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

I remind the Deputy of the long-established Government strategy to use the tax code to attract jobs and investment to Ireland, in particular foreign direct investment. This strategy precedes the current Government. We have used a competitive tax system in this way for more than 50 years, but it underpins the Government’s key objective to create jobs and economic growth by attracting foreign direct investment and encouraging enterprise. Further, as the Deputy is aware, the programme for Government states that, as part of the Government’s fiscal strategy, we will maintain the current rates of income tax ,together with bands and credits, and not increase the top marginal tax rates. I should highlight that the current prevailing low investment levels to which the Deputy refers can be attributed to the deterioration in the Irish property market. The contribution to GDP of investment in building and construction fell from close to 20% in 2007 to around 5% in 2011. This reflects the sharp decline in housing activity and the Government’s ability to provide an impetus for this industry has been limited. Domestic firm level investment has also been constrained, even though investment in machinery and equipment has remained relatively robust in recent years.

In the light of the domestic investment environment, strong FDI performance in recent years has been a welcome boost and the tax system is particularly suited to encouraging this type of activity. The positive impact this has on domestic demand, as well as on employment and exports, remains important. As an example, estimating the size of the behavioral effect of a further increase in corporate tax rates is difficult, but it is likely to be relatively significant. An OECD multi-country study in 2008, OECD Tax Policy Studies No. 17, found that a 1% increase in the corporate tax rate reduced 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%.

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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. In another report by the OECD in 2010, OECD Tax Policy Studies No. 20, corporate taxes were identified as the taxes which were most harmful to economic growth prospects.

Competitiveness is a crucial factor in achieving sustainable growth in a small open economy such as Ireland’s. The economy’s competitiveness is the result of a wide range of factors, with the National Competitiveness Council’s scorecard analysing Ireland’s international competitiveness using 127 individual indicators. These range from measures such as economic growth and quality of life to the policy inputs that will drive future competitiveness such as the education system and the delivery of infrastructure. Taxation is one element of this policy mix, as taxation rates impact upon the attractiveness of an economy as a place to do business and work.

However, speaking generally, the marginal rate of income tax which is described as the tax rate that applies to the last euro of the base is an important consideration in the formulation of tax policy. Marginal tax rates are important because they influence individual decisions to work more. 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”.

It should be noted that the top marginal tax rate for employees, including USC and PRSI, is now 52%. It has increased from 43.5% in 2008. The top marginal tax rate for self-assessed individuals is now 55%. It has increased from 46.5% in 2008. Not only have the top marginal rates increased significantly but marginal rates on lower income levels have also increased. In addition, the top marginal rates take effect at significantly lower income levels. For example, the top marginal tax rate for employees in 2008 was 43.5% and took effect at an income level of €100,101 and above. In 2012 the top marginal tax rate for employees is 52% and takes effect at an income level of €32,800 and above. It is also important to point out that higher marginal tax rates for high earners may also incentivise a greater level of tax evasion and contribute to the development of a shadow economy.

The fact that foreign direct investment in Ireland was particularly strong in 2012 reflects Ireland’s competitive position and that the current Government strategy in relation to tax is working.

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