A cornerstone of failure
The Republic’s low corporation tax rate is zealously guarded by the failed political elite but has fatally undermined sustainable economic development according to Donagh Brennan.
“A low rate of corporation tax on export-orientated activity has been a cornerstone of our industrial policy since
the 1950s and the 12.5% rate is now part of our international ‘brand’. The contribution from the corporate sector will be made through the maintenance and creation of high value employment.”
So stated the National Recovery Plan 2011-2014, issued in November 2010 by the Fianna Fail/Green government, under close supervision from the EU/IMF/ECB Troika.
More recently Taoiseach Enda Kenny told the Wall Street Journal “Foreign investors like decisiveness…There isn’t any confusion about Ireland’s corporate tax rate: it is 12.5%. End of story… It is a cornerstone undoubtedly of why companies might invest in Ireland.”
These statements make clear that despite the unmitigated disaster of the Republic’s economic policy the Irish political class, of whatever hue, are committed to maintaining its ‘cornerstone’ of a corporate tax rate less than half the level of most developed countries.
The stark reality is that any State which has made tax reliefs the basis of its industrial policy for 50 years is admitting a gross failure of economic development. Globally, corporation tax relief has often formed a key element of a first phase of industrial development, not been its defining feature for decades.
The Republic’s low corporation tax starves both the Irish exchequer and other European states of funds that could be invested in creating employment or social infrastructure – the only winners are multinational corporations seeking to boost billion dollar profit margins.
The evidence is against the policy having any positive effect on economic growth. In the five years (between 1992 and 1997) when corporation tax was 40%, according to data from the recent National Income and Expenditure Accounts, the Republic’s average annual growth rate was over 7%. However, in the eight years since the rate was reduced to 12.5%, average growth was little more than 1.5% per annum.
So why are the Irish political elite, on both sides of the border, so wedded to prostituting economic development to the corporations?
History of Ireland’s Corporation Tax Relief
Ireland’s history of providing tax relief on exports began with the introduction of the Export Profits Tax Relief (EPTR) by Fine Gael Taoiseach John A. Costello in 1956. The relief provided a “remission of 50% income tax on profits of a manufacturing industry derived from increased exports” to be used “for the expansion of the industry.”
As the Department of Industry and Commerce had noted; “It is possible that the granting of the concession may induce foreign enterprise to establish in this country industries capable of exporting goods to the dollar area”.
It was not until the 1970s that the Industrial Development Authority (IDA) started to overtly market low taxation to attract multinational corporations to Ireland. Measures offered in the mid-1970s included a fifteen year tax holiday for exporting firms, full depreciation and total tax relief on earnings from royalties and incomes from licenses patented in Ireland. Once Ireland entered the EEC, however, such tax incentives were judged to be discriminatory, and a change was required. This lead to the introduction of a broad 10% tax rate for manufacturing in 1981, although a 32% corporation tax remained for other sectors.
In 1998 the Republic’s most infamous Minister for Finance, Charlie McCreevey, announced that he would introduce legislation for a phased reduction in Corporation taxation. On the 1st of January 2003 a 12.5% rate of Corporation tax came into existence to the dismay of most EU governments, but a fanfare of praise from multinational corporations and neo-liberal economists.
Skewing the economy
On its introduction it was boldly predicted that the new 12.5% rate itself would create jobs and bring prosperity. The defence of it since then has remained the same. In a March 2011 debate on Corporation Tax in the Dáil, Fine Gael Minister Brian Hayes suggested that the wording of the motion being debated in the chamber should be changed to “Dáil Éireann recognises that the 12.5% corporation tax rate will support Irish economic recovery and employment growth by attracting foreign investment”.
But what actually happened when the rate was introduced was a significant increase in the Foreign Direct Investment (FDI) leaving Ireland.
The economist Michael Burke in a study examining the inflow and outflow of FDI from 1998 to 2010 found that after the rate was cut in 2003 “there have been many quarters with a net outflow of FDI and the annual average total was an inflow of just €2.3 billion. Before the rate was cut that annual average inflow was €17.7 billion, and there was only one quarter of net outflow in FDI.”
That the outflow of direct investment should increase after the rate was reduced would not surprise those aware of the many studies which show that firms involved in direct investment consider other factors to be more important than the Corporation Tax rate when choosing where to invest. Perhaps the most important of these is the availability of a high quality workforce. One reason for the rise of direct investment prior to 2003 is that during this period Ireland had the highest percentage of the 20-24 year olds in the EU who achieved at least an upper second level education. Ironically a country that lowers its tax rates will be less able to pay for investment in infrastructure, transport links and education for future generations.
Another aspect of the change in the Corporation Tax was the boost in profits experienced by the Irish banks and certain domestic firms to whom it applied (the vast majority of Irish firms do not earn enough to be liable for Corporation Tax). The resulting profits however, were not invested back into businesses, but into property speculation.
Drop in Direct Investment, Rise in Financial Investment
Studies by Dr Jim Stewart, lecturer in Finance in Trinity College Dublin, have found that direct investment, which is associated with manufacturing and creating jobs, reached a peak in 2003 and has since fallen. Foreign investment, however, in the form of portfolio and other investment such as financial assets of banks and financial services in the Irish Financial Services Centre (IFSC) “continued to rise until 2007 and fell in 2008 reflecting the financial crisis. In 2008 IFSC investment was over 13 times the size of foreign direct investment and approximately 11 times the size of GNP”.
However, this ballooning of investment is just the movement of capital in and out of the country. As Keith Walsh, an economist with the Office of the Revenue Commissioners, wrote in a report The Economic and Fiscal Contribution of US Investment in Ireland published at the end of 2010, “much of the inward IFSC investment involves the movement of capital by multinational companies to subsidiaries in the IFSC that is re-invested overseas”.
In September 2010 the Irish Times published a report on internal briefing material drawn up by Revenue officials which shows that: “There has been a significant rise in firms transferring the residence of their main holding companies to Ireland or considering doing so. The very limited amount of tax paid by some of these firms indicates they do not have any meaningful presence here in terms of investment or jobs”.
The Republic’s loose regulatory tax regime, membership of the Eurozone and the low Corporation Tax rate are all components to this process.
Richard Murphy of Tax Research UK, in a report on the proposed cut in Northern Ireland’s corporation tax rate to 12.5% notes that in “five quarters in 2009/10 Ireland had inward investment of $31.1 billion. Outward investment in that period was $31.0 billion. In other words, Ireland is not the location in which foreign direct investment is taking place”.
12.5% Corporate Tax rate supports employment growth?
The number of unemployed people in the Irish State currently stands at the highest ever. FDI, even job bearing investment, has never supported substantial employment growth in Ireland. There has been virtually no change in foreign-based industrial employment from 1983 to 2006 and in 2007 the total for direct employment by foreign direct investment in Ireland was 152,267 or 7.25% of the workforce.
The IFSC is also hardly a source of employment growth. 39 of the 46 treasury management firms out of the over 400 located at the IFSC that Jim Stewart surveyed in 2008 reported no fixed assets and had a median employment of zero.
One of the strongest features of the collapse in employment since 2007-8 has been the fact that most of the job losses have occurred in working class occupations. Employment for those with third level education has remained relatively stable and most that have become unemployed have been able to return to the workforce within six months. In contrast, the fall in employment of those in working class occupations has led to a significant rise in long-term unemployment.
The employment provided by foreign multinationals, with the exception of some manufacturing, will do little to alleviate the unemployment crisis which massively affects the working class.
The Failure of the 12.5% Rate
That the ‘cornerstone’ of the State’s economic policy is aimed solely at maintaining the employment and income levels of a fraction of the workforce, and that there is no corresponding plan for development and employment elsewhere in the economy, indicates both its failure as an industrial policy and its specific class interest.
The attraction is solely to companies who are more mobile, who come and go with relative ease, leaving very little residual skills in their wake. The policy has also led to a decline in real economic investment by both the State and indigenous industry. The policy failed to prevent those who domestically benefited from an income boost ploughing their increased profits into useless property speculation. It has failed to increase employment and it failed to improve the tax returns available to a government which it could then use to create sustainable economic growth.
Increasing the rate and closing off avenues by which companies can avoid tax, in line with other jurisdictions would allow for an increased investment, in schools, infrastructure, transport and health, all of which would boost additional inward investment and create jobs.
The low corporation tax regime has led to a skewing of Irish politics due to the vast sums of international financial capital flowing through Dublin. Although this capital produces no benefits for the wider economy, its enrichment of sections of the Irish elite has resulted in the maintenance of a low Corporation Tax rate becoming an overriding priority for a political class largely uninterested in developing economic policies which benefit the State and its people.
Article published in LookLeft Vol.2 No.9