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

In restoring the public finances to a sustainable path this Government has striven to ensure adjustments to taxation are made in as growth-friendly a fashion as possible. At the heart of this endeavour is the principle that the tax system maintains the right incentives for people to work and invest. Research by the OECD has shown that taxes on labour tend to be more damaging to economic growth than taxes on consumption and property. This is due to the disincentive effect it has on decisions made by individuals to work and invest in their education.

Efforts to reduce the budget deficit and increase the stability of the tax system have been guided by the Commission on Taxation, which was established to review the structure, efficiency and appropriateness of the Irish taxation system. As part of its wide-ranging review, published in 2009, the Commission on Taxation recommended the introduction of a property tax and water charges. Property taxes are a valuable component of a tax system on the basis that they offer a stable source of revenue for the State and have limited effects on people's decisions to work and invest.

With the above principles in mind, research by the OECD has shown that Ireland has one of the lowest entry points to the higher rate of tax as a proportion of the average wage within the OECD area. The point at which individuals begin paying tax at the higher rate in Ireland commences at just above the average wage. This reduces the earnings of people at this point in the income distribution, contributing to lower economic growth through reduced labour force participation and effort. An increase in the threshold at which people begin paying the higher rate of income tax would lessen the burden on people at this point in the income scale and increase economic activity.

Until the recent introduction of the local property tax, Ireland was one of the only countries in the OECD not to have a property tax. The lack of a stable source of revenue in the tax system during the recent recession placed significant strain on the public finances. The introduction of the local property tax has helped restore sustainability to the public finances while minimising the effects on people's decision to work and invest.

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Finally, it is important to emphasise that incremental changes to a tax system should not be viewed in isolation from the tax system as a whole. Efforts to reduce the budget deficit by this Government have been guided over the period by the best available research from the OECD, the Commission on Taxation and others to achieve a sustainable budgetary deficit in as growth-friendly a way as possible. Comparing individual aspects of tax policy decoupled from the wider impacts of the existing tax system or the changes made to it over the course of fiscal adjustment can give misleading implications of wider tax policy effects on people and the economy.

As regards the request of the Deputy concerning the income tax increases which would be equivalent to the local property tax and water charges for average workers, it is not possible to be specific. Any required yield to be obtained from the income tax system could be achieved by many routes, including a reduction in personal tax credits, reductions in the standard rate bands, increases in the rates of income tax, reduction of the threshold for the universal social charge, reduction of the bands for the USC or increases in the rates of the USC. If the Deputy wishes to posit a specific alteration to the tax code in order to achieve a certain yield, I will be happy to have my officials, in consultation with the Revenue Commissioners, calculate the relevant outcome.

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