Fears of a corporate tax boom
The Irish Fiscal Advisory Council, the fiscal watchdog set up after the 2008 crash, released its half-year fiscal assessment report on Tuesday. It contained a lot of good news for the government.
The council now expects a budget deficit of just 0.8% of GNI (Gross National Income, the measure of Irish economic performance now preferred by most economists) in 2022 and a surplus in 2023. It now forecasts that gross public debt will have fallen to just 81% of GNI in 2025, from 106% in 2021.
“Tax revenues have been boosted by a rapid recovery and high taxes, in part thanks to massive support during the pandemic,” says IFAC President Sebastian Barnes.
That’s the good news. The bad news is that the war in Ukraine is not the only thing that has made the outlook much more uncertain, while “rising inflation, driven by energy prices, has reduced expectations for economic growth real”. IFAC also points out that Irish tax revenue has shifted dangerously towards corporation tax in recent years.
Total net corporate tax revenue more than doubled from €7.3 billion to €15.3 billion in the five years from 2016 to 2021. With total net tax revenue increasing by “only” 43% to €68 billion over the same period, this means that corporation tax has risen from 15% to 22% of total taxes collected in the space of five years.
IFAC is concerned about the sustainability of this rapid increase in the share of corporation tax in total tax revenue, pointing out that while corporation tax funded 10% of “base” government spending in 2014/15, this figure had risen to 20% by 2021.
“The government should take steps to reduce its reliance on corporation tax. This includes capping the amounts of revenue from that source that are spent or phasing out spending that depends on that source,” the report says.
This huge increase in corporate tax revenue is a huge boost to the budget figures. IFAC estimates that the Treasury has collected 22 billion euros more in corporate tax since 2014 than can be explained by the national economy and that if these “excess” corporate tax revenues were excluded, the deficit would be much higher, from 6 to 9 billion euros in 2021 alone.
IFAC calculates that “excess” corporate tax revenue has reduced the structural budget deficit by 3.2% of GNI in 2021 and will reduce a further 3.2% of the deficit this year. Without the fiscal “hit” provided by ever-increasing corporate tax revenues, the gross government debt and deficit would be much higher.
The council recommends that some or all of the corporate tax ‘surplus’ either be diverted to a rainy day fund or used to pay down existing debt. With a general election likely in less than two years and a populist Sinn Féin party knocking on the doors of power, that seems unlikely.
“It would be politically difficult at this point in the election cycle,” observes Goodbody Stockbrokers chief economist Dermot O’Leary.
But that’s barely half. The assessment report points out that the vast majority of corporate tax revenue comes from a relative handful of majority foreign-owned companies. The top 10 companies now pay half of corporation tax, compared to a quarter in 2008. This is roughly the tax equivalent of putting all your eggs in one basket.
While IFAC is right to draw attention to the concentrated nature of corporate tax payments, it certainly doesn’t go far enough. Detailed figures compiled by the Revenue Commissioners show that while 56,000 companies paid corporation tax in 2020, almost €9.4bn or 79% came from just 100 companies.
Figures from the Revenue Commissioners also show that the vast majority of large corporation taxpayers are foreign corporations. He estimates that foreign companies paid 9.6 billion euros or 82% of all corporate tax in 2020.
And it’s not just corporate tax. There are also the other taxes that these companies and their workers pay to the public treasury. The Revenue Commissioners estimate that 49% of the 21.5 billion euros in employment taxes, income tax, USC and PRSI paid by companies on behalf of their workers in 2020, or 10, An additional 5 billion euros came from foreign companies.
Add nearly €4.1 billion in VAT paid by these foreign companies and the total tax levies in 2020 were €24.9 billion, or more than 40% of total tax revenue that year. of 59 billion euros.
To put this into context, prior to the crash of 2008, property and construction-related taxes contributed just over one-fifth of total revenue. With the Treasury now doubly dependent on multinational corporations, how vulnerable are we to a sudden drop in tax revenues from foreign corporations?
“Compared to 2007, stamp duty and VAT then rested on unstable foundations. Our IDEs [foreign direct investment] is now on much more stable footing. I would be more concerned about corporate tax than income tax, where we are more dependent on the decisions companies make about their tax affairs.
“The vast majority of this investment comes from the United States. We are more closely tied to the US economic cycle than to the European cycle. I fear a US recession later this year or early next year. We shouldn’t put it [increased corporation tax revenues] in daily expenses. A certain proportion of corporation tax should be ring-fenced,” says O’Leary.
These concerns about the sustainability of the massive increase in corporation tax revenue come at the same time that, probably for the first time since the Second World War, an Irish finance minister may find himself having to choose, no not between politically popular forms of spending such as health, education or social welfare, but between guns and butter.
Even by post-Cold War European standards, Irish defense spending is extraordinarily low, around 0.4% of GNI in 2020, or just under a billion euros in cash terms. This compares to a European median of 1.3 pc (of GDP). In practice, if not in theory, Irish defense policy for decades has been to let the RAF defend our airspace and the US Navy our surrounding seas.
Russia’s invasion of Ukraine changes all that.
“After Russia’s invasion of Ukraine, EU countries are under significant pressure to increase defense spending,” says IFAC.
Already, Defense Minister Simon Coveney has said defense spending will increase by around €500 million over the next few years. However, this would increase Irish defense spending to just 0.6% of GNI, less than a third of the 2% of GDP that most European countries pledged to increase defense spending after Putin’s assault. in Ukraine. Reaching the 2% GNI target would boost Irish defense spending to almost €5 billion a year, an increase of 400% or €4 billion on the current figure.
How likely is such an increase in defense spending? Sweden’s and Finland’s NATO membership will leave Ireland, Austria, Cyprus and Malta as the only EU members that are not also part of NATO. While Austrian neutrality is part of the 1955 treaty under which the wartime allies withdrew from the country, Irish neutrality enjoys no such protection. Even if we do not formally join NATO, a major increase in defense spending, much higher than that envisaged by Coveney, is now inevitable.
However, far from being separate and unrelated issues, Ibec lobbying director Fergal O’Brien sees defense spending and our reliance on multinational corporations as closely linked.
“There needs to be a serious discussion about defence. There are incredibly valuable assets in the Irish economy. These assets must be protected. We have a great obligation to protect our economic model. It is not just an ideological question.
While corporate tax has been the best performing product in recent years, other taxes, particularly income tax, have also performed very well. After being almost stable in 2020, the confinement having confined most of us to our homes, tax receipts increased by 17% to reach 26.6 billion euros in 2021. This strong growth continued in 2022 with income tax receipts up 17% to 11.9 billion euros in the first five months of this year. Corporate tax had an incredible start to the year, with revenue jumping 77% to 5.2 billion euros at the end of May.
Unlike most other developed countries, there has been no post-pandemic “big quit” in Ireland. Instead, the number of people at work continued to grow strongly. The CSO’s latest labor force survey shows the number of people in employment topped 2.5 million for the first time in the first quarter of 2022, up nearly 7% from the same period last year .
Where are all these extra workers coming from? Although the percentage of men and women in employment is increasing, employment is growing faster among women. Over the past two years, 68,000 more men have entered the labor market, compared to 102,000 more women who have found jobs. Could it be that Covid-19, by persuading many more employers to accept remote work, has made the labor market more favorable to women?
Whatever the reason, O’Brien believes that the existence of a large pool of young, educated working women is one of the reasons why corporate tax revenues, especially multinationals, are not going to disappear anytime soon. early.
“No other economy is creating as many high-value jobs as we are right now… We absolutely outperform. We need to start planning for the medium-term sustainability of our model.