Brian Cowen (Laois-Offaly, Fianna Fail)

I thank Deputies for the many interesting contributions to the debate on the Finance Bill 2008 and look forward to a constructive and informed discussion on Committee Stage, during which I hope Deputies will have a fuller opportunity to discuss some of the issues of interest to them. In my reply I will respond, in so far as possible, to the points made by the Deputies on the Bill.

In my introductory remarks, I pointed to the hallmarks of an equitable tax system and to what had been achieved in recent years for those on low and average incomes and for the more vulnerable groups in society. On the question of tax incentives, successive Governments, of all hues, have used such reliefs for the purpose of furthering certain socioeconomic objectives. Once again, Deputy Burton has failed to acknowledge any of the measures taken by me or my predecessor to abolish reliefs that had achieved their purpose and whose continuation was no longer appropriate, or to counter tax avoidance, or on base broadening, with a view to achieving greater equity in the system.

I point in particular to the measure I introduced in the Finance Act 2006, which came into effect from 1 January 2007. The measure restricts the use of tax incentive reliefs and will ensure that those who have high incomes and who use tax incentive reliefs will have an effective rate of income tax of about 20% at least. Data from the Office of the Revenue Commissioners on those with the highest incomes in the country consistently show that the majority of them pay tax at or close to the top rate. It is estimated for 2008 that the top 1%, approximately, of income earners, representing those earning in excess of €200,000 per annum, will contribute about 25% of the expected yield compared to less than 15% of the income tax take in 1997. These are the indisputable facts.

Deputy Bruton alleged that the Government was introducing new tax incentive schemes without any appropriate cost-benefit analysis but this is not the case. In budget 2006, I made it clear that any proposals for the introduction of new special incentive reliefs should, as far as appropriate, be time limited and subject to an assessment of costs and benefits prior to their introduction. Since then, the mid-Shannon scheme was subject to an independent cost-benefit analysis before it was introduced and the film relief scheme was subject to one before it was extended. Therefore, the Deputy's assertion that no cost-benefit analyses are being conducted on proposed new tax incentive schemes is clearly wrong.

Deputy Bruton's concerns regarding the termination of the schemes in July 2008 rather than at an earlier date fly in the face of the recommendations of the consultants who carried out the reviews, who saw no merit in an early termination of the property-based schemes in 2006. Rather, both external consultants' reports recommended that the schemes be retained for existing projects over a transitional period in order to allow for an orderly winding down of the schemes and to prevent overheating of the wider construction sector in the rush to meet the 2006 deadline.

I remind the Deputy that the main property schemes have been closed off to new projects since early 2003 in the case of the urban renewal scheme and since December 2004 in the case of the reliefs for student accommodation, hotels, holiday cottages, town renewal, rural renewal and the living over the shop scheme. While the Deputy is correct in stating the schemes are due to terminate in 2008, he fails to acknowledge that the time extension applied to pipeline projects only and also that, during the extended period, the levels of reliefs provided were reduced progressively to 75% and 50% of the levels that applied previously.

My decision to provide for a orderly winding down of these schemes between 2006 and 2008 reflected a pragmatic and balanced approach which took into account the significant role of the construction sector in the economy as a generator of economic growth and employment.

Deputy Burton expressed concern about a potential rise in home repossessions and about families meeting their mortgage commitments. As I noted in my reply to her in the House last week, possession orders applied for are not always granted or implemented and they are not always issued against residential properties. I am sure the Deputy would also acknowledge that higher levels of court proceedings for property repossessions need to be interpreted with caution given the variety of circumstances that give rise to such cases and the fact that not all of the proceedings relate to residential property.

Even where orders are secured, some are not enforced. The number of orders granted by the High Court in 2006 represented a tiny proportion of all home mortgages, in the order of 0.05%, and the Irish experience is of low levels of non-performance on mortgage loans.

In this context, the Financial Stability Report 2007, published last November by the Central Bank and Financial Services Authority of Ireland, points out that there are no firm indications of a significantly higher level of mortgage arrears in the banking system. In overall terms, housing affordability is supported by relatively low loan-to-value ratios, income growth, interest rates that are relatively low in historic terms and, in particular, increases in mortgage interest relief for first-time buyers.

In regard to mortgage repayments, the Government has provided substantial assistance in budgets 2007 and 2008 in the form of increased mortgage interest relief to those most in need of support in this area, that is, first-time buyers within the first seven years of taking out their mortgage. This has substantially cushioned the impact of increases in interest rates. Cumulatively, as a result of the last two budgets, first-time buyers have obtained additional relief of up to €100 per month, if single, or €200 per month, if married or widowed, subject to paying sufficient mortgage interest to avail of the relief. These improvements are in addition to the complete reform of stamp duty on residential property which considerably alters the economics of house purchase and repayment, especially for first-time buyers. The measures taken by the Government in the past two years represent a substantial level of support to mortgage holders.

Deputy Burton also referred to the tax position of a single person on the average industrial wage where bonus payments or overtime payments are received. With the single standard rate band set at €35,400 for 2008, the average industrial wage for 2008, estimated at some €34,000, is placed well outside liability to the higher rate of tax. This fulfils the commitment made in the programme for Government.

The effective tax rate of a PAYE worker on the average industrial wage of €34,000 is some 9% in 2008. If such a person earns, for example, an extra €2,000 in bonuses or overtime this year, his or her effective tax rate will be approximately 10%. The Deputy will agree that such low effective tax rates at such low levels is a substantial signal of the importance the Government has attached to reducing the tax burden for lower and average earners.

The latest comparative data available from the OECD, relating to 2006, indicate that in international terms, for the single worker on average earnings, Ireland has the lowest tax wedge in the EU and can report significant progress on income tax reform as a result. Deputies are probably tired of hearing me say this because it has been the case for each of the seven years from 2000 to 2006. For a married one-earner couple with two children on average earnings, Ireland has the lowest tax wedge in the entire OECD. In addition, when cash transfers from the State are taken into account, such couples face a negative burden because they receive more in cash transfers than they pay out in tax and social security contributions. Ireland is the only OECD country where this is the case. Moreover, the data do not take into account the further improvements made in budgets 2007 and 2008.

I remind the House of an interesting fact. After budget 2008, the percentage of the income tax yield coming from those earning at or under the average industrial wage is estimated at 4% of the total tax yield as compared to more than 14% when we came into office in 1997. Such earners represent approximately 55% of all income earners. This represents a considerable improvement in terms of tax equity.

Deputies Bruton, Burton and Shortall referred to the absence of provisions in the Finance Bill dealing with the pensions system. The Green Paper on pensions was published in the autumn of last year and sets out comprehensively both the challenges facing us and the options for change in the pensions area. The Green Paper is a discussion document aimed at ensuring that we have an informed public debate before any particular approaches to dealing with the pensions agenda are decided. In this context, a period of consultation on the contents of the Green Paper is under way. It would not be appropriate for the Government to undermine this consultation process by adopting particular courses of action at this stage. We will listen to what the social partners and others have to say on this and the other issues discussed in the Green Paper before progressing proposals in this area.

Deputy Burton raised the issue of the cost of the incentive for energy-efficient equipment, and Deputies O'Donnell and Finneran asked why it is not being extended to individuals. This incentive involves providing companies with the opportunity to invest in certain specified energy-saving technologies and being able to write off the full cost of that investment against their taxable income in the year of purchase. In the normal course, companies would only be entitled to write off the cost of this type of expenditure over eight years. The additional cost to the Exchequer arising from this incentive in terms of tax forgone will depend on the extent to which it encourages more companies to invest in the specified equipment than would do so in the absence of the incentive.

Moreover, it should be recognised that there will be benefits and savings to investing companies, the economy and the environment from the increased use of energy-efficient equipment. Putting a monetary value on these benefits is not a simple matter, but this incentive should be viewed in the nature of a "pump priming" exercise that will operate for three years. It is hoped that, over time, companies will see the ongoing value of investing in energy-efficient equipment in terms of the improved economic returns to themselves as well as the environmental benefits to society.

I note the welcome from Deputy Burton for the measures designed to increase the tax take from higher profits from the exploitation of future oil and gas finds. The Deputy asks whether these measures cannot be applied retrospectively. There are limits on the extent to which it is legal or desirable to make taxation retrospective, while there is a compelling case for increasing the tax take in the future from more profitable oil and gas fields. Internationally, licensing terms are being amended in favour of national governments in light of increasing oil prices and fewer prospect areas available for exploration.

The overall objective of the changes being made in this Bill is to ensure that the State will get a higher return in the case of more profitable oil and gas fields while continuing to encourage the industry to invest in exploration for oil and gas. We must get the balance right between ensuring, on the one hand, that Ireland gets an appropriate return for the exploitation of its resources while, on the other, giving sufficient encouragement to those who would search out and extract those resources at considerable risk. The revised arrangements achieve that balance.

Deputy O'Donnell referred to the changes being introduced to bring the tax treatment of foreign-sourced dividends received by companies in Ireland effectively into line with the tax treatment of the underlying income out of which domestic-sourced dividends are paid. He has called for the introduction of participation exemption. There is an argument that entirely exempting foreign-sourced dividends from taxation would help to encourage corporations to locate their headquarters or holding companies in Ireland. While there may be something in this, there are also some downsides to bear in mind. We must be careful not to contravene the EU code of conduct on business taxation and not to open the door to Ireland being used as an open channel for the passage of untaxed foreign income to other destinations.

While we always look closely at suggestions which could increase the attractiveness of Ireland as a location for foreign investment, I must find the right balance in this case. A concession of the type being sought by various commentators could have the negative side effect of attracting operations of little substance whose purpose here would mainly involve tax planning. We maintain an attractive low rate of corporation tax and will continue to do so. We maintain a tax system that is efficient and open to business and will continue to do so. Commentators who take one aspect of our system and compare it to favourable aspects of other systems often miss the key point that our business tax system is very attractive in the round.

With regard to Deputy Burton's comments on carbon emissions trading, the provisions in this regard are part of a package of measures that should assist with business development within the international financial services industry and are consistent with the Government's commitment in the Building on Success report proactively to "pursue appropriate actions for the further development of the industry". Trading in carbon credits is an integral part of the effort to reduce greenhouse gas emissions. Carbon credit trading is one element of our approach to meeting our Kyoto targets as set out in the national climate change strategy. It also forms part of the EU's proposals for the post-Kyoto period to 2020. It is recognised that it helps reduce emissions globally, encourages technology transfer and helps lesser developed countries.

Deputy Burton has accused me of undermining the housing market when it came to amending the stamp duty regime. I have made it clear that it was my intention that changes to the stamp duty regime that would disrupt the market would not be introduced, not that reform of stamp duty could not take place. The election of itself raised speculation as regards possible changes to the stamp duty regime which was fuelled primarily by the Deputy's proposal to introduce changes over a three-year period. It was responsible to react to this speculation and bring certainty to the market by setting out future intentions with regard to stamp duty reform.

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