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One of the most controversial aspects of the Celtic tiger and subsequent implosion of the Irish economy has been the 12.5% rate of corporate profits tax applicable to most businesses in Ireland.

Its detractors accuse Ireland of harmful tax competition which will lead to a race to the bottom in corporate taxation worldwide. President Sarkozy and Chancellor Merkel have all but made an increase in Irish corporate tax rates a precondition for any renegotiation of the ECB/IMF deal to deal with the banking (and now fiscal) crisis in Ireland.

Its supporters argue that Ireland's 12.5% headline rate is very close to the effective (average rate actually paid) rate of c. 8% and that many countries with much higher headline rates have so many exemptions and supports for businesses that their effective rates of tax are in fact much lower than their headline rates.  

They further argue that other small European states like Luxembourg and Switzerland have even lower effective corporate tax rates and that lower taxes is the only way that smaller (and particularly more peripheral) economies have of competing against larger economies with much larger domestic markets and economies of scale.

Finally they argue that if Ireland were to increase its corporate tax rates, many mobile businesses would leave - not to elsewhere in Europe - but to even lower tax countries in the far East and Caribbean - resulting in a net loss of output and tax revenue for Europe as a whole.

Corporation profits taxes cannot be considered in isolation from other taxes businesses face in the Irish economy where VAT rates, commercial property rates, development levies, and service charges tend to be very onerous and have increased far faster than inflation in recent years.

The small business sector, in particular, is being devastated by a collapse in domestic demand, lack of access to credit, and a fire-storm of insolvencies which is threatening even profitable companies who cannot get their insolvent debtors to pay up for services rendered.  In many cases the coup de grace is then delivered by a local Council levying swinging increases in property rates in response to increased costs and a declining base of companies still in business.

The big problem with many such commercial rates, development levies and service charges is that they are entirely unrelated to a company's turnover, profitability, cash flow or ability to pay.  The operation of these local taxes is also often seen as largely capricious, at the whim of the local council, open to corruption, and unrelated to rates levied on other competing local businesses.

Finally, such taxes are very onerous and inefficient to collect, with complex and time consuming appeal procedures, and with many businesses closing and re-starting elsewhere when confronted by legal proceedings.

Corporation profits taxes raised c. €4 Billion last year, and commercial rates c. €1`Billion.  An increase in the corporate profits tax rate from 12.5% to c. 16% combined with an abolition of commercial rates  would therefore be revenue neutral, but would shift the taxation burden from struggling, non profitable businesses to profitable businesses thus protecting both tax revenues and employment throughout the economy.

It would also be broadly progressive - those who make higher profits pay more tax - and could also be presented to Merkel and Sarkozy et al as a gesture towards corporate tax harmonisation within the Eurozone without harming our reputation as a business friendly environment for foreign investment.

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Feb 10th, 2011 at 07:26:33 PM EST

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