Corporation Tax and the politics of Union…

There seems to be a head of steam gathering in behind the campaign to drop Corporation Tax to the same level as the Republic. Peter Bunting of the ICTU has argued that it is both wrong headed, and implausible. Indeed the campaign’s biggest problem is that no UK adminstration is going to wear differential rates that privilege Northern Ireland over, say Cornwall or Yorkshire. That doesn’t mean to say that the campaign will not meet it’s object. It is not beyond the realms of possibility that Prime Minister Brown will seek to drive the Tories in an electoral corner by doing that which they least suspect: cutting Corporation Take to 12.5%! The question is: will it work? Or is it, as the ICTU, alleges, just another form of magic thinking?

  • There is NO chance of this happening. The UK is one homogenous taxation zone and Brown could not afford to indulge Paisley and co. It’s also interesting to note no mention of the fact that corporation tax for SME’s has gone up in Prudence’s last budget and no mention of THAT coming down. This is will o the wisp economics, and the opportunists signing the letter will remain just that.

  • Garibaldy

    Mick,

    Great thing to post up. Fair play to you. I remember you saying a while back when you were looking for a right-wing blogger that you thought there was a bias towards the left in the bloggers, but the reality is that very rarely if ever do we have an economic thread that starts with a discussion of a even of a soft left viewpoint.

    This ICTU analysis is important. If sustainable and high-value jobs are to be added once more to our economy and for the future, then we must not surrender everything to foreign business interests and allow ourselves to be fobbed off with yet more call centres, and assembly plants disguised as factories that will bugger off at the earliest opportunity. The easy mantra of let’s drop corporation tax as the solution must be resisted.

    If we seek to ape the Republic’s recent advances, then serious cash must be put into education and development, integrated planning of transport and production must occur, and the interests of workers too must be catered for in a serious manner.

  • A differential minimum wage rather than Corporation tax looks more likely:

    http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2007/07/22/nwage122.xml

  • oneill,

    Wouldn’t surprise me – Gordon loves putting up taxation on employers but in no way will this do what Paisley and the other nationalists want, namely to secure a dramatic reduction in corporation tax to increase the flow in inward investment!

  • There isn’t much case for a UK rate of 12.5 per cent as it would be unlikely to bring in enough business to replace the revenue lost.
    That calculation is different for Northern Ireland and for some of the other UK regions, which is the basic case against a unified UK rate.
    Right now it may not look like practical politics but that situation is not necessarily stable.
    Scotland and Wales will be pushing for more powers over taxation, while England will be pushing for fewer subsidies to the other nations.
    Those demands are mutually reinforcing. At some point fiscal autonomy will emerge as the best compromise for everybody.
    At that stage, Stormont could end up with control of corporation tax by default. Does anybody imagine, that in that situation, they would maintain the current rate?

  • Comrade Stalin

    David V is right about this. There is no way that any British government is going to create an small tax haven within the UK, and stand by to watch as the entire City of London decamps to Pollock Dock. Nope, it ain’t going to happen.

    As well as chasing a pipe dream, I think that people are guilty of believing that low corporation tax is some kind of magical fix-all for a long period of economic decline. They have an old joke over on Slashdot (the long standing nerd “blog”, which existed long before the term was coined) which, in our case, would go something like this :

    1. Cut corporation tax.
    2. ???
    3. Profit!

    The truth is rather more complex. I used to believe, until quite recently, that lower corporation tax would fix a lot of things. The trouble is, as I have now come to realize, that lower corporation tax could not come by itself; and it’s the unexpected extra surprises that you’d get with it that could do the harm. Either public spending would have to be cut, or income tax would have to be raised. Looking at what people are saying, I don’t think the case for cutting corporation tax is being made on the basis of revenue replacement through increased business activity (as you are suggesting, Tom) – and in any case the tax cut would have to work it’s way through the economic cycle before we would see that increased revenue. No; the plan would have to be to increase other taxes to offset the losses.

    In the Republic of Ireland, the government takes around the same proportion as the UK in terms of income tax, but significantly more in VAT. I was surprised to find, though, that a greater proportion of the RoI’s income comes from corporation tax compared with the UK. I’d guess that both VAT and income tax would increase in the UK to fund a cut in corporation tax.

    I’d say that if a similar model was used in the UK, the overall tax take would probably not change significantly – and that is before accounting for the effect of any economic improvements seen. In fact, there is reason to believe that in the economic circumstances of the UK at the moment, a cut in corporation tax combined with an increase in income tax/VAT could lead to reductions in consumer spending which, for the retail and other service sectors, would probably lead to a fall in revenue which would probably not be offset by the reduction in tax on profits.

    On the other hand, in a tight labour market where unemployment is relatively low (as is the case in the UK at the moment), the additional surplus cash available to firms as a result of any tax cut may have to be used to retain employees rather than being used to invest in new technology or create more jobs, particularly in highly skilled jobs. In other words, you might see a significant spike in inflation.

    The Republic of Ireland did not have this problem, as it had a surplus of resident citizens available to work. While a significant proportion of people continued to migrate in search of work overseas right up to the end of the 1990s (easing the burden on the Republic’s labour market and welfare state), the Irish government later worked to bring them back to fill jobs at home. As Garibaldy has said, despite not having much money available, the Irish state reaped the investment of having a well-run and well-funded education system, meaning that the workforce was able to take on new and highly skilled jobs easily. The labour market was able to grow and scale without runaway inflation in the cost of labour.

    It increasingly looks to me that it is the Irish republic’s combination of low corporation tax, a well educated workforce, and relatively high unemployment and immigration which created the circumstances within which the Celtic Tiger could flourish. In Northern Ireland we have a relatively tight labour market, especially in the skilled sector. Our skilled workers do emigrate, but my suspicion is that it will be much harder to drag them back into the sectarian quagmire here that it was to make people come back to the more vibrant Ireland of ten years ago.

  • The ERINI study estimated that a cut in corporation tax would reduce revenue by £300 million in the first year and would be revenue positive within six years. Interestingly the case for regional variations in corporation tax rates was picked up by The Times last week.

    Government action can play a role in trying to narrow Britain’s own national
    rift. But it is hard not to conclude that it should largely be limited to
    perhaps three things. First, measures that boost skills and education and so
    enhance regional productivity and competitiveness. Secondly, investments in
    infrastructure, and especially in transport, that can help to link up
    regional economies so that they can achieve the critical mass they need to
    thrive. And thirdly, the time may have arrived when ministers must also
    seriously contemplate significant corporate tax incentives to draw economic
    activity away from England’s overheated and overcrowded South East

  • It was Sammy Mc Nally what done it

    If DUP and SF had held out for this jointly defore the STA deal it would have put Tony in a very difficult situation – no doubt he would have found a way if it had of been necessary to do a deal.

    I suspect Bertie could have pushed for this with some success – but knowing the Warriors of Corruption as we do they might have taken the view it might hit them in their pocket.

    Non Iron is clearly not in the same situation constitutionally as rest of UK – that is what GFA and STA are about – there is a constutional link with ROI. If European legislation is a block but can be fudged then presumably it can be done.

  • John East Belfast

    What this letter clearly illustrates is this whole campaign is about ROI based businessmen with NI operations wanting to pay less tax to the UK Exchequer in the ‘promise/hope’ that the shortfall will be taken up by FDI from Non ROI based companies.

    The charge is led by Tony O’Reilly and indeed the Belfast Telegraph’s peddling of the INM Group plc Agenda is now embarassing.
    Indeed how did anyone think having Michael O’Leary – who clearly delights in the fact that he only operates in Ryanair’s Agenda – was a good idea to add to this list ?

    I think that lack of local opposition on this matter – because nobody wants to be seen to be calling for higher taxes – has given these people a green light to engage in all manners of kite flying.

    Firstly having an operation in another tax regime only works perfectly if that regime pays the same tax as your own jurisdiction.
    ie INM Group plc would just love the high 40% Net Profit margin that is taxed in NI at (to be) 28% to be taxed at 12.5% so that they could repatriate more home.

    The whole campaign ignores certain UK fiscal incentives already in place – Business Taper Relief and Research & Development Tax Credits – and also certain fundamental economic issues that make NI very different than the ROI was/is when low CT was used as the major ROI strategy.

    Business Taper relief basically means that if local entrepreuners start a business in the UK and sell it after 2 years they only pay 10% Capital Gains Tax.

    R&D Tax credits mean that for small companies every £100 spent on R&D gives a Tax deduction of £175. For large companies it is £135.
    This is important because for FDI Research & Development gives a low tax regime raison detre.

    ie if a US company pays low CT then unless it leaves it in ROI it will pay the high US CT when it brings it back to the US.
    Therefore the ROI prospered because in the nineties US IT & Pharmaceuticals invested their post tax manufacuturing surpluses in the ROI and as a result the ROI got a double dunt of both blue collar and white collar jobs.

    UK R&D Tax credits eliminate this reason for small companies and greatly reduce it for large ones.

    Anyhow the authors make no qualms about the policy being about the latter and FDI so lets look at that.

    With 4% Unemployment in NI where are they going to get the workers ? – the public sector only has so much fat.
    Two things will happen

    1. they will drive up local labour costs
    2. They will have major Eastern European immigration on a proportion with the ROI.

    2 will have disastrous consequences for our housing prices and indeed the overall NI social infrastructure.

    What we need is to foster and grow indeigenous NI companies at a manageble rate and triple our Tourist Industry. None of this has anything to do with aligning NI & ROI Corporate Tax Rates – it is all nonsense

    These people do not have the interests of NI Plc at heart – just the level of Post Tax Profits they can suck south of the border at everyone else’s expense.

    Also the ROI CT rate of 12.5% has to be paid somehow – I dont see people calling for 21% VAT as opposed to 17.5%, or a top rate of Stamp Duty of 9% as opposed to 4% on house and property purchases. Or what about Higher Income Tax kicking in early ?

    Indeed reading a letter from largely ROI based businessmen with a few token northerners (what does Robin Eames understand about Tax ?)asking my Govt to reduce their tax take and damage my economy is breathtaking due to the silence from our politicians – I applaud Bunting for highlighting the dangers and the issues involved.

    Not to mention the US individuals who would not dare argue against the US Federal Corporate Tax Rate imposed on all US corporates – no matter how poor that State

    The sooner this distracting and dishonest ‘one club golfer’ approach to economic strategy is killed off the better.

  • Bob Wilson

    Have to agree with JEB and others who eloquently detail why this campaign is nonsense.
    Apart for anything else Gordon B is the man who has spent ten years taxing people more – either by raising taxes or freezing (or in the case of marriage) abolishing allowances. Why would he cut it in NI – esp given the high govt spend here.
    Local SMEs would have been better jumping up and down publically about how Gordon is putting tax on small businesses UP and campaign to stop this increase than chasing the crazy dreams of the Big Corporation (and yes I too noticed how most of the signatories seemed to be southern)

  • protorious

    What depresses me most about the continually campaign for the cutting of corporation tax specifically for Northern Ireland (or even Scotland or Wales) is the fact that these campaigners seems to ignore the EC.

    Just look at the mess Gibraltar has been bogged down in the for the last 5 years after they tried to lower their corporation tax… It really would be impossible with the EC’c current stance on corporation tax to lower it in such a regional matter

    Therefore Brown would only have the option of reducing it nationwide if he wants to appease the various calls from nationalists for greater tax control; something which I very much doubt that Brown will ever due as it doesn’t really fit into his economic plan for the UK…

    Oh well, we can always dream

  • Frustrated Democrat

    What we need is not lower corporation tax but recognition of companies who reinvest their profits in expansion as opposed to paying dividends or holding cash.

    This could offset corporation tax by deducting the growth in selected assets (fixed and current)from the profits.

    For a new company this would allow all the investment to be offset against profits during its growth.

    This would see a dramatic increase in investment instead of taxes and dividends being paid.

  • DK

    “It really would be impossible with the EC’c current stance on corporation tax to lower it in such a regional matter”

    I am glad this has been mentioned. It seems to be forgotten that the EU has long been planning to harmonise corporation tax (http://tinyurl.com/2ouayn). Whether this is across the Euro-zone (do-able) or proposed for the whole EU (practically impossible) will determine the effect upon Ireland and Northern Ireland. For example, if corporation tax was just harmonised in the Euro-zone, at a stroke Northern Ireland would have a lower corporation tax than the Republic (it would be harmonised at French/German rates, which are higher than the UK).

    This is what happens when you have a common currency – you have a common tax regime. And is also a reason why NI is unlikely to get a lower Corporation Tax rate than the rest of the UK.

  • George

    DK,
    Ireland cleverly managed to secure a permanent veto, that is never due a review, on its corporate tax rates so it is for the Irish state to give all this away and allow tax harmonisation. I can’t see any Irish government doing it.

    As Finance Minister Brian Cowen said only last Saturday:

    “Ireland opposes corporate tax harmonisation as a matter of principle. We have seen from experience that low tax rates on capital and labour deliver jobs and growth.

    “There are constructive things we can do in Europe to reduce tax barriers to trade, to use the tax system to stimulate much-needed research and development investment, and to ensure a level playing field for taxpayers in Europe irrespective of their member state of origin. Doing this does not require us to harmonise tax rates or tax bases across the board.”

    Sure people like EU Tax Commissioner Laszlo Kovacs want harmonisation but as Cowen said:

    “Tax harmonisation is neither necessary nor good for Europe. We do not see how it will advance European competitiveness or the Lisbon Agenda, nor, indeed, how it will assist business generally.”

  • Gréagóir O’ Franclín

    The PM would hardly show favouritism toward NI ragarding tax. Unfair to the rest of the UK’s regions. There would be an outcry, surely!

  • ingram

    Sammy.
    quote Non Iron is clearly not in the same situation constitutionally as rest of UK – that is what GFA and STA are about – there is a constutional link with ROI. unquote

    The constitutional position was settled with the Irish relinquishing ALL TERRITORIAL CLAIMS to the North , the GFA and SA affords no constitutional link merely crumbs at the table.

    Articles 2& 3 are gone mate for at least 2 generations

    Back to reality.

    This proposal is a gimmick with no grasp of reality.The sooner people realise that stormont is just a local talking shop designed to stop murder and mayem and devoid of real power the better. Its a bit like Greater Manchester( similar populace) advocating a lower tax regime than Birmingham. Utter nonsense.

    Just like the GOC said! in 5 years time soldiers will be shopping in Belfast in uniform no different than in Cornwall.

    That is reality Sammy.

    Ding Ding

    Ingram

  • It was Sammy Mc Nally what done it

    Ingram,

    The constituitional link with ROI is a central part of the setlement in GFA/STA. Whether this is ‘crumbs at the table’ or an ’embryonic United Ireland’ as suggested by the the Very Reverend Ian Paisley is debatable – but on thing is for certain – Surrey it aint. Swapping that for useless aspirations ( articles 2 & £ ) was a superb piece of political sleight of hand.