The latest instalment from McCreevy's pen does not match his earlier work but the move away from lower taxes is certainly a twist in the tale, writes David Kennedy

In concluding his 2001 Budget, the Minister for Finance, Mr McCreevy, described his first five budgets as the chapters of his first book. He defied suggestions that he would be a "one-hit wonder" by looking forward to a second best seller beginning in 2002.

Unfortunately from a business perspective, the opening chapter shows little sign of the individualism that marked Mr McCreevy's first five years in office. Before Wednesday, the Minister's work was framed by passionate support for such reforms as individualisation of tax bands, the re-birth of pensions and a strong belief in lowering income, corporation and capital gains tax rates as a means of driving business and the economy.

One could be forgiven for perceiving that his publishers have taken control of the sequel. As a concept, the Minister's belief that a broader tax base is a price worth paying for keeping tax rates low, stands up to scrutiny.

However, it masks the reality that for large segments of the business community, the tax environment in which they operate has actually deteriorated since Mr McCreevy penned his first instalment in 1997.

While reduced tax rates have generally eased the tax burden on businesses in the domestic services sector, foreign businesses in the Republic have experienced a relative deterioration in their tax position throughout the McCreevy opus. Multinationals, attracted here in the past through a package of grants, an attractive cost base, an educated workforce and the 10 per cent tax rate, have enjoyed no tax rate reduction in recent years. For many, their tax rate has increased to 12.5 per cent.

Fiscal changes initiated by Mr McCreevy, such as the lifting of the cap on employers' PRSI (in 2000), acceleration of various tax payment dates (starting in 2001) and Wednesday's reduction in capital allowances, have increased the tax burden for these businesses.

These changes, coupled with a considerable reduction in grant packages now permissible under EU law, and an increasing cost base over the past five years, are worsening our relative competitiveness.

A general move towards lower corporate tax rates across Europe and the introduction in other jurisdictions, including Britain, of specific tax incentives to encourage holding company activities and investment in research and development and intellectual property, only serve to compound the deterioration in our international competitiveness. This has been reflected in a considerable reduction in new foreign investment projects in recent years.

The importance of multinational investment in the Republic can hardly be overstated. Despite apparent calls from his publishers for fiscal prudence, it is disappointing that the Minister hasn't stood by his commitment to lower taxes by introducing a range of tax incentives such as research and development credits, tax write-offs for intellectual property and the abolition of capital gains tax on the disposal of foreign subsidiaries.

The need for such measures had been well signalled to protect our ability to attract and retain foreign investment. The conviction, which was evident throughout the Minister's earlier works, will be required to deliver these changes.

Lower capital taxes have been a key feature to date. Throughout his first five instalments, Mr McCreevy strenuously defended his decision in 1997 to reduce capital gains tax rates to 20 per cent (from 40 per cent). The reduced rate has encouraged capital transactions across a range of sectors, not least the property sector, by removing a previous disincentive for sellers to part with their assets.

Unfortunately, in opening his sequel, the Minister seems to have lost the plot by increasing the key stamp duty rate from 6 per cent to 9 per cent, in what would appear to be a bout of fiscal opportunism on the part of the "publishers".

While sellers are still incentivised to sell, it takes two to tango, and it must be questionable as to whether investors will be attracted to buy Irish property, knowing that they would need to generate an increase of more than 11 per cent in value just to break even, to allow for typical transaction costs.

Although a three percentage point increase in stamp duty may look reasonable in the light of a halving of capital gains tax rates, the gains tax is only payable provided a seller actually makes a profit. The increased stamp duty cost arises for a purchaser before and irrespective of a profit.

If the Minister were to increase the rate of stamp duty on share transactions by three percentage points, it would most likely cause the collapse of the equity markets in Ireland.

While the impact on the property sector may not be as catastrophic, it will almost certainly lead to considerably reduced activity.

If this move away from lower taxes is not a major U-turn, it is certainly a "twist in the tale" and may not yield the €158 million annual stamp duty increase that the Minister expects. The true Exchequer impact of this measure will only be seen from next year's capital tax receipts.

A fall in capital tax receipts, which seems quite plausible, may focus the Minister's attention on whether conviction and flair should win out over fiscal opportunism in finalising the remaining chapters of his sequel.

David Kennedy is a tax partner with KPMG