Analysis: Irish firms could do with a little bit more help with tax

Just a few days ago the US celebrated what’s known as Tax Freedom Day. It’s promoted by a Washington DC think tank and designed to give people some practical notion of the amount of money the government takes out of the economy each year.

This year it fell on April 24, marking how long it has taken the US economy to earn enough tax to pay all its bills for 2016.

Running a similar calculation for Ireland gives what may be a surprising result.

Our tax freedom day would have fallen on April 16, illustrating that less of our economic output goes in taxes than in the US. Surely some mistake?

Despite how it feels, we are not a particularly highly-taxed country. Our income tax rates are high, but the lion’s share of income tax is paid by a quarter of the workforce.

Our VAT rates are also high — 23% is among the highest in Europe — but it doesn’t apply to everything. Most groceries, for instance, don’t attract VAT.

This has never stopped anyone looking for tax reductions, such as the recent observation by the chief executive of the Irish Stock Exchange, Deirdre Somers.

She was widely reported as saying that our tax system acts as a disincentive to entrepreneurs from scaling up their businesses.The tax system does tend to do that.

She also suggested that we are less good at growing indigenous Irish business than bringing in foreign direct investment from abroad.

Bias in the tax system can be problematic. Tax systems only work well where there are no exceptions to a general set of rules.

A corner shop pays corporation tax at the same rate of 12.5% as the bank next door, and at the same rate as the multinational factory down the road.

There are both economic reasons and EU law reasons why this should be the case, but should there be different tax rules for companies in the early stages of growth and development?

As it happens, there are different rules for at least some of these companies.

For example, a number of special tax treatments exist to give entrepreneurs a tax break for capital investment.

These incentives known variously as Business Expansion Scheme, Employment and Investment Incentive and Seed Capital Relief have been used over 3,000 times by companies since 2007.

This isn’t huge in the overall scheme of things it has to be said, and that is because these incentives are riddled with restrictive terms and conditions.

Any case for a tax incentive for business development will have to prove that the investment can’t be sourced without tax relief. That can be a high hurdle to jump.

This is a pity. We know how property incentives which lasted too long distorted the property market, but there are better examples of tax incentive policies.

The hospitality sector will point to the effect of the 9% rate of VAT as positive for its industry.

It is hard to move away from economic assessments of the effects of tax reliefs because tax is a key component of economic activity.

Yet we decry the outcomes of the property reliefs, not so much for their negative economic impact, but for their negative societal impact. Excess tax breaks on residential property come to mind.

The social consequence is more important than a mere economic outcome.

Many commentators pour derision on our 12.5% rate of corporation tax, claiming that it results in companies not making a sufficient tax contribution.

This narrow criticism excludes the very important societal contribution companies make in terms of creating employment.

Ireland hasn’t the natural resources, climate or population to cut it as a modern economy aspiring to full employment.

We have to offer some compelling reasons for foreign investors to locate here.

Similarly, the compelling reason for fostering the growth of our indigenous industry should be the social aspiration of having our own people creating employment and growth opportunities for our own people.

I’m not sure that the tax system should be the primary mechanism to provide such support for the practical reason that emerging industry doesn’t make very much money, and therefore has less capacity to use tax reliefs.

What emerging industry can use is more support in raising funding and reduced hiring costs.

In both of these areas, the tax system could certainly help a bit more than it does at present.

Brian Keegan is director of taxation at Chartered Accountants Ireland