Joe Higgins (Dublin West, Socialist Party)
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To ask the Minister for Finance his views on the assertion that further tax increases on high earners, corporation profits and employers would adversely affect investment rates when within the EU15 despite Ireland having the fourth lowest tax rates on high earners, the lowest corporation tax and the lowest employers PRSI, instead of being rewarded with high rates of investment Ireland instead has the lowest rate of investment as a percentage of GDP. [2127/13]

Michael Noonan (Limerick City, Fine Gael)
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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%.

Additional information not given on the floor of the House

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.

Joe Higgins (Dublin West, Socialist Party)
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The purpose of the question was to ask the Minister his views on the assertion, by Fine Gael Ministers particularly, that further tax increases on high earners and corporations would adversely affect investment rates when the evidence in the European Union is that countries which have much higher rates than Ireland have immeasurably higher investment and projected investment rates. Does the Minister agree that data from agencies such as the OECD, EUROSTAT and the IMF disprove comprehensively that right-wing argument that increased taxes on high earners and corporations would be a major barrier to investment and economic activity?

Is the Minister aware that, for example, the effective tax rates on the highest income-earners in Austria is 37%; in Sweden, 37.4%; and in Germany, 44%, compared with 31.5% in Ireland? Is he aware that corporation tax rates are 25% in Austria, 26% in Sweden and 30% in Germany, compared with 12.5% - much less than that, effectively - in Ireland? At the same time IMF projections for 2017 for total investment which is critical to the future of the economy, put Austria, Sweden and Germany way ahead of Ireland which lags at 10.7% projected. Is it not clear that the Fine Gael-Labour Party policy is to protect the billionaire tax exiles, the rich, the elite in society, rather than being based on a solid economic policy which has not been proven?

Michael Noonan (Limerick City, Fine Gael)
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I have given the OECD view from its survey. According to the OECD, even a 2.5% rise from 12.5% to 15% would reduce inward investment by nearly 10%. The OECD in its working paper entitled, "Tax and Economic Growth", states:

The possibility that high top marginal tax 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.

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Where would they go?

Michael Noonan (Limerick City, Fine Gael)
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I am not avoiding what the OECD has said. I am quoting from two separate OECD studies, one on corporate taxation rates and the other on personal taxation rates, both of which sustain my argument that higher taxes reduce foreign direct investment and they can lead to the migration of the very highly skilled workers whom we need to grow the economy and create further employment.

Joe Higgins (Dublin West, Socialist Party)
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Why, then, do we not have a flood of migrants of the wealthy and very high earners from Germany, France and Denmark, into Ireland to avail of the significantly lower tax rates here? The Minister's argument begs that question. The evidence is that investment in all other economic indicators are much better even though still reflecting the crisis in European capitalism overall.

Michael Noonan (Limerick City, Fine Gael)
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We do not have a flow of migrants into Ireland to avail of lower personal tax rates because we do not have lower personal tax rates than the rest of Europe. We have very high marginal rates of tax in Ireland. The marginal tax rate for employees, if the universal social charge and PRSI are included, is now 52%. It has increased from 43.5% in 2008. The top marginal rate for self-assessed individuals is 55%. The top marginal rate is also being applied to much lower incomes. For example, the top marginal rate of tax for employees in 2008 was 43.5%. It took effect at income levels over €101,100. In 2012, the top marginal rate of tax is 52% and it takes effect at income levels of €32,800. Is it any wonder that a flood of high-skilled individuals are not coming in? We are not saying we have low marginal tax rates. We are saying we do not want them to rise any higher because we will drive people out. That is the point.