Michael McDowell (Independent) | Oireachtas source

I have some sympathy with Senator Higgins's suggestion that there should be a report on some of these possible changes in taxation policy. I am an admirer of the skills of the Minister for Finance, Deputy Donohoe, but what is wrong with the current Government is that we are not facing up to a fundamental issue, namely, the level of capital gains tax. When I served as Opposition spokesperson on finance for the Progressive Democrats in 2002, I proposed an amendment to the Finance Bill to reduce the rate of capital gains tax from 40% to 20%. Former Deputy Charlie McCreevy, who later became Minister for Finance, was an Opposition spokesperson as well and he and I teamed up on this matter. I had the good grace to lose my seat in the following election so my tuppence worth was simply offered on that day.

I strongly believe that the rate of capital gains tax is too high. I am looking at what is coming down the tracks in this debate by way of recommendations. For example, there is a suggestion in recommendation No. 14 that the rate of capital gains tax be brought back up to 40%. I am strongly of the view that we need to have a 20% rate of capital gains tax. I fully understand that people will say that we are already taking 35% or 40% of basic income and this, that and the other by way of taxation, and question how this would square up in terms of equity to a capital gains tax rate of 20%. On becoming Minister for Finance, Charlie McCreevy had the bottle to pursue his own views, expressed in opposition, and reduce the rate of capital gains tax from 40% to 20%. The result was a 500% increase in the yield from capital gains tax. This poses a fundamental issue for elected politicians: do you put theory before practice or practice before theory? My strong view is that a low rate of capital gains is a sensible arrangement in order to keep assets moving within an economy and that the rate of 33%, which was introduced in the aftermath of the financial crisis, was a knee-jerk reaction, which, I can well understand, was politically sensible at the time. We should, however, take a look at it now from the perspective of what transactions we are inhibiting. There are many people who, when they look at various transactions that are open to them, will note that a consequence of proceeding with one particular course of action is that 33% of the nominal gain that will accrue on that transaction will go straight to the Exchequer and their reaction is to hold off and to hang on to the asset in the hope that at some future date there will be a different regime.

I consider the former Minister, Charlie McCreevy, a friend and a good and decent man. He took the bull by the horns and cut the rate of capital gains tax from 40% to 20%. There was huge opposition to that at the time. It was regarded as ideologically indefensible, but the result was a 500% increase in the yield to the Exchequer. Leaving aside the housing bubble and the rest of it, when that money came in, it was available to the Exchequer to expend on redistribution and other things. A stance should be taken in this House against the current rate of capital gains tax of 33%. It should be reduced to 20%. In the final analysis, one can, of course, look to compare that with the higher rate of income tax, PRSI, etc., but I am convinced that the Minister should look at the outturn of such a low rate of taxation. I am convinced that if the rate of capital gains tax was reduced from 33% to 20% the result would be a very substantial taxation boost. The former Minister, Charlie McCreevy, proved that that was correct.

I can well appreciate that in the aftermath of the property market crash, the credit squeeze and all the rest of it, the Government of the day thought that on equity grounds, because we were burden-sharing across the economy, it should be increased from 20% to 33%, but the Department of Finance is not infallible. Very few of the people in the Department engage in any activity that would attract capital gains tax. There is a different world outside Merrion Street. That world is one in which the disincentive effect of taking one third of all capital gains by way of taxation is significant. The proof of the pudding is what happened when the former Minister, Charlie McCreevy, reduced the rate. I hope nobody is listening to me because on the basis of stamp duty measures that I once proposed they will probably think that this is a serious possibility. It is not in the mind of the current Government but a future Government should face up to the fact that 20% is the appropriate rate for capital gains tax to keep assets moving, transactions happening and to stop people engaging in massive tax avoidance schemes. There are transactions that are necessary. People who own land and who are faced with the proposition of whether to put it on the market often decide not to do so because before anything else happens, one third of the gains will accrue to the State. I am of the view that 20% is the appropriate rate for capital gains tax, as it is for the lowest rate of income tax, and that it should remain at that level.