Monday, 11 April 2011

Corporate tax rate

Peadar Kirby: The issue of Ireland’s rate of corporation tax again dominated the news agenda over the weekend with the standoff between some EU Ministers (notably the Germans) and Irish Ministers being yet again reiterated. It appears ever clearer that the refusal of the Irish side to enter into discussions on the issue is becoming the obstacle to gaining a lower interest rate on the country’s borrowings and, perhaps, other concessions also on the contents of the bailout package. What is most disturbing is the lack of any debate here in Ireland as to whether the dogged stance being adopted by Irish Ministers is in the best interests of Irish development, as to whose interests it most serves, and as to what might be the balance to be struck between moral and economic grounds for continuing the present stance. The extent to which the present policy stance has been elevated into a fundamental bedrock of national policy and the extent to which the media and commentators accept this without the slighted debate or questioning, invites comparison with the worst days of the cosy consensus of the Celtic Tiger period.

There are at least three major dimensions of the issue that require public debate. The first is the economic one and, for most of those who mention this issue, this seems the only dimension that matters. But, in addition, there is a major moral dimension that urgently requires airing, and a dimension relating to international justice and fairness highlighted recently in an interesting analysis paper published by the Debt and Development Coalition Ireland which seemed to get little media attention.

To deal with the economic issue firstly. To many it seems self-evident that raising our corporation tax rate would damage our attractiveness for foreign investors. Perhaps this is true, but it would be good to have some evidence to back up such a claim. Just what damage might a few percentage points on our low rate do to Ireland’s attractiveness as a destination for investors? In other words, among the many attractions of Ireland, just how important is the present rate of tax? Indeed, the argument of some Ministers that in effect France has a lower rate than does Ireland could lead one to draw the conclusion that the tax rate is not the determining factor after all, given that Ireland continues to attract investment in this situation. Furthermore, the argument needs to be broadened to a discussion of industrial policy, something that is urgently overdue. Numerous reports have been issued over recent decades recommending that the state wean itself off its dependence on foreign investment yet, if anything, that dependence has grown over this period. One wonders what positive advantages for the development of a more robust and consistent policy for the growth of SMEs might result from the raising of our corporation tax rate, particularly if the tax regime could be designed in a way that did help foster greater innovation in this sector. At the very least, a rise in the corporation tax rate would serve to wean our politicians and officials off the instinctive reaction that economic development and export-led growth have to depend on foreign investors.

The second important issue that is entirely absent in consideration of this issue is the moral one. Are there not very strong grounds for arguing that, in a situation where those on average and low incomes are bearing a major burden of the adjustment efforts being made by the state, that those corporations which make huge profits from Irish workers and receive very favourable treatment by the state should make some modest contribution to recovery? It is noteworthy that those many voices that are raised in criticism of the fact that Irish taxpayers are being forced to bail out French and German banks, do not see the similarities between this favouring of corporate interests over citizens’ interests and the consequences of the state’s failure to seek a greater contribution from corporations which have benefited greatly from their presence in Ireland.

A third issue concerns international justice, again a dimension that is entirely missing from Irish concerns on the issue of corporation tax despite the widespread interest among the public in international development. Attention was drawn to this in the report entitled ‘Driving the Getaway Car? Ireland, Tax and Development’ issued by the Debt and Development Coalition Ireland last month. This is a very useful overview of some of the ways in which Ireland’s low corporation tax ‘is open to abuse by multinational firms in a way that directly or indirectly damages the tax take of Southern countries’ (page 41). While the author, Dr Sheila Killian of UL, does not consider the effect of raising the rate of Ireland’s corporation tax, she does recommend a number of actions that Ireland could take to seek more effectively to ensure that these abuses do not occur. The EU’s CCCTB proposal seems designed to address some of these potential abuses.

Each of these dimensions of the issue of corporation tax requires a lively public debate. Furthermore, since this touches on moral and development issues as well as ones relating to industrial policy, it would benefit from a range of voices and concerns finding expression. Yet, I suspect that one of the reasons why this is not happening is the very efficient lobbying being done on behalf of US corporations by the American Chamber of Commerce, a very powerful lobby group. It already made the position of the US corporations very clear just as EU pressure was mounting on Ireland to raise its corporation tax. Lobby groups have, of course, every right to put the position of their members forward. However, when the state adopts a similar position with no public debate, and when the media row in behind this without raising any questions, then we are in a very troubling situation which bears far too much resemblance to the lack of debate and the caving in to vested property interests that characterised the public realm during the Celtic Tiger years.


Martin O'Dea said...

While your arguments are perfectly sensible and morally sound, and indeed seem to show exemplary usage of a new, fair and societally beneficial paradigm of holistic considerations of policy implications; they pay no heed at all to the boogeyman!!

Robert Sweeney said...

'media and commentators accept this without the slighted debate or questioning'

Of course they do. The media are themselves large corporations and/or dependent on the corporate sector for their income through advertising. Having a serious debate about corporation tax is akin to a church publication seriously debate child abuse.

Patrick said...

Its true many blindly stubble through the argument for the corp tax rate without really understanding it. Equally many that look to challenge this assumption are blind in their criticism.

"The EU’s CCCTB proposal seems designed to address some of these potential abuses."

It's important that you understand the cost of formulary apportionment under CCCTB and how you would anticipate covering the lower corporate tax returns to Ireland. The French tax base is effectively lower for the chosen few who legislation is written to given large grants or exemptions to. It is flawed to discuss the tax rate without giving an understanding of the tax base. While there are notable - 'Double Irish' - exceptions, the Irish tax base is relatively flat (the spread between the marginal and effectively rates are quite close). This is the attractiveness to new companies its actually not about who you know as in narrow tax base countries but a clear system.

Their is a fear, real or perceived, that any change in corporate tax will spark a full scale review of a companies position in Ireland. It's like happily paying your waste bin charge til you hear its going up, then you start shopping around. We could have picked 15% but the concern isn't the amount but Pandora's box.

Lastly, I don't think saying that know is the time to cut our dependency on FDI tax revenue makes much sense, as the reduction in it would need to be raised elsewhere - likely domestically so that would do further wonders to our domestic market.

Martin O'Dea said...

The boogeyman thrives in a deficit of information - and this is precisely what the current technologies can provide a proliferation of. Nat O'Connor's work on government information and other work on honest interviews of head of international firms should be readily available.

Are companies going to leave Ireland if we increase our corporate tax rate to 15% and come slightly more in line with E.U., negotiate a better interest rate (at least until next shift in reality or euro crisis) and, importantly, have corps contribute to the necessary increase in government revenue???
Ask them!

Government must see itself as stronger than corps or vested interests. I believe that companies will not abondon childlishly because they are upset that we stop rolling over completely - we can be an attractive place to do business without prostituting ourslves. Remember the anti-war protests of 2003 and Bertie Ahern's effective concession that the principles of the war and the shannon stop-over had to come second to possible repurcussions from U.S. businesses. A reaction that was again extremely unlikely; but that held a light up to why many of the errors of FF were made - not in fact out of arrogance so much as fear and a willingness to be turned over readily just to keep the good times coming