Tax policy amounting to a free pass for the big boys

Mon, Aug 9, 2010, 01:00

OPINION:At a time of acute economic strain, it’s the individuals who are bearing the brunt of it through increased levies and taxes, writes ARTHUR BEESLEY

IRELAND’S GENEROUS corporation tax regime has achieved totemic status as a policy of supreme virtue which sets the State apart from less-enlightened rivals in the race for foreign investment. So strong is its lustre that any suggestion of change is deemed to carry grave risks of economic self-harm. Yet change there should be, for the system needs a rethink and is open to abuse.

It is grossly unfair as well. When the economy hit the rocks, the Government took the blade to public services and raised personal taxation. Yet it hasn’t gone near the corporate tax rate of 12.5 per cent, for fear of giving offence to international investors who just might make off with their money if it went up.

This means individuals are bearing almost the entire burden of adjustment – and it is a very large burden too. Increases in the income and health levies and the PRSI ceiling in the 2009 supplementary budget were projected to yield an additional €2.79 billion per annum. That’s the equivalent of 71.5 per cent of the entire corporation tax take last year: €3.9 billion.

In the interests of equity, the policy should be reviewed immediately. Not increasing corporation tax in the current climate amounts to a free pass for profitable businesses – loss-incurring firms don’t pay the charge – at a time of acute economic strain for all.

Scarcely a family in the State is untouched by the crisis. More than 150,000 people have lost their jobs since the start of 2008, mass emigration is back and taxpayers are on the hook for tens of billions of euro to fix the banks. Therefore, no option to help restore order in the public finances and reduce the State’s crippling dependence on borrowing should be off the table.

Extraordinarily, however, the Government expressly blocked any substantive discussion on even a modest increase in the corporate tax rate when it set up the Commission on Taxation in 2008. Written into the commission’s mandate was the requirement to “guarantee” that the current charge remained. The presumed objective was to avoid sending out a signal that pressure could build for an increase in the tax, putting the frighteners on a market that was told the rate is here to stay.

As it happens, the commission was “supportive of Government commentary” that there is no intention to move it either upwards or downwards. The current rate is appropriately low, it said, and constitutes a strong brand for Ireland’s domestic economic activity and inward investment. “It is generally agreed that corporation tax policy, in particular the introduction of the 12.5 per cent standard rate of corporation tax from 2003 onwards, has been a key factor in Ireland’s economic success.”

But Ireland is no longer an economic success. In the present climate, the question of whether it is still appropriate that the State should have the lowest corporation tax rate in the EU-15 group of western member states and the third-lowest rate in the wider group of 27 states merits serious examination.

After all, Ireland doesn’t necessarily have to have the lowest rate to be competitive. The State was a magnet for inward investment long before 2003, and downward pressure on other business costs means competitiveness is being gained in other areas. Yes, a massive hike in the rate would surely be unwise. However, even a small increase of a few percentage points would lessen the load on everyone else. Every euro counts.

Although argument is routinely made about the deathly law of diminishing returns coming into play whenever corporation tax goes up, that’s not to say a modest rise would not have benefit from the public revenue perspective.

The trick is to measure the likely yield against a range of projected increases, something the Government does all the time in respect of other tax brackets. There’s no reason why it shouldn’t do so here, publish the results, and take a “brave” decision to ask more of the business community in the light of the emergency conditions that prevail.

When imposing levies on personal income and cutting public wages, the Government was only too happy to portray its actions as courageous. Why stop there?

At the same time, it might as well examine if the one-size-fits-all approach is appropriate.

Take, for example, the new €39 billion capital spending plan, which will deliver a metro service for Dublin and other infrastructure. In the current regime the companies which are big beneficiaries of the plan would pay the exact same tax on their profit as every other company, even though their revenue stream from the Government is virtually guaranteed. Should they not pay more tax on their profit for this privilege? They’re big boys after all, with enterprises large enough to take on projects worth hundreds of millions of euro.

And there are precedents for sectional taxation in the corporate sphere. In more prosperous times, Charlie McCreevy imposed a special levy on the banks.

Then there is the question of abuse. Numerous companies funnel huge profits through Ireland to avail of the tax rate, employing nothing or nobody here but billable hours for accountants and lawyers to find ways of bringing down the actual rate they pay. There’s nothing to stop them, although many change their legal structure to avoid publishing their accounts once they are uncovered by reporters. This only fuels suspicion that the regime here is being used by some firms as a tax shelter.

This is glaringly at odds, of course, with the Government line that the policy is a crucial competitive tool for the stimulation of employment. It would be much better to recalibrate the regime with fresh incentives – for international and Irish businesses – to create jobs while taking steps to extract a greater overall contribution from profitable groups. This is basic common sense.

Arthur Beesley is European Correspondent of the The Irish Timesbased in Brussels

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