Is Ireland too dependent on corporation tax?

Analysis: While corporate tax returns have skyrocketed in recent years, there are several risks associated with depending on this windfall

Corporation tax is a tax levied on the profits and gains made by corporations. Exchequer returns for this tax have generally increased since 2000, but have been volatile. Revenues rose from around €4 billion to over €6 billion between 2000 and 2010. As corporate profits fell during the Great Recession from 2008 to 2012, corporate taxes followed suit. , falling below 4 billion euros. The largest increases have occurred since 2014, when revenues were around 4.6 billion euros. In 2016, they exceeded 7 billion euros and net revenues crossed the level of 10 billion euros in 2018.

At this point, questions have been raised about the sustainability of this level of tax revenue. Growth continued, with revenues of almost €12 billion in 2020. Last year, corporate tax revenues increased by almost 30% to over €15.3 billion euros. To give a better idea of ​​the magnitude of these tax revenues, the 2021 figure is over €3,000 per person and €6,000 per worker, based on five million people and 2.5 million workers.

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From RTÉ Radio 1’s The Business, Dan O’Brien from the Institute of International and European Affairs on the Central Bank’s warning about Ireland’s overreliance on corporation tax

So why have these tax revenues increased so much? One reason is that changes to tax laws around the world have encouraged multinational companies to locate more of their profits in Ireland. There was a very substantial upward shift in earnings in 2015.

A second reason is that corporate earnings in general have been strong in recent years. Gross trading profits are now around 200 billion euros. Another reason is that Ireland has been successful in attracting many multinational companies in growing and profitable sectors such as technology, finance and pharmaceuticals.

While it is positive that economic activity, income, employment and tax revenue have increased and continue to increase in Ireland, there are several risks associated with the surge in corporate tax revenue. As a result of this growth, corporation tax has become a larger tax, accounting for an increasingly larger share of overall tax revenue. It overtook excise duties and rose to third place, just behind VAT (15.4 billion euros) and income tax (26.75 billion euros).

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From RTÉ One’s Six One news, RTÉ’s economics correspondent Robert Shortt on Exchequer figures showing a surplus at the end of March 2022 of €200m

According to OECD data, corporate tax revenue in Ireland in 2015 amounted to 11.2% of total taxation, which is above the average of 9.2% for the EU. OECD. In 2018, this figure was 14.2% of taxes, compared to an average of 10% across the OECD. The Revenue Commissioners report that corporate taxes will account for nearly 23% of tax revenue in 2021. There is a risk that a potentially volatile source of revenue will now account for almost a quarter of tax revenue. Reducing government spending is not easy, so sources of revenue that are reasonably stable over the economic cycle are preferred.

The second risk is that corporate tax revenues are heavily concentrated in foreign companies. The share of tax paid by foreign companies has increased as the export-oriented sector has performed better than the domestic economy. The experience of the pandemic has highlighted this two-speed economy. As the tourism, hospitality and retail sectors struggled, many exporters and multinationals prospered.

In 2021, the split was 80% tax paid by foreign multinationals, 9% paid by Irish multinationals and 11% paid by domestic companies. Although many foreign companies have been operating here for decades and have established close ties to the labor market and suppliers, the fact remains that foreign direct investment is inherently mobile.

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From RTÉ Radio 1’s The Business, UCC’s Seamus Coffey on Ireland’s involvement signing up to OECD tax reforms

The third risk is that corporate tax revenues are concentrated on a small number of companies in five sectors of the economy. These sectors are manufacturing, administration and support services, technology, finance and insurance, and wholesale and retail trade. More worryingly, the top 10 companies paid out more than 8 billion euros in 2021, or 53% of net revenue. The top 100 paid more than €12 billion, or 79% of net receipts. A situation where the corporation tax of just 10 companies funds most of the public education expenditure is not reasonable. The fourth challenge is that Ireland stands to lose up to €2 billion in corporate tax as part of the OECD’s reforms to the global corporate tax system, known as the BEPS project. (Base Erosion and Profit Sharing).

The Irish Fiscal Advisory Council, an independent body that assesses the public budget and fiscal stance, has repeatedly warned of these risks and estimates that the Treasury has gained around €22 billion in “surplus” from ‘Corporation tax. The danger is that the government has become dependent on these revenues to fund increased current spending. For example, the HSE added 12,000 staff in the two years of 2020 and 2021. Government spending has risen sharply due to the pandemic and politicians are using perhaps temporarily excessive revenue to fund permanent increases in spending public.

What can be done to reduce these risks? One solution is to set aside some excess corporate tax revenue in a rainy day fund. Economic theory suggests that there should be a fixed rule for setting aside revenue surpluses above a certain threshold in order to make the commitment to save revenue surpluses more credible.

Ireland’s Tax Advisory Board has said corporate tax revenue ‘should not be used to fund permanent increases in spending’ but should be placed in a new Rainy Day fund https://t.co/CsHrTDOsh5

— RTE News (@rtenews) July 5, 2022

In June 2019, the Oireachtas passed a bill authorizing the creation of a Rainy Day fund and allowing the Minister of Finance to transfer €500 million per year into the fund between 2019 and 2023. However, all funds Rainy Day have been returned. to the public treasury in the year following its creation to meet the costs of the pandemic. The government has argued that it is a priority to support jobs and incomes in the short term.

The Fiscal Advisory Council notes that our reliance on windfall corporate tax revenue is now built into the annual public budget, and that there are no plans to reduce this reliance. The minister responded that these taxes fund important public investments and facilitate an expected budget surplus in 2022. He promised to address overreliance on excess revenue in time for the 2023 budget.

It’s hard to expect politicians, who naturally focus on short-term issues and stay in power, to resist the temptation to spend extra revenue. Aside from hoping they are reasonable with public finances, the best idea seems to be to establish a fixed formula in law to force them to be careful in saving excess corporate tax revenue in the rainy day fund.

The views expressed here are those of the author and do not represent or reflect the views of RTÉ