Michael McDowell (Independent) | Oireachtas source

Whatever the origin of USC and whether it was an emergency matter, it has the effect, together with income tax, of forming the basis of the marginal rate of tax that many people face. Senator Kieran O'Donnell mentioned the self-employed, of whom I am one. I do not make a plea in respect of myself but I do so on behalf of many other people in the self-employed category. They face a number of discriminations in the taxation system. If somebody who is self-employed hits the top rate of tax, USC and PRSI, for every hour they work after a certain period or every additional day they work or weekend they work, 55% of what they earn goes to the State. It cannot be right that people who, in many cases, are struggling to keep firms going, who have taken enormous risks and who have taken borrowings to establish businesses that employ others- I refer to people such as small electrical contractors and not the fat cats who are regularly assailed - should face a 55% tax rate at the margin of their incomes. The margin matters because it is the basis on which an electrical contractor will decide whether he or she will go for another contract, do some more work, employ more people, take further risks and the like. If the tax system makes the State a 55% partner in all those decisions as far as the gains are concerned with no risk in respect of any losses that can arise, not to mention the additional risks such people are taking, including the risk of going bust or the nightmare of having banks withdraw working capital, credit arrangements and so on, it is immensely penal.

I fully appreciate that our tax system had to be made much more severe to remediate the financial crisis the country fell into but Sinn Féin points out that the changes made in the section have implications for other taxes and the Department of Finance has pointed out the tax consequences of reductions in the USC. I accept that is sometimes the case but other measures should be considered by the House later when we get to the question of CGT. In Kildare House in 1997, I recall former Deputy, Charlie McCreevy, and I proposing by way of an amendment on Committee Stage of the Finance Bill that the CGT rate should be reduced from 40% to 20%. I do not say this to be critical of the Department but the stock rejection of this was that it was a foolish idea and it was unfair on ideological grounds. Ultimately, when Charlie McCreevy became Minister for Finance later that year and took the opportunity in his first budget to make the reduction, the yield from the tax increased by 550%. We come up against the law of diminishing returns in the context of taxation. The current CGT rate is too high. Many transactions are not happening because people say, at the end of the day, that they will not give 33% of the value of a transaction to the State. The 20% rate had the advantage of stimulating activity. The odd few people emigrated to avoid even that rate and perhaps something should be done to stop them. We know who I am talking about but few enough people begrudge the State 20% on a capital gain. The yield increased when the cut was introduced.

I do not accept the proposition that we are always engaged in a zero-sum game in respect of taxation and rates. A 55% combined rate of tax, PRSI and USC for the self-employed has serious effects on their motivation and willingness to take risks and to expand their businesses. Likewise, tax rates such as 33% on capital gains are counterproductive.The proof of the pudding was when Charlie McCreevy reduced the rate from 40% to 20% and the yield went up five and a half times. We should learn from that. I am not making an ideological point but saying that while it is possible to have ideologically driven tax rates, their yield can be depressed. I favour section 2 and the thoughts that lie behind it. I do not believe it is a step in the wrong direction. It could go much further. We should take an overall view of our tax rates to see whether they are inhibiting or encouraging economic activity. For this reason I beg to differ with the Sinn Féin views expressed here to the effect that any diminution in pay related social insurance, PRSI, or the universal service charge, USC, is socially counterproductive. It is necessary to consider the marginal rates, the effects on marginal decisions, on growth and on investment and so on when considering where the rate should be.