| Minister Mc Creevy has steered four Finance Acts through Dail Eireann. Although each was remarkable, it is easy to forget the changes they have made to the taxation landscape in Ireland. There have been major successes, some good things, and some changes on which the jury is still out. |
Corporation tax
When the Minister took office the standard rate of corporation tax was 36 per cent. On 1st January next, the standard rate in respect of trading income will be 16 per cent, and that will reduce the 12.5 per cent one year later.
This dramatic rate reduction is the most important change to corporation taxation since the introduction of manufacturing relief in 1980. It provides business in Ireland with the lowest effective corporation tax rate of any mainstream economy in Europe. This has been achieved with EU approval notwithstanding the hostility which Ireland’s low tax rate attracts from other EU member states. This is an achievement of the utmost significance for the future of the Irish economy and the prosperity of all Irish people.
Personal tax rates
The Minister reduced the top rate of income tax from 48 per cent when he took office to a current 42 per cent. The standard rate has been reduce from 26 per cent to 20 per cent. The Minister doubled the standard rate band for single persons in the same period, from IR?10,000 to IR?20,000.
Personal tax – fundamental reform
Although the Minister’s rate cuts and band widenings were impressive, in the long term it is the reformed structure of income tax for which the Minister is likely to be best remembered. Two great constraints faced previous Ministers in attempting to benefit lower paid workers. The first was that increases in reliefs or allowances tended to benefit the better off more than the less well off, as they were available at the higher rate of tax as well as at the standard rate of tax.
The second major constraint was that an attempt to lessen the burden of tax on workers by increasing rate bands or allowances was extremely expensive as a married couple attracted twice the relief from these measures as was available to a single person, even if only one spouse was working.
The Minister introduced the concept of tax credits to replace allowances and reliefs. What were previously allowances and reliefs are now available at the standard rate of tax only, and therefore are of the same value to every tax payer, regardless of their marginal tax rate. That solved one problem.
Among the Minister’s more controversial reforms was to introduce individualisation. This reform brought to an end the doubling of personal allowance increases for a married person with a non-income earning spouse. These two changes have opened up the way for the future to make significant impacts on the tax burden of individual workers.
Capital tax rates
The Minister halved the tax rate generally applicable to capital gains tax and capital acquisitions tax, bringing it down from 40 per cent in each case to 20 per cent.
It was common experience that the 40 per cent rate of capital gains tax was a major obstacle to transactions and business. It served to prevent transactions happening rather than to raise tax. In contrast, the 20 per cent rate is raising substantial taxes and is not seen as an impediment to transactions.
Pensions
The Minister’s single greatest reform to pensions was to liberate the system from the obligation pay over accumulated funds to acquire an annuity that died with the pensioner. The pension fund can now (in the form as an Alternative Retirement Fund) be a capital sum owned by the pensioner and capable (provided he doesn’t spend it) of being inherited by his family on his death.
The Ministers efforts in this area are not yet complete. To date he has liberated principally the self employed person from the annuity scourge. The task remaining for him is to liberate the employee in a similar fashion.
Outside the direct area of taxation, the Minister has created a fund (now containing several billion pounds) to help finance State pensions in the future.
Savings products
One challenge which the Minister has had to face was the conversion of the IFSC into a nationwide financial system. An aspect of that was his extension of the ‘gross fund’ concept enjoyed in the IFSC to the entire country. He has also successfully phased out our (illegal under EU law) discriminatory tax provisions against life assurance and unitised products sold by overseas companies.
Other achievements
The Minister has overseen the process of consolidating tax legislation (in the case of stamp duties, for the first time in a century). This process was started by his predecessor, Mr Quinn. The Minister has rationalised and rewritten tax reliefs in the area of donations to charities, and third level education fees.
And the failures
Lest the Minister at this point believes that he is reading his own election manifesto, let us look at some of the areas where he does not deserve a pass mark. The major blunders of the last four budgets were:
Removing the PRSI ceiling on employers: Just as the world economy was about to plunge into a recession, Mr Mc Creevy introduced a tax on jobs, and in particular on higher paid high tech jobs.
Capital acquisions tax – scope: At a time when we were trying to create an international economy which requires high skilled foreigners to reside here from time to time, Mr Mc Creevy introduced changes to gift tax and inheritance tax that will bring such people within the net of those taxes, both in respect of what they give, and in respect of what they receive, from 2004 onwards. The result will be that few executives from abroad will be willing to remain in Ireland for longer than five years (the time limit for the new tax kicking in).
Dividend withholding tax: Having reduced tax rates so as to attract foreign investment, the Minister introduced a tax on taking profits out from that investment! Although the tax is riddled with exceptions and exemptions designed to undo its own damage, it remains a cumbersome obstacle to foreign investment in Ireland. In reality it achieves nothing in terms of tax yield, apart from diverting some income tax into a different heading.
Housing market: Four years of macro manipulating and micro manipulating the housing market is unlikely to have yielded a single extra house on the supply side, and has left the rental market in chaos. As houses prices are threatening to fall, and rental accommodation prices are soaring, we remain faced with a 9 per cent stamp duty and a prohibition on the deductibility of interest against rental income from residential property.
Losses relief restrictions: Mr McCreevy has multiplied the number of ‘ring fences’ that now operate so as to prevent true losses from being offset against income before computing tax. It is now quite possible that a company may have losses, and still be liable for tax on income. This whole area is a complete mess of injustice and complexity. It is not a suitable background to a wealth creating economy. A wealth creating economy requires that risks be taken which implies that losses will arise.
Conclusion
Taking it all in all, major successes and some serious mistakes, Mr Mc Creevy has left the country in no doubt as to who is in charge in the Department of Finance. |
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| Article appeared in the November 2001 issue.
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