| The OECD have praised Ireland's economic performance. It has also offered advice on future taxation policy, some of which may be politically unacceptable. |
The OECD identify as a prime cause of our current boom the substantial foreign direct investment in Ireland. It notes "Ireland's share of OECD total foreign direct investment inflows surged in the 1990s, reaching a level out of all proportion with its GDP share; for example, in 1997 it ranked fifth in the world as a destination for US direct investment outflows."
It is no coincidence that inward investment has found Ireland attractive. Since the mid 1950s government policies have been focused on attracting inward investment. That makes the recent decision to introduce dividend withholding tax all the more surprising. That tax is a direct obstacle to inward investment.
In looking to the future the OECD advise "Cuts in tax rates should be offset by base broadening moves and other revenue raising measures." Curiously, the unfortunate dividend withholding tax was at one time described by the Government as just such a base broadening measure, to compensate for the introduction of the 12.5% corporation tax rate. What is overlooked of course is that the 12.5% corporation tax rate was not a tax reduction for very many companies, it will represent a tax increase (when it affects them).
The OECD recommend "the Government to encourage more actively the private provision of child care and pre school facilities." The Finance Act 1999 took some limited steps in this area by permitting employers to provide tax free creche facilities in quite restrictive circumstances, and in providing capital allowances to certain creche buildings.
The OECD suggest "the private rental market (in houses) should eventually be deepened in order to allow greater labour mobility, even if short term considerations persuaded the Government to discourage the development of this market - - last Spring." This suggestion can be not other than a proposal to reverse the denial of interest relief to those providing rental residential accommodation.
The OECD also suggest as "desirable longer term reforms, the phasing out of mortgage interest relief, and either the reintroduction of residential property tax, or a restructured capital gains tax." The latter suggestion is probably aimed at the abolition or restriction of the present exemption in respect of gains on disposal of principal private residences. These suggestions could prove difficult politically.
The report identifies a daunting list of infra-structural investment which is outstanding. It suggests the use of public-private partnerships to tackle this. It says "Any new motorways should be financed in part by toll charges. Water should no longer be provided free at the margin to residential users, recycling should be encouraged with appropriate incentives." It goes on to suggest "some sort of tax/subsidy scheme" to help achieve targets in GHG emissions. All of this is to suggest a move away from taxation financed spending to "user financed spending."
The report has many other interesting comments to make in purely economic areas. Whether or not the advice offered on taxation issues, as identified above, is acceptable to the Government, the issues raised will unavoidably feature in the budget planning process for the December 1999 Budget. |
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| Article appeared in the May 1999 issue.
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