You Can Pry our 12.5% Rate from our Cold, Dead Fingers

Once again, the Government has gone on record that it will not be increasing the corporate tax rate. This firm stance is based on the idea that without our attractive tax rate, foreign firms will flee for other locations, increasing the speed of our downward spiral. Nevertheless, there has been little attempt to provide any suggestion as to how much such a move would hurt tax revenues or employment, or even whether it is a foregone conclusion that a tax increase would lower FDI at all.

The first thing required to address the issue is to estimate how much FDI will respond to a corporate tax rate increase. As with everything else in economics, the answer is it depends (although one can reasonably rule out an increase). As summarized by a 2008 OECD report, on average, studies find that a 1 percentage point increase in the effective corporate tax rate leads to a 3.7% decline in FDI.

This average, however, masks a lot of important variation that we would need to consider before coming up with an answer for Ireland. First off, there is the issue of how to calculate the effective corporate tax rate (what firms actually pay) from statutory rates. In particular, for FDI coming from foreign tax credit countries like the US, foreign earned income is added up as are foreign taxes paid when calculating what is owed upon repatriation (and yes, a host of evidence does indeed indicate that multinationals repatriate income even from low tax locations). To get an idea of what this means, let’s use a simple example. A US firm earns €100 in Ireland, on which it pays €12.5 in taxes to the Irish government. At the same time, it earns €200 in Germany, where it pays a 50% tax rate (which is the sum of the federal tax, surtaxes, and the municipal trade tax), resulting in payments of €100 to the Germany government. So the firm’s worldwide income is €300 and its foreign tax liability is €112.5, implying an effective foreign tax rate of 37.5%. When it repatriates this income back to the US, where the corporate tax rate is 35%, the Americans compute a tax bill of €105, which the firm’s excess credits more than wipe out. Therefore the firm’s effective tax rate on income is 37.5%. Now consider a second firm, also with €100 of Irish income but with €200 income earned in the UK where the tax rate is 30%. This firm pays €72.5 in foreign taxes, implying it is in an excess limit position when it repatriates its income to the US. This means that when the US tax authority applies the €72.5 tax credit to the €105 tax liability, the firm still owes €32.5 to the Americans. As such, the effective tax on its foreign income is 35%.

Now increase the Irish tax rate to 15% (the level, coincidentally of the German federal corporate tax). This is an increase of 2.5% in the Irish statutory tax rate. For the firm also in Germany, this increases its Irish tax liability to €15, increasing its foreign tax payments to €115 and its effective tax rate from 37.5% to 38.3%. Given the average elasticity of 3.7, this implies that worldwide FDI overseas would fall by 3.7*(38.3-37.5) = 2.96%. If it decreases operations in Germany and Ireland in proportion to income, this indicates a less than 1% decline in Irish FDI. For the firm also in the UK, the Irish tax increase increases its foreign tax liability to €75, still less than the US tax rate, implying that its effective tax on foreign earned income remains constant at 35%, suggesting no change in FDI.

So the first issue is where did these firms come from (crediting nations like the US, the UK and Germany, our three biggest investors coincidentally) or from foreign tax exempting countries (such as France). Further, where else other than Ireland are they operating and how big are those operations relative to the Irish one? Put simply, it is incorrect to state that a rise of the Irish tax from 12.5% to 15% implies a decrease in FDI by 2.5*3.7= 9.25%. And it is important to note that this example is extremely simple and doesn’t include issues such as tax planning (especially the retention of assets by young multinationals – see Altshuler for a good discussion), triangulation strategies (Altshuler and Grubert), and the myriad other factors influencing the actual taxes paid by multinationals. To come up with a much more accurate prediction in the effective tax rate, you’d need a lot more firm specific information to which I am not privy.

Outside of this, there remain questions about the applicability of the 3.7 elasticity. There is evidence that the tax elasticity of investment has grown over time (see Altshuler, Grubert and Newlon), which suggests that taking the results from our previous tax changes may not give a good indication of what would happen today. In addition, the evidence of Hines suggests that an increase of 1% has differential impacts depending on whether the baseline tax is something low (like zero) or something higher (like 12.5%). Looking at variation in taxes across US states, he finds that when including the zero tax states (like Delaware) an increase in the tax rate reduces FDI with the biggest reductions for low-tax states. When excluding the zero tax states, he actually finds no significant impact on FDI from higher taxes. This again warns us against using past changes to predict future ones.

Finally, it must be recognized that regardless of whatever average elasticity is estimated, the actual response is going to vary by firms. This is because the benefit of seeking out a lower tax location must be balanced against other factors. It must be remembered that while taxes are a cost to the firm, they are not the only cost to the firm. For multinationals that come to our emerald shores, taxes clearly play a role. However, surveys of multinationals tend to find that their importance lags far behind factors such as effective labor costs (which account for quality as well as wages) and energy costs (see Glickman and Woodward, The New Competitors: How Foreign Investors are Changing the U.S., 1989, for an example). Put simply, if a firm pays €2 million in labor costs and €100,000 in taxes, moving shop to save 2.5% in taxes doesn’t make sense if this comes with anything more than a .125% increase in labor costs. This also highlights the importance of knowing what a firm’s next best location is since the tax/labor tradeoff varies whether you’re comparing Ireland to a zero tax rate tax haven, a comparable tax location like Poland (where the rate is 19%), or a high tax location like Germany. Second, the willingness of a firm to relocate is going to depend on how expensive moving is relative to whatever added tax burden there is. For firms that invest heavily in immobile assets – be they capital-intensive facilities or worker-specific training – relocation is an expensive and time consuming activity. As such, at least in the short to medium run, they are probably less likely to shift production overseas in response to an increase in the Irish tax burden.

Putting these together, which firms are likely to relocate first? Firms with small labor costs, low capital requirements, and that can easily find or train workers to suit their needs. This might describe services (although not if the employees are highly trained, unique, or are privy to firm proprietary knowledge as could arguably be the case for IT) but it does not do a good job of describing manufacturing. As such, whatever the change in FDI measured as sales or assets is following a tax increase, the employment effects in the economy at large are likely to be small, especially in the short to medium term. Further, the employment impacts are likely to be strongest for relatively skilled workers, not those on the factory floor.

What then of the tax take? Given the above, it’s reasonable to assume the elasticity will be greater for services than for manufacturing. Thus to compute the change in tax revenues, one would not only need to know the elasticity for each type of activity (where manufacturing is likely to be close to zero in the short run) as well as the relative size. I don’t have the breakdown of the contributions of foreign multinationals to Irish revenues by industry, perhaps others with better data can give a suggestion. Nevertheless, if the elasticity of services is below one (which if the Irish facility helps to offset high taxes paid by other subsidiaries is certainly a possibility), there is certainly the possibility that tax revenues would increase when the tax rate goes up.

Putting all of this together, two things become clear. First, the precise impact of any tax increases is simply unknown. Second, it is quite likely that the size of those impacts are going to depend on whether one focuses on tax revenues, employment, or some other measure of FDI’s contribution to the state. However, there are serious reasons to question whether blind (as a Batt) adherence to the 12.5% rate is in the state’s best interests.

As a final point, all of this relates to what happens today. Evidence on tax competition suggests that if we increase our taxes, so too may other EU nations (Davies and Voget), offsetting some FDI losses. On the other hand, there is a potentially legitimate concern is that a tax hike today raises the spectre of time inconsistency, deterring future investment. This is one situation where having our ECB overlords force a tax increase on us might be a good thing. If investor perception is that this was not what we would have chosen on our own, it may mitigate damage down to our reputation as a country committed to low taxes. Given our high wages compared to other low tax countries, it is pretty clear that firms are here for a number of reasons in addition to our attractive tax. A small increase in that tax rate doesn’t change that fact.

54 thoughts on “You Can Pry our 12.5% Rate from our Cold, Dead Fingers”

  1. My gut instinct is that this is not about our fiscal policy any more but about stopping a domino effect from cascading into the core Eurozone.

    Think Spain as too expensive and Ireland as a cheaper fix.

    The story today about channeling the EFSF cash into the banks only and using the NTMA pot for current expenditure is highly plausible. The EZ wants us to take the money more than we want to take it.

  2. I think the elasticity on the first 0.1% increase in the CT rate would see a multiplier effect far in excess of 3.7 because MNCs will see that future rates are no longer certain in Ireland so tax-planning for a 3-5 year time horizon becomes uncertain and other tax jurisdictions become more attractive. Equally if Ireland defends her 12.5% rate at this point under the most forceful pressure then MNCs might see certainty in this last redoubt and that might increase FDI so a 0% change might have a very positive effect.

    I would have thought there was more mileage in shoring up loopholes which see our 12.5% rate reduced/avoided by routing income through the Netherlands and Bermuda for example.

    However if CT rates stay the same then income tax will almost cetainly need increase (unless the certainty we give MNCs with our diehard defence of the CT rate means that more industry/income is generated here). It’s a thorny issue but my instinct would be to defend the CT rate to the last.

  3. @Ron

    Interesting article that contains a number of complicated issues. If I may, your piece contains the following 4 points.

    1. Forecasting the impact of corp tax changes on changes in FDI or overall employment is very complex.
    2. A rise in corp tax will not increase FDI or GNP.
    3. It is not even sure that a rise in corp tax will increase the total tax take.
    4. A rise in corp tax will damage our reputation as a good low tax base for multinationals. (I would also suggest that it would be irrelevant if a policy change was forced on us by the EU or not)

    Academically interesting/challenging issues aside, given these 4 points, I cannot see how it would be good to change our corp tax policy anytime in the next 10 years.

  4. @ Ciaran Daly

    That telegraph article is, to put it midly, a load of rubbish. The below section is just crazy:

    Its output contracted by an extraordinary 10 per cent last year, and may well do so again over the next 12 months.

  5. This blog piece is refreshing as most comments about corp tax have been in line with the title of the piece.

    I would just like to add one point that has been hinted at near the end. What is the next best alternative to a rise in corpo tax? If it is a rise in government charges or income tax how will that affect FDI? So the article describes the gross effects of an increase in FDI, but as we have to raise revenue anyway, should we discuss (and further complicate) the net marginal effect of increasing corpo tax relative to the other policy options.

  6. Does Philip Lane’s stricture:

    “I remind commentators to refrain from ad hominen comments.”

    only apply to the plebs?

    Is this not ad hominem: ‘blind (as a Batt)’?

    It is spectacularly witty though, and I am sure that Batt is having a laugh at this display of academic wit, assuming he’s able to read it, and certainly much more witty than my own particular favourite, ‘Moron Kelly’, but that one is in bad taste as he isn’t an FF politician.

    Celtic Phoenix’s comment about the Daily Telegraph article is, of course, correct. It is rubbish to suggest that Ireland’s GDP will fall by 10 per cent this year. It will rise. By how much we do not know. But, I confidently predict that by Q4 (which, tempus fugit, we are actually now in, although figures won’t be out for Q4 until March) the y-o-y rise in GDP in Ireland will be greater than in the UK. What would be interesting would be if someone contacted the Daily Telegraph journalist who wrote it and ask him who told him that Ireland’s GDP would fall by 10 per cent this year. I know who my money is on. It is clear that there is a campaign emanating from London to break-up the Eurozone, and continued exaggeration of Ireland’s economic problems is part of that campaign. How they are all going to explain away Ireland’s GDP figure for Q3 is beyond me.

  7. @ John The Optimist

    Those defending Ireland focus on our national Profit & Loss Account (i.e. on annual revenue and costs). That is stabilising / improving. So there is some limited good news there.

    But our real problem resides in our national Balance Sheet (i.e. our assets and liabilities). That continues to deteriorate as our main asset, property, continues to fall in value while our liabilities remain.

    With their equity shrivelling many citizens and corporation are engaged in massive deleveraging as they seek to rebuild their balance sheets. It is equity compression (and not budgetary uncertainty) which is the main factor behind the jump in our national savings rate.

    At every turn the authorities have underestimated the size of the balance sheet problem. They continue to do so. The October revision of the July assertion that AIB needed no additional capital was an example of past error. Today’s NCB comment that BoI will eventually have to make “further cash calls from shareholders / the State” is an example of continuing error.

    My back of the envelope estimate is that the banking crisis will cost the State something closer to €100 billion than the €50 billion estimated by Honohan and Elderfield.

    Concerns about bank solvency have triggered deposit withdrawals and bank illiquidity. This is behind the policy tug-of-war about the need for emergency help between our government and “another player” (Ollie Rehn’s phrase). However good the Q4 GDP figures may be, is it really sensible to have a public spat with the same European Central Bank which is lending our banks €130 billion and thus keeping them and the Irish economy alive?

    The killer blow to defend the 12.5% CT rate would be for us to amend the constitution to enshrine it there.

  8. Corporation tax is the ONLY reason FDI companies choose to locate here. Let’s not stop the pretence that it’s about our “great young people”, or our “great education system” or our “English-speaking” population or any other piece of guff.
    The ONLY reason companies locate here is to make as much money as they possibly can. (ie how much PROFIT they can make).
    If they believe they can do that in Ireland, then they will locate here and bully for us (and them)! If not, they won’t, AND/OR they will move: Exhibit A: Dell, Exhibit B: Digital…..ad nauseam.

    Green fields, cailins dancing at crossroads, leprechauns, great craic have zip to do with it.

    AND, if you think the “sophistication” of the country is anything to do with it, think again! Remember, Intel chose to locate here in 1989, in the depths of the last great gombeen recession. They chose to build FIFTY PERCENT of their ENTIRE MANUFACTURING OUTPUT in Ireland, a time when we didn’t have roads, internet, or even basic TELEPHONE service across the country. Why? Not because we were genetically or intrinsically superior in any way, it was because we offered 10% corporation tax at that time. That was then, and remains now, the only reason they are still here. (the high cost of business here may hasten their departure of course).

    So – until and unless there are 200,000+ people employed in hi-tech, indigenous companies, we need to get over ourselves.
    We are “slightly” better than we used to be, but our glorious government has wasted the last TEN YEARS. Their moronic, myopic policies (if you could actually call them “policies”) have destroyed the gains of the 90s and left us even further behind than we were at the end of the 80s.

    A suggestion in closing : why not invite all the contributors to this website to create a coherent, holistic set of solutions to the following problems:

    1] 450,000 people unemployed/underemployed
    2] 150,00 people emigrating
    3] 400 billion euro of debt (by 2015)
    (Fiscal, Nama, bank recap and mortgage debt

  9. @Cormac Lucey

    What have banks got to do with the point that a Daily Torygraph article, read by millions of investors, is making a ludicrous and false claim about Ireland’s GDP growth in 2010, which Celtic Phoenix cleverly spotted straight away, and which I then belatedly rowed in to back him up?

    Since you are a man of great distinction, perhaps you will write to them and point out the absurdity of their claim? I could do that, of course, but it would be binned.

  10. Rather than harm our low-tax brand by changing the headline 12.5% rate, why not just tighten up on a few loopholes such as the Double Irish or Dutch Sandwich?

  11. @ JTO

    I hope you over-estimate the readership of the Telegraph. Any serious investor wouldn’t base any real money decisions on such tripe. If challenged I’m sure the ‘journalist’ would just say he has yet to be proven wrong. See bold below:

    He says:
    ‘Its output contracted by an extraordinary 10 per cent last year, and MAY well do so again OVER THE NEXT 12 MONTHS’

    Note how he doesn’t mention any figures for growth this year.

    Aside:
    I’d have to agree with Cormac Lucey. I definitely share your confidence for our ‘profit and loss’ position, as I am involved in and know of a few SMEs doing quit well.

    It’s the ‘balance sheet’ that’s the concern i.e. the real question is how much are the country, the banks and the individual going to loose as a result of the property crash.

  12. Cormac,

    Perhaps you would turn over the envellope so that we can see your estimate. AFAIK, the total size of the covered balance sheet was about 500bn euros. AIB & BOIs Anglo and Permos combined balance sheet was 375bn and the equity base was about 20-25bn. Pre provision profits are about 3bn cumulative per annum. So I think you are talking about a loan loss of close on 33%.

    Have you morphed into Brian Lucey DSM, DFM

  13. @Cormac
    What you have to remember is that JtO is deliberately feeding the frenzy of British newspapers & bond market investors selling Ireland short.
    His strident and repeated – but baseless – claims that an army of D4 residents are deliberately trying to collapse the Irsh economy has been noticed by swaps & CDS dealers and fed Torygraph editorial writers. Alarmed by the ‘fact’ that an important section of Irish society wishes to see the economy fail, investors have withdrawn their money from bonds, cash from banks and hacks have penned a thousand editorials.
    His creation of the mythical D4 eco-anarchist has scared the bond markets witless.
    It is our duty to remind those markets that nobody who actually lives in the Republic has any vested interest in its failure; quite the reverse, of course. It is only outsiders, sitting in foreign jurisdictions, who can indulge in fairytales that are actually quite damaging to the Irish national interest.

  14. @simpleton

    Wrong. Professor Brian Lucey has allready said that he wants to see the economy collapse. Are you calling him a liar? Let’s take him at his word. I’m sure that he’s a sincere, honest and upstanding man and, when he says he wants to see it collapse, we should not doubt him.

    Any more up-to-date information from the taxi driver?

  15. Whatever we get out of FDI companies through corporation tax is small change in comparison with we get out of them indirectly through the €21bn they spend each year on payroll and locally sourced goods and services, and through the downstream economic activity that generates. Even if we had only a mild suspicion that raising corporation tax rates would hit FDI employment, it would be irrational to take the risk.

    As it is, so many FDI companies now say that the Irish tax regime is critical to their presence here, with the other advantages having withered away, that raising the corporation tax rate would be suicidal.

    It’s hard to see us climbing out of the hole we are now in without raising employment steeply in exporting industries, whether FDI or indigenous. We desperately need more FDI employment to contribute to this, and we will be in deep trouble if it does not at worst stay still. The available evidence it is going backwards already, even holding the corporation tax rate still. We don’t know for sure what will happen if we raise the corporation tax rate, but the obvious risks of a very ugly outcome are great enough that they should dissuade us. They should also dissuade any of our continental friends with an interest in the solvency of EU banks.

    BTW, I believe the US has (somewhat dated) published statistics on the effective tax rates of US corporations operating in Ireland.

  16. I’ve also examined the question using a simple comparative model based on a selected number of other EU states.

    My conclusion is CT at the unreasonable low rate of 12.5% is a sacred cow based on unfounded and little challenged view that lower CT in Ireland is a key advantage to us in attracting FDI. Where is the evidence for this, where is the verification for this?

    Higher rates in other eu countries have not led to a flight of capital outside this country! Germany, for example, faced with the bill for the coming down of the Berlin Wall beefed up its CT with a complimentary solidarity tax.

    This is a model we should well examine with the view to buffering the cost of the bank bailouts and the fiscal readjustment required to bring down our rate of sovereign debt.

    http://colmbrazel.wordpress.com/2010/10/20/corporation-tax/

    I actually agree with the european view that our rate of CT is far too low and do not agree with the propaganda such views are motivated out of envy for our low rate of CT.

    I believe the argument for higher rate of CT is based on the view that CT should form a reasonable contribution to society, whether in the UK, Germany, Ireland or anywhere; that ‘beggar thy neighbour tax rates’ for CT only represent ill informed and poor taxation policy; that current CT rates in Ireland are just another example of the overall paucity of good taxation policy for this country!

  17. The comment by BeeCeeTee on the overall contribution of the FDI sector to the economy is very pertinent, where 80-90% of exports are accounted for by FDI companies.

    Focusing on the rate of corporation is only part of the story: it is the overall tax strategy used used by these companies that needs to be understood.

    The best indicator of how Ireland’s tax system is exploited is revealed by the rate of return on investment by FDI companies. Data on the rate of return on investment for US companies have been provided by the recent NCC report: for Ireland it has fallen in recent years from 24% to 20%. The average for EU countries is about 5%.

    Changing the tax rate here is likely to have a major impact on the potential for maintaining and increasing levels of FDI.

  18. @JtO
    Latest from the taxi driver – he’s just seen an idiot, who should know better, feeding a troll.

  19. Its worth noting that this year corpo tax went from 10% to 12.5%.

    We had a manufacturing rate of 10%, which the Commission said was distortionary. However they allowed us a phase in period which ended this year.

  20. @simpleton

    Latest from the taxi driver – he’s just seen an idiot, who should know better, feeding a troll.

    JTO:

    Clarify. Which of us is the troll, and which the idiot.

  21. @Ron: Great to read your analysis on the issue; it’s real pity you don’t have access to the Irish figures so that the debate could be had, full and proper. Or perhaps more fairly, its a shame Revenue haven’t published anything substantive on the topic (to the best of my search) since 1993 (http://www.tara.tcd.ie/bitstream/2262/2739/1/jssisiVolXXVII93_134.pdf)

    From my own examination of the issue, it would appear that the core mater is that of competition; we should appreciate that unlike us mere mortals, MNC’s are rational and strategic; they will move if it makes sense to move. Looking at alternative Euro locations I estimates that we would only risk pricing ourselves out of the market at rates above 18%.

    Ronan Lyon’s well informed post on this topic covers much of this ground: http://www.ronanlyons.com/2009/06/22/can-ireland-afford-to-increase-its-corporate-tax-rate/

  22. Ron – Excellant artical. A debate should be had in this area.

    I think that an economy whos only attraction is low tax (if that is the case) is on very shaky ground…anyone can copy that model easily.

    The debate should also focus on how we become less reliant of type of FDI that is so cost senisitive. Other countries have; otherwise they wouldn’t have FDI.

    How do we make the Irish workforce worth a CT of 15% or higher?

    If we can’t get a handle on this and create a competive advantage then we’ll always have to rely on the kindness of strangers! Not an appealing long term strategy.

  23. I’m finding a lot of this discussion off the wall. We are already in trouble with inward investment, even at the 12.5% CT rate. IDA Ireland clients added 4,615 jobs in 2009, and lost 18,028. We are not in some sort of stable position, where we can shave a bit more off FDI enterprises without disturbing things. We have a serious problem with FDI leaving, and people seem to want to respond to it by making life harder fof the FDI enterprises we still have.

    It will be great if we ever get to the point where our competitiveness can survive a 15% corporation tax rate, but we are a long way from there right now.

    I know the folks posting here are doing their honest best with very limited data. But the limits inherent in their data mean that their results are completely unreliable. Ireland’s FDI profile is so different to that of most other countries that the studies of FDI in other countries quoted here are unlikely to contain much information useful for guiding Irish policy. And the numbers being quoted for Ireland’s effective tax rate are a very long way from estimates (for 2006) produced by the US Bureau of Economic Analysis for Irish affiliates of US corporations.

    As they say in computing, “garbage in, garbage out”.

  24. “You Can Pry our 12.5% Rate from our Cold, Dead Fingers”
    but hey, take child care from disabled kids, and take hospital beds, maybe you want an old celtic corss or two while you’re at it….take ’em all…..just make sure the US coporations are happy.
    This is how it reads to a foreinger. I am not sure this is what you meant, or is it?

  25. @BeeCeeTee
    I remain unsure as to the linkage between FDI, competitiveness and jobs. Or rather, I am unsure what CT in isolation has to do with it. The total cost of production must surely be a factor?

    Our total cost of production has vastly increased in every measurable area over the last ten years. That is why jobs are going. Not even the corporate tax rate could save them. And why should it? It is to do with profit flows, not jobs.

  26. Not knowing how these things work, ( any of us, it seems) here’s my suggestion:
    As this is commerce, why not trade the holy 12.5% ( all together now – alleluia)
    for low interst loans or grants to fix some social issues, stuff like care for the disabled, the old the sick. Schools to help Ireland build a smart economy. Euro brothers, give us that, and we give you our 12.5%…or does it really have to be cold dead fingers.
    So it’s sounds fuzzy wuzzy, everything does here, it’s California.

  27. @Colm Brazel
    ‘I actually agree with the european view that our rate of CT is far too low and do not agree with the propaganda such views are motivated out of envy for our low rate of CT.’

    Do you really think that Intel, Microsoft, Google Facebook and all the chemical and medical device countries qould remain in Ireland if we were to hike CT. Jto’s GDP projections would fall through the floor. As Hogan has pointed out we are a high cost country.
    You cite other European countries including Germany. You are not comparing like with like. The massive industrial base in Germany cannot be compared to our little (formerly agricultural) country.
    We have our model and it worked reasonably well up to now. I would suggest we make sure it is not changed. We are up to our ears in manure and some people want to pile on more.

  28. Any company contemplating moving to Ireland with the intention of investing tens of millions will do an indepth analysis. Corporate tax, market size and access (EU), workforce cost and productivity, non tariff barriers, land costs, building costs, convertible currency (Euro), language skills unilingual/multilingual, unimpededed movement of capital (in and out). Corporate tax standing alone is neither a cow nor sacred, it is one of many factors.
    How is Ireland’s low corporate tax rate regarded by the gov’ts of the US, Germany, France and others? My impression is not very favourably, in US political circles it is looked upon as a siphon taking jobs and cash out of Americans pockets. The Germans and French have mixed feelings on the one hand it helps their corporations who take advantage of it and on the other hand they see it as a drain on their economies but not of a magnitude that causes them to be overly concerned. However, should the Irish gov’t finish up at the feet of the European Comission, ECB and IMF pleading for relief, corporate taxes, property taxes, state corporations and many other items will be on the table. Our gov’t is not in a position of strength and as beggars cannot be choosers they will simply take what they can get. Our politicians babbling on about what is and is not acceptable to them is meaningless.

  29. Interesting article, thanks for this.

    However from another perspective.

    Many of the foreign multinationals have been established here for close to 20 years.

    Those which are involved in manufacturing are now operating older less efficient plants. Technology moves on a lot over 20 years.

    Therefore when the time comes, they will have to look at upgrading their older Irish plant, or shutting down and building a newer plant somewhere else in the world.

    Intel has already opened up new plants in Israel and China. In addition some of the older Irish Fabrication labs have been decommissioned.

    I would be interested to hear of a plan to restore the 14 reasons why intel came here in the first place. Apparently there is only one of the original 14 reasons left.

    If we are to create employment we must regain our competitiveness. In addition whilst there is appalling doom and gloom in the air we have a much better infrastructure than ever before. More motorways have been built, airports upgraded, broadband infrastructure, and a lot more houses and apartments to house employees. More modern, efficient power stations have also been added to the grid. Remember some years ago there was concern that there would not be enough capacity to power the country etc

    Hence there is a lot of stuff already in place, ready to go, ready to be used.

    We just have to sew it all together and make it work.

  30. Apparently one of Ireland’s greatest has a view, which I hadn’t noticed before (via Harry_w). Bono:

    ““I can understand how people outside the country wouldn’t understand how Ireland got to its prosperity but everybody in Ireland knows that there are some very clever people in the Government and in the Revenue who created a financial architecture that prospered the entire nation – it was a way of attracting people to this country who wouldn’t normally do business here,” he says. “And the financial services brought billions of dollars every year directly to the exchequer…………”

    I wonder where Ireland would be now if it had spent the last 20 years persuing a different economic ideology, perhaps one less focussed on low tax rates and financial services?

  31. Hogan, you are of course right. Our costs are out of line with our capabilities, and we have to fix both. In the meantime, we desperately need retain whatever advantages we have.

    I’d give the Government an A on its defence of the tax regime.
    I’d give it a B on its efforts to improve capability.

    I’d give it an E on improving cost competitiveness. To date, it seems to have been doing its best to reinforce downward stickiness in Irish prices. It is to be hoped that the budget will reverse that self-defeating strategy.

  32. I thought I’d pass this on from a post on Daneric’s Elliot Waves…

    [Update 7:28PM: I am sensing a slightly differing dymanic at play here in the usual “wash-rinse-repeat” world of fiscal bailout mechanics. The Irish just may just balk at being made perpetual debt slaves:
    http://www.zerohedge.com/article/ireland-told-take-bailout-or-be-responsible-pan-european-contagion
    I concur with Karl D’s thinking http://market-ticker.org/akcs-www?post=172300

    Why not just default and get it over with? Sooner or later, the psychological framework of BAILOUT WORLD will change into “Hey, I think we’ll try something different…why don’t you just eat my debt instead because perpetual debt bondage may be worse?”

  33. The 1997 agreement with the EC was to merge 3 tax rates into one and the biggest beneficiaries were domestic businesses who were paying a rate of 32%.

    So some of the proceeds of this tax cut went into property speculation rather than investment in business.

    The only way FDI will go in future is down and ex-Intel chief Craig Barrett suggested yesterday that Intel would be unlikely to build a new chip plant in Ireland which would cost $3-4bn.

    The receipts from the tax haven activities may amount to 30% of more of total corp. receipts.

    These are attractive for companies as a small number of staff can often be responsible for big figure operations.

    Ending the zero rate on patent income should be looked at as even a low rate could be worthwhile.

  34. Re

    ceteris paribus Says:

    “Do you really think that Intel, Microsoft, Google Facebook and all the chemical and medical device countries qould remain in Ireland if we were to hike CT. Jto’s GDP projections would fall through the floor. As Hogan has pointed out we are a high cost country.”

    Yes, I do believe they would stay. But I believe you hit the nail on the head with your remark “As Hogan has pointed out we are a high cost country”

    Those high costs are the most damaging of all parameters that feed into FDI. In fact, as we speak they are probably the main issue why FDI is not
    expanding as it should and why many decide Ireland is not for them, while those already here are considering moving their manufacturing base out of here. High energy costs are probably the most damaging of all.

    So, I should therefore qualify my support for higher CT up to a safe marging of at least 18%.

    But energy costs and bubble related rental/construction costs should be brought down to limit further damage to FDI.

  35. I agree with MH and Jagdip Singh. While I too think that the CT of 12.5% is too low, there is lower hanging fruit in the form of zero tax on patent income which allows for the Double Irish. Google’s worldwide effective tax rate on income was 2.4% last year.

  36. Would there be any way to separate the banks from the sovereign in a bail out situation.? Do the unthinkable and liquidate AIB, BoI , ILPM and to hell with them and haircut the bonds with the ECB refunded by some of the bailout cash or something along those lines. The rest of the bondholders take the pain. It seems such a pity for the sovereign to go down with the banks.

  37. @MH & seafoid
    Add in the 20 bn in Irish sovereign bonds that the ECB holds…

    IMO, 80-90 bn in bailout isn’t going to be enough. The banks alone probably need about 150 bn to clean up their balance sheets.

  38. @seafoid
    The only way this could be achieved would be for an external agency to do it. As Mr. McWilliams was arguing on Pat Kenny and as I have been saying for some time, the ECB is the only credible agency to run such an operation. Only it has the balance sheet that could cope with it.

    It would involve printing money.
    It would involve loss of national sovereignty.
    It would involve shareholders and bondholders losing.

    Is anyone prepared for such an outcome?

  39. Perhaps you have heard of Australia?

    We attract FDI by taxing the bjasus out of them, but still they come and build railway lines, hundreds of kilometres long, hit with royalties in states and taxes federally!

    So we had Kevin Rudd, a geeky, possibly likable, workaholic who wanted to impose more tax, on a level of profits over the gilt rate, which until recently, did not exist in Australia. 6%. Over that level of return on capital, a 40 % rate of tax is imposed. In addition to straight CT. Occasionally, the state would pay certain money to the lucky miner. But the idea was to take 20,000,000,000 out of the shapely coffers of those filthy rich miners.

    He lost his job and his plan has yet to be implemented…..

    This could be politically costly…. ooops lets increase the CT rate!!! Not!

  40. This might interest people on this thread

    BERLIN, Nov 16 (Reuters) – Ireland should raise its ultra-low corporate tax rate — currently at 12.5 percent — to consolidate its budget, a finance expert from German Chancellor Angela Merkel’s governing conservatives said on Tuesday.
    “The Irish rates are below the European Union average,” Michael Meister from Merkel’s Christian Democrats (CDU) told Reuters on the sidelines of the annual party congress.
    “I therefore see here at least a possibility, given the high budget deficit, to improve revenues without causing a negative impact on growth,” he said.

  41. RTE is reporting on an Irish Management Institute/NIB MNC survey today (doesn’t appear to be available online yet) which warns against change to the CT rate. I wonder if the 12.5% CT rate can remain but say rules on minimum rates are enforced eg a minimum of 10% to prevent current avoidance measures.

    The CT rate may have to increase but it should be very carefully considered to ensure we don’t sacrifice a multi decade benefit for the sake of spiked tax returns for a couple of years.

    http://www.rte.ie/news/2010/1116/corporation-business.html

  42. @ All
    Another feature to the banks situation is the effects of what the Govt is going to do to them through their customers with the coming budgets.
    There is definitely going to be a decrease in customer income and possibly a bad debt situation coming from the budget…

  43. @EndaF – you need to be careful to distinguish between statements designed to have internal political effects from those that are aimed externally. A number of recent statements emanating from the German government have clearly been aimed at internal politics (but had serious consequences externally).

  44. @seafoid

    “Would there be any way to separate the banks from the sovereign in a bail out situation.?”

    Perhaps Anglo could be sold to the ECB for the princely sum of €1.

    ECB then bring Anglo into instant conservatorship.

    Such a bailout would at least give the possibility of being able to manage a bailout for the other banks and of course deal with the bigger sovereign debt problem.

  45. “The EU is a proto-fascist organisation”, a statement with which I couldn’t agree more.

    http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100008667/the-horrible-truth-starts-to-dawn-on-europes-leaders/

    Germany will [eventually] ensure order is restored, when the union of independent states is restored and the wretched euro banished or retained in the core.

    We must ensure we retain our corporation tax rate. That is the way to restore prosperity. Wishful thinking in these matters doesn’t help, this is very, very serious.

  46. It seems that Ireland might have to raise taxes to survive in the short term.

    In the long term it might be possible that the Irish government manage the economy so well that the taxes can be lowered again.

    Companies & countries default if they run out of cash. Raising cash in the short term can ensure a longer future.

    If I’d seen a borrower exhibiting the kind of behaviour that is currently on display I’d stopped the supply of credit and taken actions to ensure that anything currently outstanding is being secured.

    What outcome is preferred:
    Running out of cash and getting the reputation of being difficult
    or
    Taking actions to secure the short term survival and at the same time getting the reputation of being a safe investment

    Eurozone banks might be ‘on the hook’ for Irish debt, however, the eurozone banks can be recapitalised in exchange for equity shares. Overpaying for risky assets is not the same as investing in equity.

    The equity shares can later be sold by the governments supplying the capital.

    Ireland can try to push for a deal, however, the eurozone will survive an Irish default. Will the Irish economy survive being shut off from international credit markets?

  47. The tax rate for US companies in the end may not matter if they still end up paying the US corporate rate but a key fact is missing here. The US tax is not paid until the money is brought back to the US. While the money stays in Ireland that future US tax money can be reinvested. The benefit of being in Ireland is the extra cash flow. Companies like Google have plenty of cash and don’t need to send it back to the US. Their balance sheets don’t separate where the money is and when investors look at the company they don’t deduct the future tax payments that may be made to the US. Keep in mind that a few years ago the US had a tax amnesty that allowed companies to repatriate their money without paying the tax if they used the funds to make investments in the US. There is talk now of having this amnesty again. The flip side to the amnesty is that corporations may move more of the operations off shore if they think that periodically the US will offer a tax amnesty.
    I can’t say how much of an impact raising the tax rate will cause but since cash is still king reducing that cash has to cause some impact.

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