From Socialist Voice, August 2005

Low corporation tax: The writing is on the wall

What’s left of the concept of “industrial development” in Irish public policy circles tends to revolve around two main carrots to attract transnational investment. The first is low corporation tax, the second a skilled work force. The latter approach is a much more long-term prospect; for while there would seem to be a causal link between high levels of education and an ability to attract foreign direct investment from a highly skilled, technological base, the economic returns are more nebulous and imprecise in the short term.
    The first approach, therefore—that of low corporation tax—has tended to remain the predominant vehicle used to promote Ireland as a location for foreign investment. Corporation tax is now at 12½ per cent. Low as that is, many companies manage to pay even less. Any company in the manufacturing or internationally traded services sector that has operated in Ireland since 1998 pays only 10 per cent tax on its profits. In Britain that figure is around 30 per cent, while in Belgium it is over 40 per cent. Low corporation tax is regarded as instrumental in attracting high levels of foreign direct investment; but is it a sustainable means to economic development?
    As an article in the July issue of Socialist Voice showed (“Ireland no longer so attractive to foreign capital”), the answer would seem to be negative. While Ireland still remains a hot favourite with American transnational corporations, as a recent analysis by the American tax journal Tax Notes shows, countries like China and India are growing competitors. Rising prices and the enlargement process, however, have ceded that position to the EU accession countries of central and eastern Europe, while our creaking infrastructure further limits our ability to draw foreign investment.
    Central and eastern European countries are following Ireland down the same path. Nokia, the Finnish telecommunications giant, has set up production facilities in Estonia, thanks to a corporation tax regime that could not be more favourable—0 per cent! While the IDA might argue that Ireland is competing on a different platform—skills and knowledge rather than cost—it might be argued that, as when Ireland joined what is now the European Union, the nature of foreign investment changed substantially, and there is every reason to expect that the same will happen for new member-states. Certainly, countries like the Czech Republic and Hungary have high-skill economies, and there is every chance that they can compete directly with Ireland. In that case, where does tax competition end?—a race to the bottom, as states compete to attract investment with lower corporation tax and perhaps even lower labour regulation and lower health and safety regulation.
    Ireland cannot compete with eastern European tax rates, unless we want to bankrupt the economy or impose higher taxes on spending and low to middle incomes. In addition, there are pressures emanating from the European Union to harmonise corporation tax, which means that the writing could well be on the wall for low rates sooner rather than later.


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