In his closing Budget remarks on Wednesday, the Minister for Finance, Mr McCreevy somewhat humorously reflected on his five budgets as the five chapters of his first book. Future reviews of his work are likely to include critical acclaim of it, particularly from a business perspective.
In pure literary terms, Mr McCreevy has certainly left his mark. During his term, he has fundamentally changed our tax system with self-styled initiatives such as "individualisation" of standard rate income tax bands and major reforms in the area of tax on pensions. Both of these measures have had a positive impact on business.
Aside from artistry though, the Minister retained a number of themes throughout his novel. Take, for example, reducing corporation tax rates. The intention to reduce standard corporation tax rates to 12.5 per cent had already been signalled when Mr McCreevy took office in 1997. However, at that time, the sign was that the new low rate would apply from 2006. In Chapter 2 (December 1998), the Minister advanced this programme, by confirming annual reductions of 4 per cent in corporation tax rates to enable the low 12.5 per cent rate to come into effect from January 1st, 2003.
Apart from the removal of the employers' PRSI ceiling in last year's budget, business fears of increases in other business taxes to compensate for reduced corporation taxes have largely gone unfounded. This year's chapter (Chapter 5) did, however, have a twist in the tale. It could, and indeed may, be argued that Wednesday's change in corporation tax payment dates has pushed the application date of the 12.5 per cent tax rate out to 2007.
In the medium term, companies will pay 20 per cent of the tax that they would have paid in the following year, seven months earlier. Accordingly, in cash terms, an effective 15 per cent tax rate will prevail from 2004 through 2006. This will particularly affect companies for whom cash is king.
It may also be seen in the international business community as something of a rowing back on commitments relating to future corporation tax rates. Of greater concern, however, to whoever is entrusted to write the sequel, is the growing international view that even a 12.5 per cent corporate tax rate may not be attractive enough to attract new inward investment to Ireland in the future.
The gradual, but nonetheless consistent, tackling of the "tax wedge" during Mr McCreevy's stewardship has also been of considerable benefit to business. During his term, both the standard and top income tax rates have been reduced by 6 per cent, to 20 per cent and 42 per cent respectively, with social insurance and related levies falling by a further three-quarter percentage point.
These reductions, together with the acceleration of income tax allowances and standard rate bands and, in particular, the introduction of individualisation, in what the Minister termed "real tax reform" in Chapter 3 (December 1999), have resulted in a considerable reduction in the absolute level of tax and levies to be deducted from employee wages, and have helped businesses to keep pay increases at sustainable levels and better manage wage inflation. This should be of particular benefit to business as we settle into less buoyant economic conditions.
In his first budget, Mr McCreevy slashed the capital gains tax rate from 40 per cent to 20 per cent with a view to releasing pent-up investment funds and creating an incentive for investment. As a consequence, the Exchequer yield from capital gains tax increased from €170 million in 1997 to an estimated €859 million in 2001. This enlightened change has clearly been pro business.
Indeed, encouraging investment has also been a constant theme throughout the Minister's work. His commitment of more than €2.3 billion to Public Private Partnership initiatives across a range of sectors including construction and telecommunications will serve business well in the coming years. Unfortunately, incentive schemes introduced to encourage specific business activity in areas as diverse as airport development and nursing homes and to encourage investment in our white fish fishing fleet and renewable energy sources have had limited take-up.
The darkest chapter of Minister McCreevy's term from a business budgetary perspective occurred last year (Chapter 4) when he abolished the employers' PRSI ceiling. This substantially increased employer PRSI costs across labour-intensive sectors such as the technology and services sectors. By limiting the spillover of capital allowances against all forms of income to an annual cap of £25,000 (Chapter 1), the Minister curtailed the practical application of the tax incentives provided for in urban and rural renewal areas.
While such severe curtailment may well have been justified during the buoyant economic conditions prevalent throughout most of Minister McCreevy's term, a strong case exists to relax these conditions in the present climate. It is also disappointing that the Minister has as yet failed to deal adequately with the taxation of share options and share incentive schemes generally. The responses to date on this issue have been notable primarily for their impracticality. These issues however may well serve as useful material from which to initiate a sequel.
David Kennedy is a tax partner with KPMG.
