One of the most controversial aspects of Ireland’s tax policy is its extremely light taxation of corporations. Corporate tax is only 12.5% and many corporations pay even less than that. Some would even go as far as to call Ireland a tax haven. Others defend it by claiming low taxes attract foreign investment which creates employment and provides tax revenue. Is it dishonest to aid corporations in their avoidance of paying their fair share or are low taxes necessary to keep the economy internationally competitive?
Lets first examine the claim that low corporation tax attracts foreign direct investment. This is regularly claimed, but there is a surprising lack of evidence to support it. Irish total foreign investment peaked in 2003 and then declined. There were even many quarters after 2003 when there was a net capital outflow. The average annual net inflow between 2003 and 2010 was only €2.3bn compared to €17.7bn between 1998 and 2002. During 2009/2010 Ireland had a total inward investment of $31.1bn and outward investment of $31.0bn. In other words Ireland is not the source of a large net investment. In the five years when the corporation tax was 40%, the economy grew by 7% per year, whereas in the 8 years that followed the reduction to 12.5% the growth rate has averaged only 1.5%. Now of course correlation is not causation and perhaps the economy still would have done poorly with higher taxes, but it does refute the oft-repeated claim that the 12.5% tax rate was the cause of the boom. It is a common myth that foreign investment drove the Celtic Tiger, yet an examination of the data fails to support this. There was little change in employment from foreign direct investment between 1983 and 2006.
It is often assumed that if corporations keep more of their profits, they will invest more, thereby creating more jobs. However, while this can be true, it is not guaranteed to be so. People often assume that investment rises when profits rise. After all, if businesses have more money presumably they spend more on building their business. Unfortunately this is not true. What many people don’t realise is that profits are actually increasing during the present recession after the disastrous year of 2009. Profits have risen from €39bn in 2009 to €46.3bn in 2011. Yet investment has sharply dropped in half, declining by €9.4bn. We are thus left in a position where businesses have more money but are spending less of it, in other words hoarding cash. Before the recession businesses invested only one-third of their profits, a figure that is very low by most international standards (and would surprise many supporters of low corporate tax). Since the recession this figure has dropped to one-seventh. This is below even the rate of depreciation. The extra profits from the tax increase were not reinvested in business infrastructure but rather in property speculation.
The problem with low taxes is that it is very easy for other countries to copy it. At the moment Cyprus and Bulgaria are two EU countries with corporation tax of only 10%. Other Eastern European countries are competing to lower taxes as are many tax havens. This could lead to a race to the bottom where governments compete with each other over who could defend themselves the most. In this situation only corporations gain and everyone else loses. Ireland cannot compete in the long term simply by being cheaper, because there are other countries that can always go lower than we can. We have to compete by being better.
You see, taxes are not the only consideration that matters to corporations nor even the most important. Businesses also take into account the skills and education of the workforce, the infrastructure of the country, the quality of institutions, our membership of the European Union and the fact we are an English speaking country. The path to prosperity for Ireland is not through being a cheaper option than Eastern Europe (a battle we will never win) but rather a better one. We should compete on the basis that we can provide higher quality goods and services than elsewhere. Crucially, in order to do this we must invest in the long term prospects of the economy. We need the government to invest a euro today so that we may reap two tomorrow. Extremely low corporation tax cuts into the government’s ability to do so.
Corporation tax is not central to Irish tax policy as many corporations do not even pay it. Boston Scientific paid only 4% tax of $1.4bn it earned, Apple paid only 2% and Google 2.4%. Some companies pay no tax at all. Novell (the software giant) paid zero tax. These (completely legal) accounting methods to dodge tax are so common that there is even a word for it, the “Double Irish”. The effective tax rate in Ireland is 4.2%, which while higher than tax havens like Bermuda and the Caymen Islands, is similar to that of Switzerland and the Netherlands. The US Senate (on page 30) described Ireland as a tax haven, a claim many would support. Most of the foreign corporations investing in Ireland do not hire anyone (the median number of employees of an IFSC company is zero) or even have a premises. Rather they exist merely on paper to avoid paying tax in their home country.
Companies are also attracted by Ireland lax regulation and corporate secrecy, which makes me worry about what sort of companies we are attracting and what they have to hide. Lax regulation was a major cause of the financial crisis and criminal elements launder their money through countries worth few checks. Unfortunately, the level of scrutiny in Ireland is so lax that we have no idea if we are complicit in illegal activities. Its not just US companies that use Ireland to avoid tax. A Zambian sugar company routed its profits through Ireland to avoid paying local taxes that would have been used to ameliorate the severe poverty and malnourishment that Zambia suffers from.
Is there anything wrong with being a tax haven? Is it merely being pragmatic and a necessary step to get ahead in the competitive world? Or is it short sighted dishonesty? After all corporations need the government to make money, who else will train their employees and build the infrastructure while providing a safe environment to do business? All of this requires taxes to run and maintain so dodging tax is robbing the future of the opportunities that this generation has. Businesses today prosper at the expense of businesses of tomorrow. It is this sort of short sightedness that destroys economies. It is with the help of the state that corporations grow rich so it is only fair that they pay back their fair share. It is hardly socialism to expect that businesses pay for the roads they use.
Let’s be clear, tax evasion is theft. It may not be as visible or as frightening as someone physically stealing your wallet, but the principles are the same. When Ireland lets other countries dodge tax we are accomplices to dishonesty and theft. Some say they don’t mind so long as we get a slice of the profits, but this is no different than letting someone keep stolen goods in your house so long as they pay you. Everything we gain is at someone else’s expense. Perhaps I’m naive, but I would like my country to make an honest living and not prosper by defrauding others.
Those who do not pay taxes shift the burden onto those who do. Hence the less corporations pay, the more ordinary workers do. Increasing corporation tax would raise more money than the property tax. So why is it not even being considered? Corporations benefit just as much from state services as the rest of us, so why don’t they pay their fair share? Why should fabulously wealthy corporations pay less tax than ordinary workers? We will only get out of this recession if we all pull our weight equally, we cannot allow some groups (no matter how politically connected they are) to escape the burden.
Corporation tax is widely defended by all sections of Irish politics and media as crucial to the Irish economy. All attempts by Europe or America to change it have been resented. Yet despite the claims of its supporters, it does not promote investment, it does not create jobs, nor does it help the economy. The primary beneficiaries are the corporations who use their political connections to avoid paying their fair share and shifting the burden onto the rest of society. Enough is enough, we can no longer continue as a tax haven with our ill-gotten gain. It may be tough, but we must earn an honest living through providing better goods and services and not just reaching into our neighbours pockets. We cannot cheat our way to prosperity. We must raise corporation tax so that we invest in an Ireland of the future, one that can compete and prosper on the global stage.