Income tax cuts best way to stimulate demand
Some people might not regard this as a good thing, but the reality is that the only way Ireland will work its way out of its current difficulties and address issues such as personal indebtedness, poverty, and inequality is through economic growth and employment creation.
Having successful and vibrant job-creating businesses will obviously be a central part of the process. Hence, what the Taoiseach said has to be seen as a good thing, if indeed it is true.
Also this week, the controversy about Ireland’s corporate tax status hit the headlines once again with the publication of a report claiming to show that US companies operating in Ireland pay an effective tax rate of just 2.2%. These findings have been heavily disputed by interested parties who claim that the figures on which these findings are based are flawed.
They are based on data from the US Bureau of Economic Analysis (BEA) which show that US firms with links to Ireland generate $144bn (€106bn) of profits in this country. This figure on the surface looks totally exaggerated, and in fact, it appears that while the companies may have strong links to Ireland, they do not generate those profits in this country.
The arguments are very difficult to decipher unless one is an international tax law expert. However, the headline figures from the report paint a very misleading and indeed damaging picture of the real situation.
Companies do engage in very creative and sophisticated tax planning, but the evidence suggests that it is, in the main, legitimate. So for example, many US firms operating here send back significant patent royalties to their parent.
One thing we can be sure of is that the issue of how much tax multinationals pay is a subject of significant international scrutiny and this is set to escalate.
Many governments are currently struggling in the face of massive sovereign debt burdens and are being forced to cut expenditure or raise taxes wherever possible. Hence, they are becoming much more sensitive to the issue of the legitimacy of the tax arrangements of large companies. There is strong pressure to ensure that firms pay their legitimate tax bills where they should be paid.
Ireland is attracting a lot of attention in this regard, and this attention will have been intensified by the report this week. It may be true to suggest that such companies actually do pay an effective rate of just 2.2%, but that reflects their global situation rather than their Irish situation.
Multinationals are an incredibly important part of our economic model. The IDA recently stated that IDA-backed companies account for 70% of corporation tax paid in Ireland. Last year, we collected €4.3bn, so presumably multinationals contributed over €3bn.
However, through the employment they provide and support, their real tax contribution is significantly greater than that.
The issue of corporation tax rates does pose a threat to the future wellbeing of the economy, so it is vital that the Taoiseach is as good as his word and that the Government behaves in as business-friendly a fashion as possible. The Ibec conference this week called for a reduction in the income tax burden as a way of stimulating demand. That would be a far more effective and economically efficient way of putting more money into workers’ pockets than through wage increases that would just damage our cost competitiveness.
Low-and middle-income workers should be the initial target as they have the highest marginal propensity to spend. If we want a talented and highly skilled workforce, we need to ensure that the personal tax burden is not too high. We need to focus on creating demand, economic activity and jobs.
