Notes on the Front

Taoiseach Micheal Martin wants to ‘slash’ capital gains tax. On the front page of the Business Post:

‘Capital gains tax should be slashed to encourage more Irish people to invest, Taoiseach Micheal Martin has said.  “The capital gains tax is too high in Ireland  . . . I think 33 per cent is too high . . . What I’m interested in is recycling.  If people sell, that money gets invested into smaller companies and new products and new technologies.”’

The theory here is that if we cut capital gains tax the extra money that  beneficiaries get will be re-invested in the economy.  Would this actually happen?  Possibly.  Or it might just be thrown into the beneficiaries’ pension pot, or invested abroad which doesn’t benefit our economy, or used to speculate in assets (currency, shares).  There is no guarantee that the tax-cut will go back into the productive economy.  Stephen Felle, Chief Executive of Fordel stated:

‘Micheal Martin is right to want to see more domestic capital recycled into smaller companies and new technologies. . . the question is whether cutting capital gains tax is an effective lever to achieve that.  Maybe around the edges there’s tax foregone by people selling their businesses and moving abroad, although in many cases it is to retire.’

The only thing we know for certain is that high-income earners will benefit.   According to the Survey on Income and Living Conditions, 65% of ‘other market income’ – which includes capital gains – goes to the top 10% income group. 

Another argument is that Ireland’s capital gains tax rate is too high and that this penalises ‘entrepreneurship’ and business investment.  It is true that Ireland ‘s headline tax rate is on the high side with only five other EU countries having higher or equal rates.  Is there a relationship between capital gains tax rates and productive activity?  Let’s look at two comparisons.

Ireland and Denmark:  Denmark has the highest capital gains tax in the EU, at 42% compared to Ireland’s 33%.  This should put Denmark at a real disadvantage.  Yet, their domestic business productivity is 50% higher than Ireland while Danish domestic business investment is over 60% higher than Irish investment.  Clearly, a high capital gains tax rate is not a bar to a highly productive and competitive economy.

Ireland and UK: The UK capital gains tax rate is well below Ireland, at 20%.  Yet UK productivity lags well behind other high-income European countries and is in the bottom half of the OECD table.  And when it comes to business investment, the UK is a bottom dweller, ranking 3^rd from the OECD bottom.

In this comparison there appears to be little relationship between capital gains tax-rates and a competitive economy. 

And cutting capital gains tax comes with a significant cost.

• Reduce capital gains tax rate from 33% to 30%:  €260 million
• Reduce the rate to 28%:  €436 million
• Reduce the rate to 25%:  €696 million

Even a small cut would cost over a quarter of a billion Euros.  A substantial cut would cost up to €700 million.  That’s a lot of money to gamble on whether a tax cut would produce positive results.

So is there a mechanism to direct capital gains into more productive investment without cutting the tax rate?  Yes.  It’s called ‘rollover’ relief. 

Rollover relief allows taxpayers to defer paying capital gains tax on the sale of business assets (land, buildings, machinery, etc) provided the proceeds are reinvested in new assets. The tax may need to be upgraded so that it can be applied to re-investment in young, dynamic SMEs, but the Government can use this relief to direct investment into productive areas with far less cost than a general tax cut.  The problem is that it is not as sexy or headline-grabbing as a cut in tax rates.

So, what’s really behind the Government’s intention to cut capital gains tax?  Is it the result of an evidence-based analysis of Ireland capital gains tax regime?  Hardly.  There was no evidence produced when the government cut VAT for hospitality owners and property developers. 

No, this is yet another example of ‘doing-something-so-that-you’re-seen-to-be-doing-something’ policy making:  expensive, wasteful and unnecessary.  It will have little impact on the productive economy but it will constitute another tax give-away to higher-income groups. 

Already, Budget 2027 is getting old.