To ask the Minister for Finance the reason he has not introduced a third band of taxation for high earners which would be appropriate for a progressive taxation system.
For ORAL answer on Thursday, 16th January, 2014.
Ref No: 1507/14
Minister for Finance ( Mr Noonan) : As the Deputy is aware, a progressive taxation system ensures that the burden of taxation falls most heavily on those with a higher ability to pay. The latest OECD data indicates that Ireland already has the most progressive tax system of the 21 EU countries which are members of that organisation. It is in this context that the Government has committed in the Programme for Government not to increase the marginal rate of income tax.
The Revenue Commissioners estimate that in 2014 the top 5 per cent of income earners will pay 44 per cent of the total income tax collected and those earning €50,000 or less, which represents 77 per cent of income earners, will only pay 19 per cent of the total income tax collected. In addition, 856,000 individuals, representing approximately 39 per cent of the income tax base, will be exempt from income tax altogether.
Since 2008 marginal rates of taxation on income have increased from 43.5% for PAYE workers and 46.5% for the self-employed, to 52 per cent and 55 per cent, respectively. Moreover, single employees incur this relatively high marginal rate where their income exceeds €32,800 per year. From an international perspective, Ireland is already considered to have a high marginal rate of tax on income. According to the latest data, Ireland has the 9th highest marginal tax rate out of the 34 members of the OECD.
Marginal tax rates are important because they influence individual decisions to work, or indeed to work more. A further increase in the marginal rate would reduce the incentive for income earners to work extra hours or for the self-employed to expand their business and take on more employees. Higher marginal rates of taxation undermine the competitiveness of businesses operating in Ireland, and act as a disincentive to future foreign direct investment. The OECD in its working paper ‘Tax and Economic Growth’ points to the “possibility that high top marginal rates will increase the average tax rates paid by high-skilled and high-income earners so much that they will migrate to countries with lower rates resulting in a brain drain which may lower innovative activity and productivity”.
For all of the above reasons, I have decided not to introduce a third band of taxation for high earners.
DÁIL QUESTIONNO 33
To ask the Minister for Finance if he has undertaken a cost benefit analysis of the effect of increasing Ireland’s corporate tax rate; and if not, the reason this sector has been excluded from tax increases.
For ORAL answer on Thursday, 16th January, 2014.
Ref No: 1508/14
Minister for Finance ( Mr Noonan) : It is possible to estimate the full year yield to the Exchequer of increasing the standard rate of corporation tax. I am informed by the Revenue Commissioners that the full year yield to the Exchequer, estimated in terms of expected 2014 profits, of increasing the standard rate of corporation tax from 12.5% to 13.5% is tentatively estimated on a straight line arithmetic basis to be about €326 million.
However, while such an estimate would be technically correct it does not take into account any possible behavioural change on the part of taxpayers as a consequence. In terms of an increase in the 12.5% rate, estimating the size of the behavioural effects is difficult but they are likely to be relatively significant.
To give the Deputy an idea of what the effects of such a change would likely be, an OECD multi-country study found that a 1% increase in the corporate tax rate reduces inward investment by 3.7% on average. On this basis, it would take only a 2.5% increase in the rate (to 15%) to decrease Ireland’s inward investment by nearly 10%. This OECD study assumes the average applies across the board but in fact the effect is likely to be more extreme for Ireland, given the economic challenges faced by a small island such as ourselves.
The very major importance of maintaining the standard 12.5% rate of corporation tax to Ireland’s international competitive position in the current climate must also be borne in mind. Ireland, like other smaller member states, is geographically and historically a peripheral country in Europe. A low corporate tax rate is a tool to address the economic limitations that come with being a peripheral country, as compared to larger core countries. Ireland’s low corporation tax rate plays an important role in attracting foreign direct investment to Ireland and thereby increasing employment here. Recent research by the OECD also points to the importance of low corporate tax rates to encourage growth.
Cost benefit analyses aside, it also would be difficult to justify such a move in the context of Ireland’s stated position that we will not change our corporation tax strategy. Even a marginal change would undermine both our long held stance on this issue and the certainty of business, domestic and international, in our resolve to maintain that position.