In 1962, President John F Kennedy committed to “an across-the-board, top-to-bottom cut in personal and corporate income taxes.” The tax system, he argued, “exerts too heavy a drag on growth; it siphons out of the private economy too large a share of personal and business purchasing power; it reduces the financial incentives for personal effort, investment, and risk-taking.” JFK’s administration subsequently delivered those tax cuts, expecting tax revenue to fall, in fact US tax revenues soared.
The “moral case for making corporations pay more taxes” as argued in the press last Sunday is not necessarily a practical case, for as JFK discovered, lower rates do not mean less tax is collected. In Ireland’s case this rule is even more true, because according to the Department of Finance’s last budgetary White Paper, our open economy and low tax rates have attracted global firms to our shores such that corporation tax income at €12.5 billion is the revenue’s third largest tax generator in terms of receipts, behind income tax and VAT, accounting for 22 per cent of the state’s tax base. That is more than triple the equivalent average share of tax revenue of most European countries.
Of that €12.5 billion some 77 per cent of receipts last year came from foreign-owned enterprises, and 40 per cent from just 10 big firms, including Apple, Google and Microsoft. These big tech firms are not here for the weather, they are here because of our stable policy environment on business taxes and our well educated, young workforce. If that changes they will definitely rethink their future investment plans or worse still, shift their current investments to somewhere more agreeable. Do not count on them staying if corporation taxes rise to “at least 15 per cent”, as demanded by the OECD plan drawn up by the big G7 nations.
Firstly, plenty of other countries have well educated, English speaking workforces, with lower wage and property costs, not to mention sunnier weather. Without the lure of lower taxes on profits their relative merits become much clearer to the chief financial officer back home in America. That CFO’s job is to generate maximum returns to shareholders, not virtue signal about fairness to social media followers.
Secondly, do not for one moment think that President Macron will settle for 15 per cent forever. Once Ireland accepts the principle of harmonising tax rates, the policy ratchet will be in place. Every year President Macron or his successor will bang the table and complain that Ireland is unfairly competing, is not a “good European” and demand Ireland raise its tax rates again. Once the principle has been conceded and fiscal sovereignty surrendered, the ratchet will be pushed on relentlessly until it turns.
Thirdly, as surely as Ireland’s corporate tax rates rise, the share of total tax revenue from corporations will fall. Those who argue that there is a moral case for higher corporation tax rates have to explain how the resulting fiscal deficit will be made up. If the tax revenue share from corporations fell closer to the European average, falling in nominal terms from the current €12.5 billion to nearer €4 billion, where will the missing €8 billion be found? That is over €3,000 for every working Irish taxpayer. Good luck to any politician getting re-elected promising voters that just to keep President Macron happy.
How much will income taxes have to go up? How high can VAT be pushed? Bearing in mind that Irish income taxes on individuals are far from low compared to other countries, any rise will compound our problems by making Ireland even less attractive to any foreign executive contemplating take home pay when considering locating here.
Some argue that Irish owned companies could be protected from rising rates by fiscal chicanery, tax credits, grants and the like, ignoring that EU law makes any such implicit subsidy open to challenge as probably illegal. So higher taxes will be applied to small enterprises on the high street, not just to trillion dollar corporations on the information super-highway. Voters will soon discover that in the end corporation taxes are passed on and paid by customers, costs of goods and services will rise.
If income tax and VAT rises are politically impossible, those making the “moral case for fairer taxes” will have to tell us where they will cut the state’s spending. A permanent structural deficit brought about by the loss of multinational corporate tax revenues is not possible, the financial markets will not tolerate it. Remember that troika-enforced austerity? Ireland is still recovering from the global financial crisis, those who claim there is a moral case for decimating our carefully nurtured tax base have to explain how they will balance the budget.
Where will they make up for the loss of revenue? Will they cancel the national broadband roll-out or cut health spending, perhaps they will mothball the new children’s hospital? Go ahead those of you who say low tax Ireland is a rogue state, make the moral case for those spending cuts.