Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Can Ireland afford to increase its corporate tax rate?

  • Gerard O'Neill ,

    “A well-communicated one-off increase in our corporate tax rate to 14%, therefore, would be most unlikely to price us out of the types of mobile foreign direct investments that we target.”

    Em, I think you mean ‘other things being equal’ Ronan. But what about second order effects? We are the only country in the OECD that is pushing up tax rates at present. Think vat.

    So we might just find more than Chile and Turkey joining the club of countries with lower tax rates than Ireland. A subset of that much bigger club of countries with much lower costs of doing business overall.

    And once you move away from the ‘sacred cow’ of low corporate tax rates what signal does that say about the future of corporate tax rates to any would be investor/emea head office relocator?

    • Ronan Lyons ,

      Hi Gerard,
      The argument that I’m making is precisely taking into account your two points.
      (1) What are the second order effects? Who is anywhere close to our 15.5% tax burden? In 2006/2007, the six closest economies that could be perceived as competitors (Switzerland, the UK, Austria, Denmark, Canada and the Netherlands) were all between 20% and 25%. A one-off inch upwards, maintaining an overall perspective of how attractive we are or are not, is certainly possible in that environment. Don’t be fooled by headline rates (which incidentally put even further distance between us and our ‘competitors’) – look at the real rates paid.
      (2) You talk about signals – but we’ve been here before. We increased the rate from 10% to 12.5%. That was because of economic necessity, and the business community understood – the fundamental maths of coming here still added up. We now an even greater economic necessity, and we need to make the business community understand again. This isn’t slippery slope/thin end of the wedge stuff, and business can surely understand that, namely a full economic plan outlining sustainable taxation and spending policies and the need for a one-off increase that still makes Ireland one of the best locations to set up shop.

      It is my opinion that business would prefer – and set up more meaningful operations in – an Ireland with slightly higher corporate tax rates, but with a supply of skilled labour, than in a shell of an Ireland, similar to a tax haven, which is unable to attract skilled labour here because of prohibitively high income tax rates. Personally, I would also prefer that Ireland, and I think most people here would too, if it’s possible. This is the choice we face, and I think it’s possible.

      • karl deeter ,

        there are some other factors though, in some countries in the continent a start up business has VAT relief for the first 5yrs (or something like that – i heard this from a tax guy i know who said that they find other ways of making business cheaper on the mainland). what i would also say is that raising a tax because it is possible is different than raising a tax because you should, i’d rather see targeted spending cuts come before widening the tax base via businesses when companies are already shutting down left and right.

        • Ronan Lyons ,

          Hi Karl,
          Thanks for the comment. I agree on the expenditure cuts – but bar taking out one third of the entire public sector, we’re also going to have to look at our tax base. Also, businesses go under when they’re making no profits. This is a tax on profitable business.
          R

          • Ronnie O'Toole ,

            Ronan,

            The increase from 10% to 12.5% in 1998 wasn’t from ‘economic necessity’, but was a massive tax lowering exercise, as it merged the 10% (manufacturing and IFSC) and 40% (other) rates. I think the sigalling problem is a massive issue.

            Further, we have a far higher coproration GDP than other countries. Given the rates you showed, we are possibly very close to our peak earning capacity from corporation tax. you would certainly have to prove the case that raising taxes (even without signalling problem) would increase revenue significantly.

            Ronnie

            • Ronan Lyons ,

              Hi Ronnie, thanks for the comment. I would argue that 1998 was economic necessity, because essentially all FDI was on 10% and went up to 12.5% because something much worse was the outside option. I’m arguing that the outside option – an Ireland not attractive to skilled labour – is just as unsatisfactory now.
              On your second point, we don’t actually have a far higher corptax/GDP ratio than other countries – table B here (http://www.oecd.org/dataoecd/48/27/41498733.pdf) shows that in 2006 we were below 9 OECD counterparts: Australia, New Zealand, Japan, Czech Rep, Denmark, Luxembourg, Norway (the outlier), Spain and the UK. We were on a par with South Korea, Canada, Belgium and Sweden and not that much ahead of the USA, Finland, Italy and the Netherlands.
              My argument is that by increasing the effective rate from 15.5% to 17%, we do not endanger our relative position (OECD ranking stays the same), i.e. inelastic response. I would love to get the thoughts of someone from the IDA who deals day to day with the companies, but I think those conversations are probably held at a higher and more discrete level than a blog!

              • Ronnie O'Toole ,

                This doesn’t answer the point: The ‘signal’ in 1994/7 for Ruari Quinn was that we had to change our whole taxation system. No equivalent exists today. I don’t understand way saying someting is of ‘economic necessity’ would give any investor any confidence that it is once off. Will we not have any ‘economic necssity’ in 2012 or 2015 or 2020? There is alway pressures on finances. Even domestically, the idea that this is now an option will increase the political pressure to use it in the future. Even if we are well meaning in saying this is a once off, we can’t answer for what fuiture politicans/voters choose to do.

                MNCs (particularly pharma) make very heavy cpaital investment decisions when they come to Ireland. Any signal that corproation tax rate is ‘now on the table’ would be incredibly dangerous.

                • Ronan Lyons ,

                  I think we’ll have to agree to disagree! IMO, the change needed in our entire taxation system now is vastly greater than the need in the late 1990s. A 10% tax rate for all business was – truth be told – an option, they just knew they could get away with 12.5%.
                  I do agree with you that an arbitrary increase in corporate tax rates would be self-defeating, but as part of an overall strategy in relation to actually revamping our tax system, and our expenditure, to plug the €25bn gap in a sustainable way, it’s my opinion that it could work.
                  The alternative, incidentally, is to keep the rate at 12.5% but just increase the effective tax rate, through indirect means, from 15.5% to 17%, and not tell anyone. Overcomes your signalling problem, but I prefer the clarity of message of the former.

                  • Ken ,

                    US cies in Ireland (with really few exceptions) had only provided short term low skilled jobs (admin & call center types) so it will not be a big loss if the ‘bluff’ from the US chamber of Commerce advocating that cies will leave if the corp. rate is increased..is not a bluff. US cies had started to leave the country before the crisis to relocate in eastern europe (mainly Poland…which for info has a corporate rate of 19% ). Ireland should rely on its own indigenous development and strenghten its links with its real partners..the European countries rather than importing an elusive short term economy that is now in Poland then in 15 yrs time will move to india then in another 15 yrs to Africa (where it cannot be cheaper to be). To the next Taoiseach : Spend the next paddy s days here and invite Cameron or Sarkozy but do not go to Washington..it is really pathetic.

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