I am informed by the Revenue Commissioners that the full year yield to the Exchequer, estimated in terms of expected 2013 profits, of increasing the standard rate of corporation tax by 25% from 12.5% to 15.6%, is tentatively estimated on a straight line arithmetic basis to be about €928 million. While this estimate is technically correct it does not take into account any possible behavioural change on the part of taxpayers as a consequence. In terms of an increase in the 12.5% rate, estimating the size of the behavioural effects is difficult but they are likely to be relatively significant. An OECD multi-country study found that a 1% increase in the corporate tax rate reduces inward investment by 3.7% on average. On this basis, 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.
The very major importance of maintaining the standard 12.5% rate of corporation tax to Ireland’s international competitive position 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. Ireland’s low corporation tax rate plays an important role in attracting foreign direct investment to Ireland and thereby increasing employment here. Recent research by the OECD also points to the importance of low corporate tax rates to encourage growth.
Further, it would be difficult to justify such a move in the context of Ireland’s stated position that we will not change our 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.