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CAT needs abolition, not reform Back  
Capital acquisitions tax is a bad system heavily patched up in a misguided effort to keep it alive.
Over the years it has been necessary to exempt transfers to spouses, substantially remove the charge on farmland, on business assets and on unquoted shares in trading companies, and to introduce a complex series of reliefs in relation to transactions between a child and a parent. After all of this, the tax is one on which the rates are too high, the thresholds are too low, and the structure of the tax is based on definitions of personal relationships that no longer reflect (if they ever did) the manner in which people live their lives together.

Tax on PAYE class
What started as a fairly universal tax on gifts and inheritances of very substantial amounts has now become a tax on moderate wealth. It does not affect the poor, nor need it affect the very rich (who largely take themselves out of the country rather than suffer it). It does not apply to any significant degree to the farming community, and it does not apply to any significant degree to the owners of family businesses by reason of business property relief. It is left as a tax largely borne by the PAYE middle classes. They are the sector of the community which has traditionally, through income tax, borne more than their fair share of the tax burden.

There can be no justification for maintaining a tax which in reality is focused almost entirely upon this group in the community.

Base cannot widen
The option of widening the base of the tax as the tax is presently structured is not open to us. To do that, it would be necessary to abolish agricultural relief and business property relief, and to subject the value of productive assets in the State to the full regime of the tax. It would be nonsense to suggest that up to 40p.c. of the value of a farm, or of a family business, should pass to the State in each generation. The present 90p.c. agricultural and business property reliefs are not generous concessions. They were essential revisions to the tax to enable the tax to hobble along in some form or another. Without them the tax would be plainly damaging to the economy.

Drives out success
Business property relief does not in most cases apply to businesses which are held through quoted companies. If an Irish businessman or woman becomes a success on the world stage, it is nearly inevitable that their business will be a quoted business. Such entrepreneurs typically will go on to found several business, becoming serial entrepreneurs. The most successful economies in the world are those which grow and encourage such entrepreneurs.

In Ireland, any such entrepreneur quickly realises that, once successful he had better get out of the country. It is to stretch patriotism beyond its normal limits to ask creators of a world class businesses to remain in the country and hand over 40p.c. of it to the State on their death. This is not theory only. The best known figures in Irish business tend to be domiciled abroad. No amount of tinkering with the tax is capable of addressing that defect, which drives success from our shores.

relationships flawed basis
It has been argued that the tax free thresholds which are available ensure that hardship does not arise. This is not true. The tax free thresholds are defined in terms of the relationships between donor and donee. These relationships are defined in rigid traditional terms. They permit a parent to leave assets to a child to the extent of £190,000 approximately; but because the tax free threshold from child to parent is generally less, they make it very difficult for a child to support his parents in their old age.

The rules take no regard of relationships between cohabiting adults where they are outside marriage. This problem has been examined by an inter departmental work-party for some years now. The truth is that there is no method of defining the wide variety of relationships that can exist between human beings. A tax which depends for its acceptability upon defining such relationships is fundamentally flawed. No tinkering is likely to be successful in the long run.

savings & pensions
The burden of gift tax and inheritance tax on the PAYE middle classes runs counter to many other efforts being made by the State to encourage savings and the building up of capital by people to support themselves in their old age. The present tax actually encourages early giving by parents to children. It is, through having a lower gift tax rate than inheritance tax rate, an incentive to improvidence in old age. Since it is only unproductive assets that now effectively bear the tax, there is no reason to encourage early giving in this fashion. On the contrary, we should be encouraging parents to retain their assets for their own support.

It is a nonsense to have numerous incentives towards saving, such as relief for pension contributions, and the lower rates of tax on savings products, while at the same time maintaining a confiscatory rate of inheritance tax upon accumulated savings.

equity ?
Predictably, it will be said that the tax is necessary in the interests of equity. Equity requires that those in the community who can afford to pay tax should bear their fair share. What equity is there in requiring those who have already borne their fair share throughout their lives to now bear the heaviest tax burden of their lifetime, from a tax which in reality is confined to the PAYE middle classes?

A rich country is a country which can support those unable or less well able to support themselves. You cannot have a rich country without having rich people in it. The spirit behind CAT is a determination not to have rich people among us. It is a recipe for poverty, and not for equity.

The outcry against CAT in recent years has focused on such matters as the impact of inheritance tax on houses in Dublin, and its inequity in the case of cohabiting unmarried couples. These are merely some of the more obvious problems. The basic problem with the tax are that it is focused on a narrow group in the community, the PAYE classes, and that it is incompatible with retaining successful entrepreneurs within our country. The tax cannot be reformed. It must be removed.

An alternative
It is not suggested that there should be no tax whatever on inheritances or gifts. The present probate tax applies at reasonable rates and with minimum exemptions. The present rate of 2p.c. can bear to be increased to (say) 5p.c. in the context of an abolition of all other capital acquisitions taxes, without causing either injustice or economic dislocation. Such a flat rate of tax with a few exemptions is capable of applying evenly across the whole community, and hopefully raising as much revenue as the existing unjust and economically harmful tax.

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