Author: Karl Whelan

Corporation Tax and the EFSF

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.

I’m not prone to anti-European conspiracy theories, so the idea that the Eurogroup finance ministers will be happy to hike Ireland’s corporate tax rate substantially, even if it would have negative effects on our economy and possibly lead to sovereign default, doesn’t strike me as correct. More generally, my sense of IMF-style rescue packages is that the package negotiations usually feature lots of nasty options but that the government can pick which areas it wishes to prioritise for protection. So (and these could be famous last words) I don’t think access the EFSF funds would imply changing the corporate tax rate.

Chelsea Billionaire Upset About Losing on INBS Subdebt

A regular source of debate on this website has been the question of who exactly holds the subdebt of insolvent Irish financial institutions. Widow and orphan funds? Credit unions?

How about Russian billionaires who own English football clubs?

Oct 1 (Reuters) – Russian billionaire Roman Abramovich may take legal action against the Irish government over its decision to make subordinated bondholders in Irish Nationwide (INBS) [IRNBS.UL] pay part of the bill for dealing with the building society’s huge property losses.

“We urge Irish authorities to re-consider their position on INBS subordinated bonds and come out with a detailed plan on what is going to happen to this institution,” a statement from Abramovich’s investment vehicle Millhouse said in a statement.

“In the meantime, we are fully prepared to vigorously defend our position using all possible legal means.”

I’m sure all right-thinking people will be wishing Roman well in his quest to take money from Irish taxpayers to free up extra funds for him to spend on Frank Lampard’s wages.

Argument for an Election Growing?

Today’s banking announcements were marketed as bring finality to the banking crisis but that was always unlikely. The final costs and implications of the crisis still depend on stuff that happens in the future which, word has it, can be tricky to predict. Jagdip has an as-always excellent discussion of the various loose ends here. I think the point that AIB and BoI’s non-NAMA loan books have not been subjected to the same stress tests as Anglo’s is an important point and one that could come back to haunt us again.

On the fiscal front, Minister Lenihan’s announcement of a new four year plan is welcome. Though the official statement didn’t say this, the Minister’s said during his press conference this morning that the plan would detail both expenditure cutting and revenue raising measures which would make it a more credible plan.

That said, the effect of multi-year plan in convincing the bond markets that we are on the road to sustainability will be severely limited by the fact that the government will have at most two budgets, and far more likely one, before the next election.

With the government having taken the decision to stay away from the sovereign bond market until January, there is a strong argument in favour of calling an election to take place in November.  Each of the political parties could be given 3 weeks to prepare their own multi-year budget proposals, followed by a 3 week election campaign, giving a new government another four weeks to negotiate a program for government and introduce a December budget.

This course of action would have the following advantages.

1. Because we are on a temporary break from the bond market, the movements in bond spreads that would take place during the campaign would be essentially irrelevant. All that would matter at the end of the day would be the budget and multi-year plan implemented by the new government.

2. The multi-year plan would be seen by the outside world as having political legitimacy. The question of whether the government had a mandate to introduce unpopular measures would disappear. And despite regular claims from journalists that the opposition are irresponsible and have no policies, both Fine Gael and Labour did produce plans last year detailing how they would implement a €4 billion adjustment. Likewise, I would have little doubt that they would be forced to provide multi-year plans to match the government’s and that the election debate would be dominated by the comparison of these plans.

3. The difficult decisions in the upcoming budget would be taken by a new government, most likely with a large majority and not worrying about elections for another five years. Difficult decisions like the introduction of a property tax could be taken without concerns about discontented backbenchers and with the knowledge that the economic situation will look better in 2015.

I’m sure in writing this I’ll get the usual flak from the usual sources, claiming I’m putting this argument purely because I’m a Labour supporter or a Blueshirt or something or other. In truth, I have no affiliations or loyalty to any political party. I just think that there are a number of objective arguments for calling an election now.  If the government puts together a concrete multi-year fiscal plan and runs an election campaign on the basis of it, they will have done a considerable service to the country.

Business and Finance Article on Tax

Following on from last weekend’s discussion of tax issues prompted by Garret Fitzgerald’s column here‘s an article I wrote on reforming our tax system for the current edition of Business and Finance (Admittedly, I wrote the piece prior to finding out about the omertà code of silence on writing about low taxation. Hopefully, I won’t get mugged on the way home.)

One point that I raise is whether the proposed Universal Social Contribution (USC) is a good idea. In addition to the question of the fairness of raising tax rates on our poorest workers, this proposal may affect work incentives and contribute to rising structural unemployment. An alternative would be raise the standard rate (yes, I’d prefer a flat tax) or to provide a credit against the USC that can get clawed back as incomes rise.

September Live Register

The September Live Register figures show a decline of 5,400 on a seasonally adjusted basis. The seasonally adjusted unemployment rate declined from 13.8 percent in August to 13.7 percent in September. The average unemployment rate for the third quarter was 13.73 percent compared with 13.2 percent in the second quarter.