Two weeks ago, I suggested that Ireland should look at two of its taxation policy sacred cows, as the country attempts to plug a hole approaching €25bn in its tax receipts with a mixture of tax increases and spending cuts. The first sacred cow, introducing a residential property tax, was discussed in more detail last week. The second is increasing the statutory corporate tax rate.
As was pointed out in comments two weeks ago, despite (or actually because of) its low rate, Ireland actually takes in a reasonable proportion of its taxes from company profits. In 2005, for example, Ireland took in just over the OECD average, relative to GDP – you can check out the full figures at Table 4.04 on page 79 of the Annual Competitiveness Report.
However, corporate tax receipts have fallen 13% in the last two years. Therefore, what got us our success in times of peculiarly benign global forces cannot be relied upon to deliver the same to our coffers in a changed economic environment. That is not, of course, to say that we should abandon the policy of an attractive business environment, as Accenture’s announcement that they will relocate their HQ to Ireland shows. We just need to be more aware of the increasingly complementary nature of capital and skilled labour.
Are Irish corporate tax rates low? And what capacity do we have to increase them? Charles Swenson and Namryoung Lee of the Marshall School of Business have estimated not just the statutory rates changed by central government but also the ‘effective tax rate’, i.e. what taxes companies actually pay, taking into account differences in the tax base (worldwide versus territorial), differences in incentives and tax credits, etc. The map below shows the effective tax rates for each country. (Incidentally, for those curious about the new mapping tool, I’m trying out Google Fusion, which is their data visualization counterpart to IBM’s Manyeyes.)
As you can see, taking account of all the finer points of taxation in each country, Ireland is still a low tax country for business – but not as low as taking the statutory rates alone. Of the 70 countries surveyed, Ireland has the 7th lowest official tax rate but the 15th lowest effective tax rate. Countries such as Hong Kong, Hungary and Iceland, which have higher official rates seem to have other incentives than just low tax rates – their effective rate comes out at less than Ireland’s (or indeed the UAE, Bermuda or the Cayman Islands). What is interesting – as shown in the second map below – is that Ireland is one of the few countries to have a higher effective rate than the statutory rate. The map below is back in Manyeyes – choose Eff/Stat gap from the menu top left to see how few countries have an effective tax rate higher than their headline rate. The typical country has an effective tax rate that is 4.3% below the headline rate. Ireland’s is 3% higher.
The capacity to increase the headline rate of corporate taxation from 12.5% depends on two things: (1) how smart you think big business is and (2) who you think Ireland’s competitors are. On the first, if business is drawn in by headline rates and carries on oblivious to the effective tax rates it starts to observe once it’s set up in a country, then an increase to 15% will be a lot less effective than other under-the-radar measures that would push Ireland’s effective rate towards 18%. It would seem from the typical country’s discount under headline rates that the opposite is the case. Business certainly likes lower tax, and doesn’t seem to mind too much if they happen on the headlines or under the radar. A clear and open increase to 15%, discussed with big business already in Ireland, should not have an impact on business here, particularly if it prevents Ireland from becoming less attractive to skilled labour through higher income taxes.
Secondly, who are Ireland’s competitors? As Ireland acts as an EMEA headquarters for many US firms, the EU is a natural grouping to compare ourselves too. We can go one better and compare ourselves to the rest of the OECD – which includes Switzerland as well as our Anglo-Saxon offshoot cousins. Among the OECD, we have the third lowest effective tax rate at 15.5%. Were we to increase that by 1.5 percentage points, we would still have the third lowest – ahead of Chile and Turkey, hardly major competitors for the same types of projects as Ireland. (One potential stickler, for those paranoid about Singapore, who are not in the OECD, is that their effective rate was 18% in 2006 and 16% in 2007.)
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. It may actually enable us to keep in the hunt for FDI projects seeking skilled labour, if it means we don’t have to increase our income tax rates above where they are currently. As we look for €10bn in tax increases – as well as €10bn or more in expenditure cuts – I don’t think we should ignore the €1.5bn or so such as measure could give us. The question posed at the start should nearly be flipped around: can we afford not to increase our corporate tax rate?