Irish Research Institute Wants To Increase Corporation Tax

by Justin Gorringe, Tax-News.com, London

01 October 2001

Presenting the Economic & Social Research Institute's medium-term review, covering the years from 2001 to 2007, ESRI research professor, John FitzGerald, said last week the Government should consider raising the rate of corporation tax after 2010 and use the additional tax revenue generated to reform other areas of the tax system.

The Institute says that 'the good times will return despite the economic uncertainty of the next couple of years,' but argues that further change to industrial policy is needed to reflect the Republic's changed economic circumstances, particularly a situation of full employment.

'Many supports for the commercial sector, both through direct subsidies and through tax reliefs, were provided with the understanding that they would help create additional jobs,' the report said. 'In the changed market circumstances of the current decade such supports are no longer justified.' The ESRI believes the business sector can best be supported by investing in relevant public infrastructure and in tackling other problems impacting directly on competitiveness.

Ireland owes a considerable part of its recent economic success to the very low corporation tax rates it offers incoming investors. A series of special economic zones and the 'manufacturing rate of tax' has meant that most companies pay only 10% tax or even less. But these discriminatory regimes are being phased out in favour of a nation-wide 12.5% corporation tax rate, which puts Ireland in the lead in any 'race to the bottom' among the EU's economies.

Economists dispute the merits of low corporation tax rates in terms of encouraging economic activity. The mainstream view is that in a closed economy, corporation tax is pointless and might as well be low; but in an open economy (like Ireland's) low rates simply give money away to foreign investors. Liberal economists would dispute this view, and one can hold up Ireland as a shining example of just why. So it might seem perverse for the ESRI to want to give away the very weapon which has forged Ireland's success. But it seems to be typical of state-oriented economic research institutes (which all bear a family relationship to GOSPLAN) to believe that taxation is good and should be used to intervene.

The institute said it was not clear how much of an increase was desirable in the corporation tax rate but probably it goes for a rate of 17.5 per cent. However, it warns that before any final decision is taken on the rate, the sensitivity of the economy to changes in corporation tax should be examined. 'This is an area where further research is urgently required - as any mistake could prove very costly,' the report says. You can say that again, John.

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