In this short presentation I will take the committee through the role tax incentives have played in taxation policy. In seeking a measured approach to tax incentives the institute will discuss with the committee issues of cost-benefit analysis, the availability of incentives to taxpayers and the appropriate use of tax incentives. We wish to touch very briefly on tax exemptions before concluding with a look at the future.
Everyone will agree that tax incentives have been a major component of economic policy in recent decades and led to significant growth in the economy. This is particularly true of our corporate rate tax strategy which has placed us at the top of the foreign direct investment list and which is now being emulated by other countries. Attracting foreign direct investment is, therefore, becoming that bit more competitive. We agree completely with Deputy Burton's comments on the need to consider socio-economic matters before considering tax. Our strategy in Ireland has always been to identify socio-economic needs before considering whether the tax policy can help. For example, the primacy of the family home is underpinned by exemptions on the sale and purchase of such properties while the importance of the family is underpinned by the exempting of children's benefit from income tax.
The need for health care is underpinned by tax relief on medical expenses and the desirability of saving is underpinned by the special savings investment accounts. Deputy Burton referred to private medical facilities. One of the key points in our submission refers to the need to introduce a certification process underpinned by all Departments. We suggest, for example, that on foot of a proposal to provide a medical facility in a particular part of the country, the Department of Health and Children should certify whether it is required before we consider tax incentives.
The Irish Taxation Institute does not consider tax incentives are provided to protect the wealthy. We would take a very poor view of any professional marketing tax schemes simply for the sake of selling them. The key purpose of incentives is not to reduce bills for the rich but to deliver on identified socio-economic objectives. We all want to ensure, therefore, that there are appropriate checks and balances in the system, which is why we have suggested the introduction of certification across all tax incentives. There should be continuous rather than once-off reviews of tax incentives. As Senator Mansergh said, property incentives have, by definition, a shelf life and it is important the Oireachtas is aware of what constitutes that shelf life. As a number of committee members have said, we face socio-economic needs today which we did not face ten or 20 years ago and it may be the case that our taxation policy can be used to address them.
We do not come before the committee today to suggest that everything in the garden is rosy. There are difficulties in the way the tax incentives framework operates and with certain incentives which do not work with the result that socio-economic objectives are not being met. Broadly, however, and without wishing to second guess the report of the consultants the Minister has appointed, incentives have delivered. We have four examples to discuss with the committee. We are all aware that before the IFSC area was incentivised, it was a derelict part of the heart of our capital city in which there was little or no employment. It has now put Ireland on the international map as a centre of excellence for financial services and created directly at least 14,000 high-earning jobs. Conservatively, it is estimated that the IFSC contributes at least €700 million per annum to the Exchequer in corporate tax receipts alone.
The Temple Bar area has put Ireland on the international tourism map. Members will recall that before it was incentivised, one proposal for the area was to demolish part of it to build a bus depot. Senator Mansergh mentioned third level student accommodation. It is great to see reports this week that students in most third level centres now have a reasonably plentiful supply of good quality accommodation and the rental price is decreasing. Members should contrast the current position with that which preceded the introduction of the incentive. We all remember the appalling scramble at this time of year as students desperately tried to find invariably poor quality, expensive accommodation. On a similar theme, we now have 17,000 apartments in areas around the country when previously there was none. Many of the relevant incentives were aimed at owner occupiers.
When the Chairman of the Revenue Commissioners, Mr. Frank Daly, and some of his colleagues appeared before the joint committee on 10 November 2004 it emerged that the estimated cost of incentives to the Exchequer was €8.4 billion. This figure shocked everyone and raised major questions about equity. Since the story started to unfold before the joint committee on 10 November, the Irish Taxation Institute has received additional information and awaits further detail. It emerged from the evidence of Revenue that incentives or credits or allowances available to all taxpayers account for the greater part of the €8.4 billion figure. The aspect of this issue which causes controversy and on which, I suspect, this meeting will focus, is property incentives. Regardless of the fact that these incentives account for approximately 2% of the overall figure, the value for money argument remains a key issue. The Irish Taxation Institute has been consistent in pointing out that while one could argue that for every €100 invested using a tax incentive shelter €42 is immediately lost to the Exchequer, we argue that the full €100 is directly invested in the economy. In addition, if this investment is doing what it should do, it will also address an identified socio-economic need. This takes us back to Deputy Burton's point on certification.
I remind members of what the institute calls the "domino effect" of tax incentives. Hotels which we use as an example in our submission could be deleted and replaced by any of the other tax incentives. While we accept that investment in hotels by individuals creates a tax cost for the Exchequer, one should also consider the harvest the Exchequer sows from it which is a little like the yield the country sowed from the IFSC incentives to which I referred. A hotel creates employment and payroll taxes, considerable yield and spending taxes, VAT and excise in bar sales and spending by conference delegates and hotel guests and VAT on food and accommodation. The hotel's profits also fall within the tax net.
Although this is all very good, are the wealthy paying their fair share of tax? In particular, are they avoiding paying their fair share of tax through the use of incentives? The wealthy should pay their fair share of tax, make an appropriate financial contribution to the Exchequer and be seen to do so. When representatives of the Revenue Commissioners appeared before the joint committee on 10 November 2004, they outlined that 99% of top earners, that is, those earning in excess of €100,000 per annum, in the PAYE sector and 97% of those in the non-PAYE sector paid top rate tax in 2001, which is as it should be. However, if one goes behind these figures, which we have taken from Revenue's statistical report for the same year, one finds that the top 5,300 earning taxpayers in 2001, defined as those earning €200,000 or more who account for 0.3% of the individual taxpayer base, contribute 11.5% of the total income tax yield. This figure amounts to €650 million. By contrast, the 1.1 million lowest income earners contribute €630 million. Furthermore, the top 1.1% of the taxpayer base pays one fifth of the income tax yield. These figures are helpful in informing all of us of the position vis-à-vis equity.
This does not, however, answer the question as to the availability of tax incentives. We are all concerned that a golden circle may be operating in this area. Incentives available to all taxpayers account for the largest part of the figure of €8.4 billion cited by the Revenue Commissioners. The controversial issue, therefore, is the availability of tax incentive shelters. These incentives are a viable option only for higher income earners because to avail of them, by definition, one must have one's own funds or the capacity to borrow and, fundamentally, the capacity to bear the risk. That is why high income earners generally use these schemes. Conceptually, that should be acceptable to us if we start from the position that we are not here to make tax incentives available so as to give a tax break to the wealthy. We are here to identify the wealth created by the better-off and determine whether we can harness it directly to deliver on socio-economic objectives, both quantitative and qualitative.
In our submission we have commented on the appropriate use of incentives. While more needs to be done in this area, we can take comfort from the fact that, in doing more, we are starting from a good base because all the incentives have been introduced, debated and scrutinised by the Oireachtas. As our president, Mr. Philip Brennan, said, we have consistently suggested in the institute that the Oireachtas needs more time, particularly on Committee Stage, to scrutinise the detail of Finance Bills which are extraordinarily complex.
If we adopt the position that the use of the incentives the Oireachtas has provided does not mean abuse, we realise that, by definition, someone using a tax incentive is a compliant taxpayer because he or she is filing returns with the Revenue Commissioners. If he or she is a high income earner, he or she is very much in Revenue's sights because it has established a high net worth grouping focused on high income earners. As members well know, the Revenue Commissioners have extensive powers when it comes to information gathering and anti-avoidance measures. If they form a view that incentives are being abused and have no commercial reality, since 1989 they have had the ability to move to reverse the trend. Clearly, they have the ability to achieve or seek to achieve changes in the incentive legislation should they see fit.
We have a very brief comment to make on tax exemptions. We gave exemptions to taxpayers on the basis of a bargain or agreement. The agreement was that, on foot of being given an exemption, the taxpayer would deliver something back to the State. That might be qualitative feedback on our cultural or scientific fabric or it may be quantitative. As far as we are concerned, the only question on which we should be focused is whether an exemption continues to deliver on the socio-economic objective set by the Oireachtas. Sometimes the Oireachtas regards certain exemptions as loss leaders, to use an expression from the grocery trade. One should remember that we have never given carte blanche to individual or corporate taxpayers and said they should be forever exempt from paying tax; what we have done is identified types of income that should be exempt from taxation. It may be and often is the case that someone with exempt income has a raft of other types of income that create significant revenue for the Exchequer.
As has been said by most members of the committee today, this debate is about socio-economic needs. It is about qualitative and quantitative objectives for the State and shelf life. The Oireachtas no longer has an interest in incentivising construction or refurbishment in Temple Bar or the Custom House docks. We are moving towards circumstances in which we want to create high value employment. We have already discussed the issue of health care. Child care was also mentioned briefly. The Oireachtas may deem it appropriate to determine whether our taxation strategy can help deliver on these socio-economic needs.
