Tax Revenue Stability and Corporation Tax
Posted on May 13, 2013 by Micheál Collins
One of the lessons of the recent economic collapse (I hope!) has been the importance of a stable tax base. Total stability is impossible for a small open economy like Ireland; we will always have swings in economic performance which will alter the volume of economic transactions and tax revenues. However, policy should aim to limit exposure to tax revenue instability as well as closely monitor those areas where revenues are unstable.
Despite these lessons, we pay limited attention to the stability of the corporate tax system - one of the four main areas of exchequer revenue. Based on the recent Department of Finance Stability Programme Update (April 2013) corporation tax revenues account for 11% of total taxation income.
A recent US Government report, reported by RTE's David Murphy here and here, found that the effective rate of corporation tax for US multinationals in Ireland was 8%. A working paper from TCD's Jim Stewart found similar results based on an examination of company accounts (see here). The US report derives from growing attention within the US on the number of large companies who park their US tax liabilities off-shore for the long-term, thereby undermining the potential revenue for the US exchequer. As Ireland is one of those parking grounds, any reform to this system would impact on the medium-term flow of corporation tax revenues. There may also be a short-term effect if a US amnesty or repatriation incentive scheme was introduced.
Aside from this, I have written in my chapter on 'Taxation' in the 'Economy of Ireland' textbook (ed by O'Hagan and Newman, Gill and MacMillan), of the other threats to the stability of corporate tax revenues. These include the inevitable moves towards a more integrated European tax base and increased tax competition from other EU member states.
Overall, there remains some fear around any detailed public policy discussion of corporate taxation in Ireland - increases or decreased in rates, changes to tax exemptions, examinations of the effectiveness of tax breaks and incentives, medium-to-long-term planning for policy reform and revenue stability. When it represents an unstable tax revenue source, and one which provides around 11% of total tax revenue, we cannot afford to ignore it much longer.