The damage done by the introduction of the proposed new income levy could go far beyond the anticipated cost to the low paid and the risk of eliminating any chance of a national pay deal being brokered.

The potential damage to Ireland Inc caused by the introduction of such a disincentive for foreign workers to locate in Ireland could be considerable.

At a time when Ireland needs to be an attractive destination for foreign executives from the many international companies based here and those now considering Ireland as a location, this levy could do serious damage. The retention of the corporate tax rate of 12.5% may not be sufficient to keep a company whose workers refuse to locate here.

The removal in 2006 of the remittance basis of taxation for those senior personnel who are asked to locate here has already eroded any attraction that Ireland may have for them.

The remittance basis of taxation provided a valuable method of effectively sheltering part of an executive's earnings from the often higher rates of tax in Ireland.

It was available to foreign-domiciled people who were employed in their home country and assigned to Ireland temporarily. The assignment would often lead to a higher personal tax burden and the remittance basis went some way towards alleviating this. The remittance basis was withdrawn by the Finance Act 2006 for foreign assignees.

High labour costs are already an impediment to attracting foreign corporate employers and their senior executives to Ireland.

The aforementioned changes to the remittance basis, whereby remuneration for duties performed in Ireland became liable to tax in Ireland regardless of a person's domicile, provided a further disincentive to locating here. What was not needed at this time was another deterrent.

The proposed income levy is just such a deterrent. It has been attacked already by many groups and described as crude, arbitrary and indiscriminate.

It is clearly a factor that will discourage any foreign executive from accepting a post in this country, along with the prospect of an increase in the standard rate of VAT, a levy on employee parking spaces and a new air travel tax when they want to visit home from time to time.

The skewing of the levy towards a higher impact for those earning over €100,100 a year will simply ensure that the more senior executive employees are the ones least likely to favour Ireland as a temporary home. The 1% charge increases to 2% on income earned over the €100,100 figure. The clear disincentive for key personnel to locate here will have far-reaching implications for Ireland's attempts to attract their employer companies to Ireland.

The attraction of Foreign Direct Investment (FDI) goes further than mere corporate tax incentives. With the arrival of new EU accession countries on the playing field, the competition for FDI has intensified.

While senior executives must act in the best interests of the company,where there is little difference between Ireland and another country, human nature would suggest that they take a look at their own personal position in arriving at a final decision. While much work has been done by the IDA and others to make Ireland attractive for foreign executives and their families, the income tax code is not helping with the previous changes and the changes now proposed.

The minister and his team need to be more imaginative in structuring the personal tax code if they want foreign executives electing to move to Ireland.

Of course high-earning executives are not the only ones who will suffer. The levy will affect the low paid in particular. Since the levy is not a straightforward increase in income tax it will have a disproportionate effect on lower-paid workers. It cannot be sheltered with tax credits or pension contributions and will therefore have a significant impact on everyone.

The new measure, for example, will mean that a low-paid employee who currently does not pay tax due to availability of basic tax credits will have a bigger tax hike in 2009 than a significantly higher-paid colleague who, because he or she is currently taxable, will be in a position to avail of the modest increase in the standard rate band for 2009. This is clearly inequitable and wrong.

For example: Dave and John are employed earning €30,000 and €40,000 respectively. Currently Dave pays no income tax because he is a lower earner. In 2009 he will pay €300 under the income levy. Currently John pays €5,306 in income tax but in 2009 his income tax will reduce to €5,096 due to the increase in the standard rate band. He will pay €400 under the income levy.

The increased burden in 2009 for John on €40,000 will, therefore, be €190. Meanwhile, Dave on his €30,000 will pay out €300 more.

The proposed levy will cause much damage. This is likely to include reduced productivity, pressure on wage demands and, perhaps most worryingly, dissuade foreign executives from accepting jobs in Ireland. They are unlikely to appreciate the minister's call to patriotic action.

Jim Kelly is
a tax director with Grant Thornton