Ireland has had a low rate of corporation tax of 12.5% since 2003. If two decades later, the rate was raised by 2.5% to a minimum rate of 15%, as agreed at the G7 summit of the biggest nations, would economic life end? Would there be a big exodus of foreign direct investment (FDI). Would there be a drop in tax revenue? Would the G7 reform proposal be a major reform of the taxation of MNCs? And will the EU corporate tax reform proposal be progressive?
Ireland's attraction for FDI has been driven many factors. But it is not one silver bullet - the low tax rate.
The public in Ireland has been subject to relentless propaganda on the importance of the local corporation tax in attracting FDI by various Irish politicians, governments, the media and the IDA. All political parties have, until recently, unquestionably supported the low 12.5% introduced in phases in by the Rainbow government from 1997 and fully operative in 2003.
The low corporation tax of 12.5% has given certainty and has been one attraction but it is not the only one. In 1998, early in the core successful Celtic Tiger years (1994-2001), I carried out a deep analysis of the reasons why Ireland, a poor country since Independence and then called "an economic basket case" by the Economist magazine, had apparently suddenly take off so successfully.
In a first book on the reasons for the Irish economic take-off, the "Celtic Tiger: Ireland's Economic Miracle Explained" I found that there were many. The multiple of factors in the economic success included a stable external economic environment; access to the Single Market in Europe; EU transfers at a time and they were really needed; good all-round competitiveness which was not just about costs and pay but included the rule of law and reasonable (it was not and still is not good) infrastructure; social partnership in maintaining stable progress in many areas; a stable and low tax on companies; earlier investment in an educated workforce; greater participation of women in the workforce; English speaking; strong state intervention, including the encouragement of FDI firms by the state's IDA in selected and rapidly growing such as Pharma and ICT; and more.
Thus if there was a small rise in the rate of tax on companies, it will not have much impact on the numbers and commitment of foreign companies in Ireland because tax is but one attraction and its impact has been greatly exaggerated, in the vain effort to maintain it. Many (eg Intel) have invested billions in physical capital here and will not pull out easily; there are self-reinforcing clusters of companies and the attractions are many, not just one. I argued that US firms preferred Ireland to the UK, the other English speaking country in the Union, because we were more pro-European and access to the huge Single Market of 513 million was extremely important. Today Ireland is the only English speaking country in the EU and US executives like to be in control of their firms and most feel they exercise this best in the own language.
Recently even a private financial corporation argued that the tax reforms will have little effect on Ireland according to an Irish Times report of a credit rating company's view. "In an assessment of the likely impact of global tax reforms on Ireland, debt ratings firm DBRS Morningstar, however, describes the risks to the state as “distant” while noting Ireland enjoys significant non-tax benefits that should keep it competitive". More and more such bodies and eventually even Irish politicians will stop extolling the low tax regime as Ireland's silver bullet and will cite the other factors, as the inevitable tax reforms are executed.
Why will a higher Tax Rate mean Lower Tax Revenue?
We take in €12.9bn in corporate tax this year (per Budget) then a rise of 2.5% to 15% should mean more tax. But Dept of Finance has forecast a fall of €2.2bn a year for some future years. Thus the Department says a higher tax rate will mean less tax! Why is this? It is explained by today's crazy world of global corporate taxation. This is because companies do not pay the nominal rate but a lot less. Some reduction in the effective rate is legitimate with capital allowances but much is done by "transfer price shifting" from one state to the next and that is where Ireland's low tax rate is attractive to multinationals and their tax advisers in the big legal and accounting firms. They would shift profits to Ireland where they would pay some tax but at a lower rate than in other EU states. This benefits Ireland but take a lot more in tax revenue from other countries (and allows companies to retain more). This tax theft is why other EU states have been so angry with Ireland. What is being proposed will mean that other countries will not lose as much in tax revenue to Ireland and MNCs will pay a bit more in tax.
Will the Drop in revenue mean cuts public services?
No because €2.2bn while a big sum, is under 4% of total tax revenue of €60.1bn this year. This shortfall can be made up by increases in the top rate of income tax; on property tax; ending tax breaks and other progressive taxes or it can be made up with a mixture of progressive taxes and other taxes. The shortfall in revenue is best not dealt with by cuts in public services, favoured by conservative austerity parties, but do no rule this out.
How big a deal would be a minimum Corporation Tax rate of 15% be?
It does not seem like a high tax when thirty years ago the average rate was 35% (see Sweeney appendix on CT rates ) but it would be a big step forward in regaining taxes lost from the massive cuts made by governments led by Ireland during the neo-liberal era to pay for public services in all countries. Globalisation and the growth of service companies particularly selling intangibles (i.e. goods/services which cannot be touched) has facilitated massive tax avoidance by multinational companies, assisted by over a million "working" in professional accounting and legal firms. These firms, the Big Four accounting and the top big legal firms, with highly qualified staff who are the ultimate "value subtracters". They make big bucks by ensuring that their client companies pay little or even no tax and so governments have been short of funds for public services for decades.
The simplification of the international corporate tax regime will put many of the tax advisors out of business (and hopefully put many into productive jobs) and ensure the reasonable revenue from the tax cheating firms to pay for the pandemic and other public services like health, housing and the massive subsidies the private sector has been given to survive.
Why is Minister Donahue's willing to damage Ireland's reputation just when we need sustained EU support, when the NI Protocol is under intense pressure?
The decision of Finance Minister Pascal Donahue to reject both the G-7 and the EU plans for international tax reform is bizarre. Especially so when he is head of the Eurogroup of Finance Ministers. The timing is also totally off - just when Ireland needs strong support from the EU as the British are seeking to undermine / re-negotiate the Northern Ireland Protocol, Ireland decides to side with the rogue state of Hungary, run by the anti-liberal, anti-EU values, autocrat, Orban, in rejecting EU plans for tax reform. The usually measured Mr Donahue's strange behaviour will be examined in the next blog.
In conclusion, if the minimum rate of corporation tax was raised slightly to 15%, as agreed at the G7 summit, economic life in Ireland would not end. There is not likely to be a big exodus of foreign direct investment (FDI). There will be a drop in corporate tax revenue for a time of up to €2.2m a year (per Department of Finance) but this is not a huge drop (under 4%) which could be made up by raising other taxes. The G7 and the EU tax reform proposals would be a major reform of the taxation of MNCs. It would be a big step forward but it would still not address tax equity and would not adequately dent the big rise in the share of national income going to the owners of capital in most countries in recent decades, thanks to globalisation, economic restructuring and in the 'pro-business" legislation in recent decades.
In spite of Thatcherism and the dominance of extreme right-wing "rational market" economics (often tagged "neo-liberalism") for three or four decades and the reductions in wealth taxes, income and corporate taxes, the level of public spending in most counties has been maintained. For example, it has been at around 47% of GDP in EU for decades. But public debt has been forced to rise to historic levels to maintain this spending on public services (and subsidies to private firms). Thus profitable companies must begin to pay more taxes to enable states to pay down debts to maintain societies. This is hopefully, only the beginning of a new stable era.
Paul Sweeney @paulsweeneyman
Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.