There has been a lot of discussion over the past few days about the implications of Commissioner Rehn’s comments about Ireland not being a low tax country in the future. While the comments didn’t explicitly mention the 12.5% corporate tax rate, many have inferred from the comments that the removal of that rate would be part of the price of an EFSF bailout for Ireland.
Two points on this issue seem worth discussing. The first is: What would be the effect of an increase in the corporation tax rate? The take from this tax this year is projected to be €3.2 billion (actually it’s running ahead of target but let’s stick with the original projection.) A purely mechanical extrapolation would see an increase from 12.5% to 15% raise an additional €640 million in revenue while keeping Ireland’s corporation tax rate low by European standards.
Of course, that assumes no negative effects on declared profits. So the €640 million figure may be too high. That said, I don’t think there’s reason to think that 12.5% is a magic Laffer-curve point whereby revenues decline when the tax rate is raised.
Over the longer-term, however, there may be more serious repercussions from a decision to raise the 12.5% rate. Even a small increase would represent a significant departure in policy from the line-in-the-sand approach that has been taken up to now. The real risk may be to that those considering future FDI projects in Ireland (or perhaps making decisions about whether to keep current operations here or consider further investments in them) see an increase to 15% as potentially being the first of a number of increases. Rhetoric about how we’d never change the rate again would not be too credible. On balance, I think the arguments for keeping the rate as it is win out.
The second point worth discussing is whether indeed access to the EFSF bailout would require changing the corporate tax rate. As I understand it from the facility’s framework agreement, the dispensing of funds from the facility does not require each Euro-area parliament to approve. Instead, agreement on a plan must be reached with the Eurogroup of finance ministers.