Why is too much tax corporation tax seen as a problem?

May 20, 2019

Sunday Business Post, 19 May 2019
Last week, the Revenue Commissioners published their 2018 annual report.  As a government organisation, Revenue were always ahead of the posse in terms of its production values.  They did glossy before anyone else; they used infographics before infographics were either profitable or popular.  The Revenue annual report is now very much like that of any private sector plc – accessible, clear, and striking a careful balance in its tone between diligent responsibility and mild self-satisfaction.  

Yet despite the not inconsiderable progress in tax enforcement and collection reflected in Revenue report, the media coverage of it was dominated by a discussion of corporation tax collected.  The dismayed fascination with how much companies pay has become a persistent problem. 

It is correct to point out that the corporation tax yield has mushroomed in the past 5 years and that by international standards we collect far more corporation tax as a proportion of total taxes than almost any other European or OECD country.  There’s nothing new here though.  Points of general interest are rarely kindled by mere economic facts, so what is the cause of the national obsession with how much companies pay?  Why should it be a problem for us that others are contributing so much to the Irish Exchequer? 

One explanation may be that since corporate profitability and hence corporation tax largesse fell off a cliff in 2008, Irish individuals have been paying the price and will be doing so for a considerable time into the future as we pay interest and inch down the national debt.  It’s natural to be fearful of an overdependence on corporation tax receipts and wary of another cliff fall. 

There may also be some degree of puzzlement that despite the attack on multinational tax-planning and profit-shifting across borders, spearheaded by the G20 in 2013, the initiative seems to have generated completely counterintuitive results for this country.  Why is a low tax rate regime now collecting more tax than ever?  

It was instructive to hear the opinions on tax expressed this week by candidates for the EU Commission presidency during a televised debate in Brussels.  The current Competition commissioner Margrethe Vestager used the idea of a company tax rate floor for her platform.  During the debate European Regulation Commissioner Frans Timmermans, a Dutchman, sandwiched her remarks with a suggestion for an 18% minimum level.  

While some European politicians still reserve their sharpest criticism for Irish corporate tax policy, they should remember that it is directly because of EU policy that we find ourselves in the current position of record corporation tax yields.  It was EU pressure which resulted in the setting of the universal 12.5% rate, so Ireland could prove it was not favouring one industry or business sector over another.  It was EU enthusiasm for the conclusions of the G20-led project to regularise international tax matters that has resulted in multinationals seeing Ireland as a safe and responsible location from a tax perspective.  

The flipside of all this is the suspicion that the EU solidarity being shown to Ireland in the face of Brexit will come with a price tag, which could be capitulation on the 12.5% rate.  The theory goes that we should fear the Greeks (and the French and the Germans and the Spaniards and the Dutch and everyone else) when they come bearing gifts of solidarity, because our tax comeuppance may not be too far away.  I think this is unlikely because the other EU countries are at least as prickly about their sovereign right to tax as we areas evident from the cool response from almost all EU member countries to the recent Commission proposal that future tax decisions need not be unanimous. 

Perhaps above all else, the crunch reason for the interest in corporation tax is that people don't like the idea of large companies, predominantly multinational and owned overseas, making very large profits and paying little enough tax.  That’s a simple enough question which gives rise to a moral maze of responsibilities and entitlements.

If we are to find an exit to that maze, I think we need to acknowledge that every company, no matter how large or where it is owned, is an association of individuals with different types of stakes in the venture.  The more a company is taxed, ultimately the less individuals will have to show for their investment of money as shareholders, or investment of time and effort as employees.  Admittedly that difference, whether it shows in lower bonuses and overtime for employees, or diminished pension funds because taxation has eroded the values of the companies they invested in, may be very hard to see. 

All these points are grounds for legitimate concern but not because of the current levels of corporation tax collection.  Rather the concern should derive from the lessons of how the money collected in the past was spent.  To my mind the greatest danger is that ultimately people will bore of the debate, just as they are bored of the Brexit debate now.  We must pay sufficient attention to how this government is applying tax largesse.  Given the seemingly endless funds being directed towards the new children’s hospital and rural broadband, the management of spending is a much greater long-term challenge and problem than the current embarrassment of riches flowing in as taxes from the corporate sector. 

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland