Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

The proposal is for a third rate of tax at 48% and that is eight percentage points above the 40% rate which is going to be the top rate from 1 January next after the Finance Bill is passed.

The economic effect is on the marginal rate of tax. Before the budget, the marginal rate was 52%, which includes universal social charge, USC, and PRSI, pay related social insurance. This would take the marginal rate of tax up to 60% for those people, a significant jump.

Such a move would also have labour market effects. If 60 cent were taken off every additional euro one earns above a certain level, literature on this question suggests it would reduce incentives. It certainly reduces the incentive to come home for those who have emigrated. The entry point in the Irish tax system is low. Before the budget, it was €32,000. Paying 60 cent on additional earnings over €100,000 would be a big imposition on a PAYE worker on such a gross salary. For someone earning the same amount in London who gets a job offer in Dublin, such a measure - essentially taking 60% once one goes above a relatively low income threshold - almost eliminates an incentive to come home.

As the debate on corporation tax develops and it becomes clear changes in the regime will take place, the level of personal taxes in a country will become an influencing factor for those who control the flow of foreign direct investment when they are deciding where to locate industry. Corporations do not make these decisions; it is people who make them. For example, last week there was an announcement by the Taoiseach of an investment of €1 billion by a multinational in a new plant in west Dublin. Would those plant managers who will be coming into Ireland ignore the fact they might have to pay 60% of their income because of such a measure?

Take the case of the self-employed. What would happen if one put an additional 8% on their tax rate of 55%? Again, this would be a disincentive to entrepreneurial people to found their own businesses. We live in a society where income and profit are drivers of activity. Why would anyone set up their own company unless there is a personal benefit of a good income from it? I accept there are other considerations in setting up one's own company but the bottom line is personal income.

One could argue this amendment has the capacity to make the income tax system more progressive. Ireland already has the most progressive income tax system of all the EU members of the OECD being at the top of the league table of the EU’s 28 member states. This proposal sticks another 8% on to the tax rate. Apart from the imposition on those with salaries who would be affected by this amendment, the economic case against it is very strong. It would be bad economic policy and would reduce rather than create jobs.