by Frank Schnittger
Thu Feb 10th, 2011 at 02:01:46 PM EST
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 rate (average actual yield) 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. For example, other small European states like Luxembourg and Switzerland have even lower effective corporate tax rates and one-quarter of the companies listed on the CAC 40 stock exchange index in Paris pay no corporation tax to the French state at all.
In this view lower taxes are 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 and 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 the Caribbean.
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 often seen as entirely 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.
Accurate statistics are hard to come by, but the best estimates appear to be that Corporation profits taxes raised c. €4 Billion last year, and commercial rates c. €1`Billion. An increase in Corporate Profits tax from 12.5% to c. 16% and 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 thus 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.
In making this argument I am conscious that it is very much contrary to both Chris Cook's ideas on property taxation, and a more general abhorrence on progressive sites like this to low levels of corporate taxation generally. Certainly the Irish taxation system as a whole is heavily weighted towards income and expenditure as opposed to property or wealth resulting in relatively high marginal rates of income tax (following recent increases) when compared to property taxes. This tends to reward "old money" at the expense of current productive activity. Some form of property or more broadly defined wealth tax is unavoidable if the burden of income taxes (which tend to impact more heavily on younger, more economically active, and larger families) are not to increase to levels which exacerbate emigration and other economically counter-productive trends.
However the existing system of commercial rates in Ireland is so opaque, capricious, and open to corruption that it really needs to be radically reformed. It is falling ever more heavily on a declining base of surviving companies and risks killing off small businesses entirely. In every town in Ireland, at the moment, small businesses are closing at an alarming rate. Another lengthy review of taxation systems (their have been many tax reform proposal published in the past) is the last thing they need. Immediate emergency action is required. An elimination of commercial rates offset by an increase in profits taxes will shift the burden of taxation from struggling to profitable businesses. If it also contributes to greater and more transparent corporate tax harmonisation within the Eurozone, then so much the better.
