Ireland’s personal tax code neither efficient nor fair - Donohoe

Ireland's personal tax code, as it stands, is neither economically efficient for the country nor fair for society, Minister for Finance Paschal Donohoe has said.

Speaking at the Irish Times/PwC Tax Summit in Dublin, Mr Donohoe said the State needed to develop a system that supported work and encouraged innovation.

“We have made steady progress in reducing the personal tax burden in the last three budgets with a particular focus on low- to middle-income earners,” he said.

However, having a situation where a worker on average wages loses up to 50 per cent of their income in tax “is not fair, is not economically efficient and is not sustainable”.

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“That is why I have spoken of the need to move towards a system, in an affordable and sustainable way, where only those paying at least average incomes pay the top rate of income tax,” the Minister said, noting, however, that this could not be achieved in a single budget.

Nonetheless, the overriding priority for next month’s budget was to continue to ease the tax burden for low- and middle-income earners, Mr Donohoe said.

The Government is expected to concentrate on widening income tax bands – specifically, raising the entry point for the marginal rate of tax – rather than cutting the rates themselves.

Tax relief

“Not only would such a change be fair, but it would concentrate resources at those on middle to lower incomes, ensuring those who need tax relief the most, get it,” he said.

Achieving a balanced budget next year, an objective laid down during the bailout years, was also priority.

“We must have an economy and national finances that are resilient,” Mr Donohoe said, so as not to repeat the mistakes of the past.

“We went through a period in which the tax cut of today was the savage tax increase of the following year and that is not a journey we can go down again,” he said.

Despite a softness in tax receipts this year, the Government remains on target to eliminate its headline budget deficit in 2018.

Separately, Mr Donohoe said Ireland would resist any attempt to change the voting arrangements on tax matters in Europe.

This follows a suggestion from EU Commission president Jean-Claude Juncker that the current practice of unanimous decisions needed to be overhauled to allow reform.

Change

“Let me be clear, the Irish Government would not favour any such change. Our view is that tax is a matter of member state competence and that unanimity should remain,” Mr Donohoe said.

He said that the Organisation for Economic Co-operation and Development (OECD), which has been leading efforts on curbing international tax evasion and avoidance, should be left to shape proposals on digital tax reform.

On corporate tax and a recent Government-commissioned report by economist Seamus Coffey, the Minister said he would be launching a consultation process on budget day “to ensure better-informed policymaking”.

“The cornerstone of our competitive offering remains our 12.5 per cent corporation tax rate,” he said, while noting the rate was now complemented by the State’s knowledge development box (KDB), which supports innovation through tax breaks.

“The OECD rules also allow the KDB to be made available for smaller companies in respect of assets that are patentable, but not yet patented,” he said.

However, the Minister said certain changes to the State’s legislation governing intellectual property were required before this aspect could be activated.