Wednesday, 18 July 2012

Questions (76)

Jim Daly

Question:

75 Deputy Jim Daly asked the Minister for Finance the Revenue that would have been raised if the corporation tax rate had been 17.5% for each of the past five years; if he will give an estimate of the revenue that would be raised if a temporary levy of 5% were to be added to the current corporate tax rate of 12.5% as a measure to address the current economic situation for a period of five years after which time the rate would return to 12.5%; and if he will make a statement on the matter. [35786/12]

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Written answers (Question to Minister for Finance)

The Taoiseach, I and other Members of the Government have repeatedly expressed the Government's commitment to the retention of the 12.5% rate. In that context, I see no point in undertaking the hypothetical exercise suggested by the Deputy. It is possible to provide an estimate on a straight line basis assuming that the proposed levy would apply to the same taxable income of all companies to which the current standard rate of corporation tax rate applies. However in reality it is impossible to estimate the level of additional tax revenue that would be realised due to behavioural change on the part of taxpayers as a consequence of such a measure which would be a significant factor given the scale of the increase suggested in the question.

Estimating the size of the behavioural effects of a change of this nature is difficult but it would be significant. An OECD multi-country study found that a 1% increase in the corporate tax rate reduces inward investment by 3.7% on average. In other words, it would take only a 2.5% increase in the rate (to 15%) to decrease Ireland's inward investment by nearly 10%. This assumes the average applies across the board but in fact the effect is likely to be more extreme for Ireland.

Recent research by the OECD also points to the importance of low corporate tax rates to encourage growth. In ranking taxes by their impact on economic growth, corporate tax was found to be most harmful. In other words, governments seeking additional tax revenues would be advised to consider increasing all other types of tax (property, consumption and income) before increasing corporate taxes.

The very major importance to Ireland's international competitive position of maintaining the standard 12.5% rate of corporation tax in the current climate must also be borne in mind. Ireland, like other smaller member states, is geographically and historically a peripheral country in Europe. A low corporate tax rate is a tool to address the economic limitations that come with being a peripheral country, as compared to larger core countries. It would be difficult to justify a temporary levy in the context of Ireland's consistently strong view that it will not change its corporation tax strategy. Even a marginal change would undermine both our long held stance on this issue and the certainty of business, domestic and international, in our resolve to maintain that position.