Tuesday, 26 July 2016

The Effective Corporate Tax Rate, Again

Prof David Jacobson: I'm glad to see that even though Stephen Donnelly TD got most of the limelight, our Progressive Economy colleague, Jim Stewart, was at least referenced in the article by Jack Horgan-Jones on Section 110 companies in the Sunday Business Post (“REVEALED: the vulture funds that paid just €250 in tax”, SBP 24/07/2016).  

Jim Stewart is the leading researcher on how Multi-National Corporations in Ireland have minimized their corporate tax payments, on how their tax advisors – the big accounting firms – have helped in this, and on how the state, sometimes unwittingly, has allowed this to happen.  Among other important analyses, Dr. Stewart has shown that the effective corporate tax rate for US companies in Ireland is around 2 per cent, nowhere near the nominal rate of 12.5 per cent. 

Brian Keegan, weekly SPB commentator on taxation is the Director of Taxation for the Chartered Accountants Ireland. In the same issue (“The Tax Take: Wrong End of the Stick”, SBP 24/07/2016) he discusses last month's National Economic Dialogue. This, from his article, is interesting:
"In the course of that event last month, explanations were presented by a senior Department of Finance official and a noted economist regarding the effective rate of tax which companies pay in this country.  They offered evidence that the effective rate was quite close to the headline rate of 12.5 per cent. 

"However, the idea that companies might actually be paying as much tax as they should did not suit the political and social agendas of some of the participants in the discussion. So the evidence and the explanations were dismissed, perhaps to be revisited at a later stage."

Mr Keegan wrapped this report in the argument that "ideology trumps intelligence".  He seems to be implying that the rejection of the idea that effective is close to nominal tax is ideological.  This is amazing given that all over the rest of that day's Sunday Business Post – in particular in the Horgan-Jones piece mentioned above – is evidence of hundreds of millions of euro being made in Ireland by Section 110 companies that don't pay tax.  

Of course these companies are somehow carefully excluded from the denominator of the effective corporate tax calculations, so as to ensure that the rate stays high.  Leaving these companies out of the effective tax calculations is in fact ideological.  

In short, it seems that the Department of Finance – supported by an unnamed “noted economist” – are intent on “proving” that the effective corporate tax rate in Ireland is close to 12.5 per cent. 

However, earlier analysis by Jim Stewart, enhanced by the latest evidence of tax avoidance by Section 110 companies, shows that the effective corporate tax rate in Ireland is very substantially below that. 

David Jacobson is Professor Emeritus in Economics at DCU.

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