Who will pay for the proposed reductions in corporation tax? The media coverage of Government's attempts to persuade the EU to allow it to "rebalance" corporation tax has not addressed this key question. These efforts, which included the Minister for Finance and even the Taoiseach, lobbying the Commission, have been portrayed as a David versus Goliath battle with little Ireland versus big-bully Brussels.
They have also been sold as a win-win issue, with no losers. The reporting has been similar to the day when hikes in agricultural prices for farmers were hailed as victories for Ireland, whereas the reality was that rises in farmers' incomes were paid for by big price rises in bread, milk and cheese for consumers.
The low rate of 10 per cent corporation tax on manufacturing runs out in 2010 and in 2005 for export service companies. Other companies pay tax at 36 per cent on profits. The government fears that the EU will not allow the extension of the low rates after these dates, because it flies in the face of the Commission's attempt to harmonise taxes for the Single Market.
It is annoying our European partners who no longer see Ireland as poor and it has been roundly criticised by Mr Mario Monti, the Tax Commissioner; Mr Theo Waigel, Germany's Finance Minister and other European partners. Mr Monti wants to stop competitive tax down-bidding between states which leads to serious loss of revenue and to reverse the resultant increased tax burden on labour. The Government thinks it has found an Irish solution to a European problem by reducing the rate of 36 per cent to only 12.5 per cent. It will tax all limited companies at 12.5 per cent and as there will no longer be any discrimination in favour of manufacturing and export services, it hopes that the EU will agree.
The Government has not considered whether the low rate of tax on manufacturing will be necessary or desirable in 11 years time, nor has it considered the wider economic and social consequences of this move.
From the Budget statement, it is possible to calculate that the transfer in the tax burden will be more than £600 million each year when the rate of corporation tax is reduced from its present level of 36 per cent (already down from 50 per cent) to 12.5 per cent by 2010. This will mean that sectors of the economy which are enjoying booming profits of unprecedented levels and which do not face international competition, are to share an unexpected and staggering bonanza of £600 million a year from the Exchequer. Those sectors include the banks, supermarkets, the distribution sector, department stores, retail chains, much of the service sector and large public houses.
Some banks are making more than £1 million profit every day of the year.
The reductions will be paid for by either higher taxes on incomes and on spending, or alternatively, by foregoing reductions in taxes, mainly by the PAYE sector. While there will be an increase in company taxes on manufacturing from the low 10 per cent to 12.5 per cent, making a contribution of perhaps £200 million a year, but not until after 2010, most of the transfer, around two-thirds, will be from ordinary workers on PAYE.
Since 1987, workers have been very modest in their pay demands under the national agreements, contributing greatly to the emergence of the Celtic Tiger. Nowhere in any of these agreements was it understood that there would be a massive reduction in tax on nontrading companies, which will be made up largely by the PAYE sector. It was never agreed that a "low company tax/high labour tax regime" would be institutionalised forever.
Years ago, because of mass unemployment, the unions implicity agreed that there would be a transfer of taxes from the PAYE sector to multinationals to encourage job creation, through high taxes on income and the low corporate taxes. However, it was understood that this would not last forever and that when the economy developed, as it has done, then companies would begin to pay more taxes (which they have done, up till now). However, this move by Government totally changes the agenda and poses a major challenge to the consensus.
Multinationals have been attracted for several reasons, including the low rate of company taxes. There was no tax on profits on exports originally and when the EU forced Ireland to introduce the 10 per cent rate, the economic establishment warned of a flight of foreign investment. The opposite occurred. In recent times, multinationals have come here for more important reasons, such as the educated, flexible English-speaking workforce, membership of the EU and the attraction of the success of the Celtic Tiger itself.
A favourable tax regime is one attraction to foreign investment, but the Irish economy may no longer need an over-generous tax system for multinationals after 2010 and it certainly does not require a ridiculously low tax regime for all companies now. It is also recognised that there is a big difference between the nominal and effective rate of tax paid by many companies. Therefore we can afford to have reductions in nominal rates provided the effective rates are reasonable.
Therefore the best way to face the problem is to face up to it squarely. Having one rate of company tax as is proposed can do this but it must be at a reasonable rate of around 25 per cent. It is vital to make the nominal rate close to the effective one, by eliminating tax allowances. The Budget did tighten up capital allowances which should reduce tax avoidance and this will make nominal rates more effective.
The Budget also met the Partnership 2000 agreement on the gross amount of tax reductions but cynically gave most of the gains to the higher paid, failing to increase personal allowances to remove the low paid from the tax net altogether.
Most extraordinary of all, it halved the rate of tax on unearned gains on capital to 20 per cent, while workers who generate those gains have to pay tax at more than 55 per cent. Then there were the reductions in corporate taxes from 36 per cent to 32 per cent (to continue down to only 12.5 per cent over the next few years) at a cost of £107 million.
These moves mean that the undoubted success of the decade of consensus is now in jeopardy because it is far harder for those of us who, up till now, have been committed to it, to continue to promote it. The decision to reduce corporation taxes to only 12.5 per cent will institutionalise a low tax regime for companies and high taxes on labour and spending.
Paul Sweeney, author of `The Celtic Tiger: Ireland's Economic Miracle Explained' is a trade union member of the Partnership 2000 Expert Working Group on Tax Credits.
