MINISTER FOR FINANCE Simon Harris has indicated he would like to cut capital gains tax (CGT).

Should he?

CGT is paid on the disposal of an asset, be that shares in companies, land and property (other than your main home), or the assets of a business. 

There are some exemptions and reliefs – for instance for older farmers or for transferring land to a child to build a house on – but broadly speaking it’s charged at 33%.

It’s not the biggest revenue raiser, compared with say income tax or VAT, but cutting it would be expensive.

Harris told the Dáil earlier this year that each 1% reduction would cost around €87 million per year.

Figures from Revenue indicate that cutting CGT to 28% would cost €465 million.

Ahead of the budget, interest groups including the Irish Tax Institute – the representative body for chartered tax advisers – and Davy stockbrokers have called on the government to slash CGT to 25%.

The government appears to be listening. Earlier this year, the Taoiseach gave an interview to the Business Post in which he said CGT should be reduced to encourage more Irish people to invest. 

The case in favour of cutting

The Taoiseach suggested that when people sell a business in Ireland they are “moving off to Portugal and other places” rather than “recycling” that money into smaller companies and new products within the Irish economy.

Those arguing for a cut in CGT make the case that the current rate is among the highest in Europe. The Irish Tax Institute says the current rate restricts external investment in Irish businesses and discourages business owners from scaling or exiting firms.

Simon Harris said at the Fine Gael think-in in Co Wexford, as reported by the Business Post, that CGT is “objectively too high” and he indicated that the government is examining a cut.

Like the Taoiseach, he suggested cutting CGT would benefit the economy.

Davy has argued that cutting CGT to 25% would increase economic activity and actually end up growing CGT revenues over time, as a result. A cut to 25% would put Ireland mid-table in European terms and support an “enterprise economy”.

Harris has said the rate is as high as it is because it was raised in response to the state’s poor financial health in the aftermath of the crash, rather than for specific policy reasons.

Dan O’Brien, chief economist at the Institute of International and European Affairs, believes there is an argument in favour of cutting CGT from the point of view of the competitiveness of Irish indigenous businesses. 

“It can be cheaper, if an Irish company starts up, to transfer to the US where it will pay less capital gains tax if it sells up,” O’Brien said.

“We definitely need stronger indigenous businesses. We need to encourage homegrown companies. We’re much too dependent on American multinationals. Things could go wrong with the US multinational sector, and that makes it really important that we do everything we can to encourage people to start indigenous Irish businesses and diversify.”

The case against

Michael Taft, an economic analyst and research officer at the trade union Siptu, is not convinced that any reduction in capital gains would be automatically reinvested in the domestic economy.

The additional income to someone who benefits from the tax cut could be invested abroad, used to speculate in currency and shares, or just thrown in the person’s pension pot, Taft said.

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He added that Ireland’s CGT rate is lower than Denmark’s 42%, but the Danish economy is not starved of investment. In fact, its domestic business productivity is higher than Ireland’s, as is its domestic business investment, Taft argued.

In a similar vein, the UK has much lower CGT and is a “bottom dweller” in terms of business investment within the OECD, Taft said.

“There is no relationship between the level of capital gains tax paid and the outcome for the domestic economy,” he said.

He believes the sums of money involved for the exchequer are too expensive without offering much to society.

“We’re talking about throwing a lot of money at people who already own their own capital – so they are going to be fairly high income – with no guarantee that money is going to go into the domestic economy,” Taft said.

He added that PAYE workers paying almost 50% at the marginal tax rate may note that capital is already taxed at a lower level than they are paying. 

“Capital earners get a lot better deal out of it than income earners,” Taft said.

Simon Harris was vague this week on whether any cut to CGT would happen in the upcoming budget or a subsequent one, so it remains to be seen whether change is imminent.