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McDowell sets out new frontiers for tax policy Back  
The Attorney General, Michael McDowell gave a keynote speech to the ACCA Irish Financial Services Society at the end of September.
It is undoubtedly a huge advantage to Ireland to have entered the Euro zone at its inception. Those who consistently dispute the correctness of our decision to join the Euro seem to me to overlook one of the greatest pitfalls which the Euro has saved us from. Had we remained outside the Euro zone, the potential for economic crisis or damage arising from currency instability would have been enormous. No economist has outlined in detail the alternative scenario that was available to us. If we had remained outside the Euro zone, our currency would presumably have been left free to move upwards and downwards in response to the value of sterling and the dollar on the one hand, and the Euro on the other. Nobody has painted a convincing picture of how that upwards and downwards movement would have worked out in practice. Would the Irish currency have closely tracked the Euro? Or would it have kept closer to sterling?

‘In terms of potential difficulties for exporters even a well-behaved Irish punt following a middle track between sterling and the Euro would have created very significant economic headaches for Irish business and for financial services in Ireland. On the less optimistic assumption that the punt would have fluctuated more dramatically, the economic implications for Ireland hardly bear thinking about.

‘It has been argued that the Irish Government, in joining the Euro zone, abandoned one of the levers of economic policy namely interest rates and credit policy. The unspoken assumption is that the Irish Government would have ensured higher interest rates in order to dampen down domestic demand. Whether an interest rates policy would have been politically sustainable or economically effective remains very much open to doubt. Whether it would have in any way compensated for the vagaries of currency fluctuation is a matter on which I have to confess I am extremely sceptical. For my part, one of the blessings of our membership of the Euro zone is that there are less things to go wrong and in particular, that interest and exchange rate policy is one area of potential political error which has been removed from the domestic political equation.

‘It should be noted that notwithstanding price inflation in the Irish economy, the Irish pound buys as many deutschemarks, francs or lire this year as it did last year. Consequently, viewed as part of the Euro zone inflation is not the simple self- impoverishment that it might have been in an economy with its own currency.

‘It should also be observed that the Irish Government has no control over the external value of the Euro which, insofar as it is in anyone’s control, is the responsibility of Mr. Duisenberg and his colleagues on the board of the European Central Bank. Given that Ireland is a small open economy importing a very high proportion of its goods and services from the non-Euro zone, slippage in the value of the Euro such as that permitted by the European Central Bank is bound to have a disproportionate effect on prices in Ireland.

‘From Ireland’s point of view, the strategic questions which we must address have to do with political and economic issues in the EU and how they are likely to be resolved. Our recent experience shows us that decisions about the value of the Euro are not taken by reference to Ireland’s particular interests. That example should remind us that if the European Union were to be given increased competence in the area of taxation, the tax policies that would be pursued by the Union would, in all probability, not be taken with regard to Ireland’s special needs.

European Integration Debate
‘The debate recently rekindled on the future of Ireland in the EU is already being distorted by somewhat glib media comment describing it as one between EU supporters and Eurosceptics. That kind of polarised shorthand may well describe the British debate on the issue. It does not do justice to the real issues that confront Ireland. With a tiny number of dissentients, the real debate is not about membership of the EU; it concerns the future nature of the EU.

‘Opposition to the creation of an EU super-state, or a US of E, does not imply opposition to the EU itself or a desire for the total suspension of its development. It is perfectly possible to hold an ambition that the EU should develop along the lines of a confederation of member-states with a limited pooling of sovereignty rather than a sovereign federation, with a federal Government, federal Supreme Court, federal legislature, federal taxes and federal armed forces. It is quite legitimate to believe that the members states of the Union simply do not have the political, historical, and cultural homogeneity required for viability of such a federal state. It is equally legitimate to believe that Ireland’s vital interests simply do not lie down the federalist road.

‘But whichever view one holds, Ireland, along with the other member states, is now approaching an important political cross-roads, and the road chosen will have profound consequences for democracy in Ireland and Europe, for our independence, and for the character and the quality of our civil society. How we respond to the challenge posed by the federalist project being promoted at present in the centre of Europe is the most important political question by far. It is as important an issue for Ireland at the beginning of the new century as independence was at the beginning of the 20th century or as the Union was at the beginning of the 19th century.

‘In the context of our strong commitment to the coming expansion of the EU to the East, all of these issues are given even greater importance. (We have seen) the first sign of the possibly reduced numerical presence of Ireland in the European Parliament. Being asked to give more powers to a body in which we are to have less say shows that we are indeed arrived at a political and historical watershed. The debate is only beginning.

‘Taxation policy has totally changed in Ireland since the days of 77 per cent income tax, and a ‘standard rate’ of 35 per cent plus PRSI for low paid workers. The programme of the present Government is to reduce the standard rate of taxation to 20 per cent by 2002, to ensure that 80 per cent of taxpayers pay tax at the standard rate and to reduce the top rate of tax to 42 per cent or to 40 per cent if economic circumstances permit. ‘My perspective in discussing tax rates is a longer term one.

‘To those who argue that tax rates do not matter, I can only reply that all experience proves them to be seriously mistaken. When Charlie McCreevy cut the rate of capital gains tax by 50 per cent and increased its yield by 80 per cent the case for low tax rates was proven beyond doubt. High Capital Gains Tax rates reduced the number of transactions and inhibited economic growth. Low tax rates broke the log-jam of pent-up transactions and increased the total yield which was available for social redistribution.

‘One of the great myths about income tax rates is that high rates are morally justified by reference to the need for social redistribution. Aggressively progressive tax rates seem to satisfy the social engineering tendencies of a small group of people who consider that the primary aim of taxation is to effect social change by itself as distinct from providing the resources to do so.

‘The truth of course is that those who are held up by the ideologues as deserving of high tax rates, namely the very rich, simply do not pay tax at those high rates. It is not the very wealthy in Ireland who pay 40 per cent tax on their marginal earnings. The very wealthy either become tax exiles or put their money into tax refuges, domestic and foreign. The late Sean Raemoinn, chairman of the Revenue Commissioners, was known to remark that to a large extent, income tax for the wealthy was a voluntary tax. The real section of the community that pays most heavily at high rates of tax is the captive PAYE worker who has no alternative but to pay. Their incomes do not allow them to avail of BES type schemes, urban renewal projects and other tax hedges availed of by the better off.

‘On the contrary many of them face a combined tax and PRSI rate equal to almost half of their marginal earnings. High tax rates for ordinary workers are inexcusable. This is especially so when the same tax laws permit the very wealthy to pay a much lower proportion of their income in taxes. The plan of the present Government to move the vast majority of taxpayers out of the top rate category is long overdue and, in my view, nothing more than simple social justice.

‘The fundamental problem with high tax rates is that they ignore the dynamics of a liberal market society.

‘We have instituted a corporate tax regime which will limit taxes on corporate profits to one-eighth or 12.5 per cent. On capital gains, the effective tax rate is one-fifth. For many ordinary taxpayers, the marginal rate of tax and PRSI on ordinary incomes is still one-half. It seems to me that to underpin economic growth and the enterprise culture in Ireland and to ensure that the maximum number of people participate in the economic life of the country, that Ireland should set itself ambitious targets for the five years after the programme of this Government in which consideration should be given to reducing the standard rate of income tax to one-sixth i.e. about 16 per cent and the top rate of income tax to one-third, or 33 per cent.’

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