Good moves signalled at the National Economic Dialogue

The National Economic Dialogue (NED) took place recently. The Minister for Finance, Michael McGrath, set the scene from an economic and fiscal context noting that the Irish economy “is in reasonably good shape, at least in aggregate terms. Inflation is now firmly on a downward trajectory, and this has been achieved without any increase in unemployment - indeed, the unemployment rate is now consistent with any meaningful definition of ‘full-employment’”.   

From a tax perspective he highlighted the risk inherent in windfall corporate tax receipts. He explained that corporate tax receipts “a decade ago amounted to around €4 billion; the equivalent figure for this year is closer to €24 billion”. The accompanying paper from the NED noted that “The Department of Finance estimates that almost half of the entire corporation tax yield may be ‘windfall’ in nature and could prove transient. When these receipts are excluded, the fiscal position is in deficit”. Let that sink in for a moment.  

The Minister went on to say that “No Budget decisions have been taken as yet” but then went on to note that there were “a number of themes which will be foremost in our thinking” as the budget package was being framed.

He then explained that last year an income tax package worth over €1.5 billion in a full year was delivered which included a reduction in the main rate of USC. Critically he noted that “I expect to be in a position to deliver a further substantial income tax package in October which will again include changes to tax credits, the standard rate cut off point and the USC”. This will be crucial in terms of adding to people’s pockets but it also presents the chance to bring additional simplicity to our tax system. Right now, and let’s not get technical as to what is and what isn’t a tax, but there is a Trinity of taxes that apply to a person’s take home being income tax, PRSI and the Universal Social Charge.  

Each of the Trinity have their own rates and their own calculations methods. After tax, hard earned take home is one of the key drivers of attracting talent and right now the potential overall tax load can be up to 55% (52% for employees). It’s good to hear the Minister will be looking at income taxation again in the upcoming Budget.

A second good move he mentioned was the taxation of Entrepreneurs. The Minister explained that an important part of last year’s Budget “was the enterprise package which included measures in relation to EIIS, the R&D tax credit and a new CGT incentive for angel investors”. He noted that he was keeping all enterprise related tax provisions under review and that he “expected to bring forward further measures in Budget 2025”. 

Regular readers of this column will know my passion for this area because it links in well as a critical hedge against the windfall risk of corporate tax receipts. The Minister noted that a large part receipts from companies is paid by a “small handful of large, profitable multinational firms”. On that basis one of the key hedging strategies that can be adopted is to ensure that domestic business thrives allowing today’s David’s to become tomorrow’s Goliaths. On that basis it is critical that the more activity that can be done in this country is done here by bringing about a force of attraction through best-in-class tax incentives.  

For example, the R&D credit is one of our largest tax expenditures. Regular readers will know that I often cite former US Treasury Secretary Paul O’Neill, who apparently said “you find someone who says they do more R&D because they get a credit for it, you’ll find a fool”. You can see his point in that human curiosity means R&D is going to happen anyway; JFK said, “we go to the moon and do other things, not because they are easy but because they are hard”. We just need to ensure that R&D always happens here (while ensuring our law is EU law compliant of course) and that’s where the R&D credit comes in.    

At the time when the corporate tax receipts were at the €4 billion level any talks of Artificial Intelligence was generally the stuff of science fiction movies by Spielberg or others involving a character called “Sarah Connor”. Now it’s part of our everyday conversations. AI is an area that should form an intrinsic part of any improved R&D credit (qualifying for OECD Pillar two treatment of course). 

The Minister mentioned matters of EIIS and Angel Investors. These relate to the entry and exit point for entrepreneurial investors but they are key drivers in ensuring such investment happens in the first instance. Therefore, consideration should be given to extending these areas as well as enhancing the areas of Entrepreneur and retirement reliefs (you don’t have to retire here) to make them more attractive through simplifying such reliefs and extending the monetary allowances.  

Angel, Entrepreneur and retirement reliefs are all reliefs from Capital Gains Tax which typically, but not necessarily, arise when the entrepreneur is exiting the business. Of course, Ts and Cs apply but then there is of course the age old question of the rate of the CGT of 33%. As we know, this is high by international standards being amongst the highest in European OECD countries. Regular readers will know my view on this given that when the rate went down to 20% many years ago the yield from that tax increased dramatically. Consideration should once again be given to this area.  

We are now at that time of the year where pre-Budget wish lists are being submitted to the Department of Finance for consideration. There will be many asks of the Minister. However it’s good to know Income Tax and enterprise taxation are on the Department’s mind while balancing this consideration of the long term in the form of longer-term savings vehicles – the Future Ireland Fund and the Infrastructure, Climate and Nature Fund. In short, it’s good to talk.  

Please note this article first featured in the Business Post on Sunday, 9 June 2024 and was re-published kindly with their permission on our website.