The Irish Times view on tax trends: an increasing reliance on corporate taxes

Tax has held up well through the pandemic, but risks lie ahead

 

The annual report on taxes from the Department of Finance provides two distinct messages. The first is that tax revenues held up remarkably well during the pandemic, due to the unusual nature of the economic hit. The second is the increasing reliance on corporation tax revenue, more than half of which is now paid by just 10 big companies. This is correctly identified as creating “a significant risk to the public finances.”

As the pandemic hit in late February 2020, the fear was of a significant hit to the public finances. There has, indeed, been a massive increase in public spending as a result. But tax revenues were surprisingly resilient, ending 2020 just 3.6 per cent down on the previous year. This compares with a fall of one third in tax revenues after the financial crash.

Remarkably, income tax receipts were down just 1 per cent in 2020, as the job s lost were almost all in sectors with relatively low pay rates, and thus limited tax revenues. In contrast, more highly paid sectors of the economy kept operating. There was a big fall in spending taxes, with VAT receipts down 18 per cent year or year.

Corporate tax revenues are now intimately interlinked with the fortunes and decisions of a small number of mainly US companies

The figures were supported by another record year for corporation tax receipts, which were close to €12 billion and accounted for one euro in every five of tax collected. The buoyancy of corporate taxes, driven by rising contributions from a few big companies has provided vital support for the exchequer.

However it also indicates an area of vulnerability for the future. As the report points out, corporate tax revenues are now intimately interlinked with the fortunes and decisions of a small number of mainly US companies. The multinational sector also tends to pay higher wages and any job losses in this area would quickly knock on to lower income taxes.

Minister for Finance, Paschal Donohoe, has pencilled in a €2 billion hit to annual corporate tax revenues by 2025. This is largely due to talks on global corporate tax reform now at a crucial stage and the outcome of which remains uncertain. A substantial part of our annual tax revenue is now reliant on the outcome of these talks and on how big multinationals respond. This exposure needs to be recognised in key decisions on the budget for 2022.

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