The Irish Times view on trends in corporation tax: some reasons for concern

Corporation tax receipts have now fallen below 2022 levels for three months in a row. Does this represent a trend? And if so, how significant is it?

Factors related to specific companies – in particular Pfizer, which has just announced 100 job cuts in Ireland and Apple – appear to have been key contributors to the decline seen over the past three months. For that reason the November figures, which will be available in December, will be important as they will involve payments from companies with a December year-end, which represents the majority.

Nonetheless, there are reasons to believe that corporation tax this year may come in below target for the first time in many years. What is less clear is whether this represents just a fall-back from an extraordinary performance in 2022, or the start of a weaker trend. The answer to this question will be very important for the outlook for the public finances.

What is clear is that the profits of some of the big pharma companies surged during Covid-19 and this is likely to have been one reason why corporation tax was so strong over the past couple of years. Many tech companies, too, prospered during the pandemic. Now pharma profits are falling back and the tech sector has also had to retrench.

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On this analysis, it is conceivable that after adjusting downwards for a period, perhaps this year and next, corporation tax receipts could start to rise again. Strong pharma investment here gives some confidence that taxes from this sector will remain underpinned, while the tech industry will, sooner or later, enter another upward cycle.

The latest events do underline Ireland’s vulnerability and its financial reliance on a small number of very big companies. The decisions to put aside some of the excess revenues in recent years, and now to create two new funds for this purpose, have been both important and welcome. So too is the fact that the State enters this period with a significant budget surplus and considerable cash in hand.

Even with that, a fall-off or even a stalling of corporate tax receipts will make budgetary management more challenging. The sharp surge in these revenues has allowed State spending to rise rapidly, while the budget still went into surplus. Now, depending on the trends over the next year or two, budgetary management could quickly become more challenging. And this comes at a time when the bills from an ageing population and from climate change are starting to climb.

This should lead to some reflection on all sides in Leinster House on the need to underpin tax revenues in the years ahead, rather than making promises of more reductions. Seemingly endless growth in corporate tax revenue since 2015 has allowed politicians to simultaneously promise prudence and also plan giveaways. This luxury may soon not be available.