean MacEntee, the Fianna Fáil Minister for Finance at the time did not favour the proposal.

In 1955, both Fine Gael and the Congress of Irish Unions again called for the establishment of a tax commission. This proposal did not find favour with the Revenue Commissioners whose briefing note for Sweetman set out several objections and questioned 'whether much would be revealed that was not already known to the Minister and his advisers’.

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From RTÉ Archives, Caroline Erskine reports for RTÉ News in 1988 on the opening of a new enquiry office for PAYE workers

Despite this, Sweetman announced the appointment of the Commission on Income Taxation in 1957. It was to be chaired by Cearbhall O Dálaigh, then a Justice of the Supreme Court and a future president of the country. Members included Monsignor William Conway of Maynooth College, later a cardinal and Catholic primate of all Ireland, and Dr. Juan Greene, a founder of the Irish Farmers Association. Public expectations were high, and some expected that the commission would recommend the abolition of income tax entirely.

The commission's terms of reference included a brief to inquire into the provisions for collection of tax from employees. It may come as a surprise to present day wage earners that employees were not subject to PAYE on their wages for most of the 20th century, but instead paid it to Revenue in two instalments a year. Tax on employment earnings was calculated based on the earnings of the previous year so the final liability was not payable until well over a year after the income was earned.

Many workers made little or no provision for their tax bills and fell into arrears. Revenue responded to non-payment with the widespread use of Section 6 Notices. These directed an employer to deduct arrears from an employee’s wages and were greatly resented.

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From RTÉ Archives, Derek Davis and Seán Carberry report for RTÉ News on the huge numbers of PAYE workers who attened a protest against the tax system in Dublin in 1979

By 1958, more than 80,000 employees were in arrears and Revenue were issuing more than 1,000 Section 6 notices a week. This led to a cat and mouse game between Revenue and reluctant taxpayers. Employees could stay one step ahead of a Section 6 notice by changing jobs, thus avoiding payment until Revenue caught up with them. Others facing tax bills they could not pay, simply went to Britain.

This unsatisfactory situation led to demands, led by the trade union movement, for the introduction of a PAYE system. Given these demands, and especially the potential benefits for the state, it might be expected that the Minister for Finance would have welcomed PAYE. However, successive finance ministers rejected the idea. MacEntee believed it would be inflationary and told the 1953 Fianna Fáil Ard Fheis that ‘it discouraged people from earning as much as they could’.

But the greatest opposition to PAYE came from Revenue. While briefing notes acknowled the potential benefits of PAYE, they also set out a long list of objections. Fundamentally, they believed that introducing PAYE would create significant additional work for Revenue, might lead to disruption of the wider tax system and that the cost of introducing it would outweigh any potential benefits. At the root of these objections lay an unyielding conservatism on the part of the most senior officials in Revenue, several of whom had been in office for over 30 years.

The Commission’s first report was published in April 1959 and was devoted entirely to PAYE. This long delay was mainly due to Revenue’s tardy response to the commission’s enquiries. While Sweetman had promised the commission ‘unfettered access’, members of the commission reported that Revenue opposed and delayed its work, failed to provide requested information and refused to engage in discussions on the implementation of a PAYE system. Ó Dálaigh would later tell T.K Whitaker that the Commission was dissatisfied "from start to finish" with the help received from Revenue.

This poor relationship culminated with a furious row early in 1959. After the draft report had been submitted to the minister, the Revenue chairman R.P. (Dick) Rice allegedly threatened to write to the papers contradicting the report’s findings, which led to an angry phone call from Ó Dálaigh to Rice. The cabinet approved the commission's First Report on April 3rd 1959. It contained a single recommendation; the introduction as soon as possible of a PAYE system along the lines of that in operation in the UK.

PAYE come into operation in Ireland on October 6th 1960. This was done via a mixture of public meetings, late opening of tax offices and a great deal of overtime. In the first year of PAYE’s operation, the income tax yield increased by £4.5 million. By the end of the 1960s, PAYE had become, as one commentator described it, ‘the pivot of modern Ireland’s tax system’. The yield from employees jumped from £7 million in 1959 to £48 million in 1969. By the late 1970s, PAYE workers were paying almost 90% of all income tax.

The introduction of PAYE transformed the state’s finances and provided a reliable stream of revenue, without which many of the social and economic initiatives of the 1960s may not have been possible. It was an important and often overlooked milestone in Ireland's fiscal history.

The views expressed here are those of the author and do not represent or reflect the views of RTÉ