Paul Gogarty (Dublin Mid West, Green Party)
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Question 58: To ask the Minister for Finance his views on whether it is inequitable that earnings from capital are effectively taxed at a lower rate than earnings from income; and if he will make a statement on the matter. [38907/05]

Brian Cowen (Laois-Offaly, Fianna Fail)
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Since the introduction of capital gains tax in 1975, capital gains have been treated differently from income in the tax code. It should be stressed that, in many cases, capital gains arise infrequently, as the asset is normally held by the owner for several years prior to the transfer. If taxed like income, it would mean taxing a large part of the once-off capital gain in many cases at the top rate of42%, whereas if it had been received as income over the period in question, much of it might only have been taxed at the 20% rate per annum or even be exempt.

Income tax is charged at progressive rates and individuals are entitled to various reliefs and credits which reduce their effective rate of tax. As the Deputy will be aware, I announced increases in the employee tax credit and the personal tax credit in the recent budget. This ensures that almost 36% of workers will be outside the tax net while about 31% will only be liable at the standard rate of 20%. In addition, it must be noted that there is a low annual personal exemption threshold of €1,270 for capital gains tax as compared to the various relief and credit entitlements for income tax. Accordingly, having regard to the effect of the personal tax credits, the tax on income is, in the majority of cases, likely to be less than the tax on capital gains.

Capital gains tax is charged on a disposal of assets, for example, shares, land, buildings. The disposal can be by way of sale, gift or exchange. It does not apply on death. A lower rate of capital gains tax encourages owners to dispose of assets during their lifetime. This has definitely occurred since the rate was lowered from 40% to 20% for most disposals in the 1998 budget and for the remainder of disposals in the 2000 budget.

Since the rate of CGT has been reduced, the yield has increased enormously. The yield from capital gains tax rose from €106 million in 1996 to nearly €2 billion in 2005 and the estimated number of assessments issued by the Revenue Commissioners rose from 7,000 in 1996 to 32,000 in 2003.