Why lowering the Corporation Tax rate might be the biggest mistake Stormont ever makes…

Before reading this post please note I am not some raging lefty. I have worked for myself my whole life. I personally would benefit from a reduction in Corporation Tax, but as a citizen I think it is completely the wrong strategy.

On the Nolan Show this morning it disclosed a DUP proposal to slash public sector jobs and use the savings to fund a cut in Corporation Tax. The idea is that this will boost private sector jobs and rebalance the economy. It is a nice idea in theory but will it work?


Multinational companies pay little or no tax already

Businessteam at a meetingIf Microsoft decide to set up an office in Belfast tomorrow, our rate of Corporation Tax is of no interest to them at all. Why you might ask? Well Microsoft, along with most multinational companies, funnel all the profits from their European operations through their Dublin office. It is irrelevant what tax rate operates in each country.

Let’s take for example everyone’s favourite search engine Google. From the Guardian:

The internet giant doesn’t pay 12.5% corporate tax in Ireland, it pays 20%. But that figure is not the interesting one. The interesting figure is the gargantuan “administrative expense” that reduces its gross profit from €5.5bn to just €45m.

Grant Thornton tax accountant Peter Vale, who works with multinationals in Dublin says the corporate tax rate of 12.5% may not be a critical factor for companies like Google.

The search engine is using Ireland as a conduit for revenues that end up being costed to another country where its intellectual property (the brand and technology such as Google’s algorithms) is registered. In Google’s case this country is Bermuda, according to an investigation by Bloomberg last year.

The 2009 Google Ireland Limited accounts show the company turned over a phenomenal €7.9bn in Europe for the year ending 2009 – up from €6.7bn the previous year.

The internet giant made a gross profit of €5.5bn, with an operating profit of €45m after “administrative expenses” of €5.467bn were stripped out.

Administrative expenses largely refer to royalties (or a licence fee) Google pays it Bermuda HQ for the right to operate.

Notes on page 16 of the accounts also show that the Irish corporate tax paid is €9.6m – an effective tax of around 20%.

A highly efficient tax structure across six territories that meant Google paid just 2.4% tax on operations outside the US.

Put simply multinational companies are running rings around governments and paying the bare minimum of tax already.

The race to the bottom?

Even if the Corporation Tax rate was a factor, then how could we possibly compete with the likes of Estonia where Corporation Tax is zero?

The UK government is funding businesses that put the high street out of business

kindleSay for example you fancy reading the new John Cleese autobiography. Instead of trekking down to Waterstones and getting wet you decide to order it on your Kindle. You pop on over to Amazon UK, but note when you buy the ebook you are actually buying it  from ‘Amazon Media EU S.à r.l.’ This Amazon company is actually located in Luxemburg not the UK. From the Wall St Journal:

Amazon EU generated €15.5 billion, or about $19.8 billion, in revenue in 2013, local company filings show. But it had just €28.8 million in net profit.

Now this is where it gets really crazy. From The Telegraph:

Amazon’s UK operation generated £4.2bn of sales last year, but it used a subsidiary in Luxembourg to help it reduce its corporation tax bill in the country to just £2.4m in 2012. According to documents filed at Companies House, the company received £2.5m in government handouts over the same period.

If you are a UK company trying to trade on the high street imagine your annoyance at finding out not only are your competitors using complex tax arrangements that make it impossible for you to compete but the government is actually giving them subsidies.

How will a cut in Corporation Tax affect NI businesses?

NI is a small business economy. Government figures show that:

  • Over three quarters of VAT and/or PAYE registered businesses with a main (or registered) address in Northern Ireland had total employment of less than five.
  • At March 2013, businesses with total employment of less than 50 accounted for approximately 98% of all VAT and/or PAYE registered businesses in Northern Ireland.
  • Businesses with 50-249 employees accounted for 1.5% of the total.
  • Businesses with 250+ total employment accounted for 0.3%.
  • Businesses with total employment of less than 10 accounted for 89.0% of the Northern Ireland total.

The level of Corporation Tax has very little day to day effect on these businesses. If I run an off license in Limavady, if Corporation Tax goes up I am very unlikely to shut up shop and move to Poland. Business people are not fools. Of course we would be happy to pay less tax, who would not? Most small companies take their salary in the form of drawings (you take your money out of the profits). This means they have an effective tax rate of 20%, far less than all of you reading this. Furthermore they do not tend to pay National Insurance either (all this is perfectly legal I might add). And Stormont wants to make them pay even less tax?

The flaw in the plan is the assumption that reducing the tax level will lead to more jobs and growth. This is not the case. Businesses only employ the staff they need: no more, no less. Give them more money and yes, some will be reinvested. But more likely that money is going on a holiday, new car or being put into an ISA or pension (if you have a personal pension the Government gives you an extra 20%-40% on top of everything you put in).

Who benefits from a reduction in Corporation Tax?

As we seen from the figures above most companies in NI are small. Very few companies are large enough to really benefit from a cut in Corporation Tax. This push for lowering the Corporation Tax is being driven primarily by the big tax and accountancy companies. It will not shock you to learn that people who make their money minimising their client’s tax bills are pushing to lower tax levels.

The nightmare scenario

The proposal by the Treasury is that any reduction in Corporation Tax will come out of our block grant. Put simply money that could be spent on nurses and teachers will instead go to big businesses.

This can lead to a situation where a large company can locate its head office from London to Belfast. They could be employing as little as one person to answer the phone, yet we would ALL be subsidising their tax cuts.

We have seen already how companies run rings round tax laws. Stormont is no match for the armies of solicitors and accountants that these businesses have.

Cutting civil servants does not mean a boost to the private sector

In the Nolan Show coverage they linked the two issues, but I believe they are completely separate. I would take the view that our public sector is far too large and we need to do more to rebalance the economy. But linking this with job cuts is completely the wrong approach.

What do you think? I would be more than happy to be proved wrong. Maybe a cut in Corporation Tax will bring a swarm of companies to our shores. But don’t hold your breath.

In part 2, I will look at the alternatives ways to boosting the private sector. Part 3 will look at how the Republic succeeded in attracting international companies. 

For further reading on this topic, this post is a good read…

  • The race for a change in NI Corporation Tax is a misunderstanding of the importance of tax in attacking businesses. A factor, but as you outline not one that is essential within the UK. That said, the need to reduce the public sector as corrupting influence on the jobs market is needed regardless, as is welfare reform. As you say, the issue of corporation tax is a completely separate issue, and hugely dangerous. Another example a lack of depth in understanding competitive markets, mostly because few of our MLAs have private sector experience.

  • barnshee

    “few of our MLAs have private sector experience.”

    “Professiona” politicians don`t have any useful F****** experience

  • Superfluous

    I’m posting from the Isle of Man. If you come to the IOM from N.Ireland you will notice how similar it is to the north Antrim coast – very similar geography, very spaced out green countryside – the people are not all that different either.

    Yet, on the IOM I’m getting twice the wage I could expect in Northern Ireland. So why can a little empty island next door to NI attract big, well paying employers but NI can’t? Why do I have to leave NI and move 50 miles to the middle of the Irish sea to get a decent wage? It can’t all be put down to the Troubles (before someone mentions it) because apparently Wales is even worse off…

    Even if I look for other jobs in my particular (IT related niche) industry, there are a couple on the Isle of Man, dozens in Dublin, hundreds in London and not a single one in Belfast (in my industry, at all). NI just has no competitive edge – it hasn’t niched itself in a global marketplace, it just offers the same tax system as London with cheap wages and property being the only incentive to move a business there. Corporation Tax may not be the magic bullet by itself – but the NI Government getting full fiscal control to create a niche business environment is the direction to move.

  • Brian O’Neill

    Am I right in thinking you work for a finance company? IOM and the Channel Islands are established bases for finance companies. Yes the only reason they are there is due to the low tax rate, but they are established hubs. Even with a lower Tax Rate NI will find it hard to tempt businesses for existing hubs.

  • SeaanUiNeill

    I think Superfluous is speaking as an employee, as I could not imagine a real risk taker being as unaware of the realities of business as he seems to be. As someone trying to run a small business in NI the problem of how the NI administration could ever begin to attract anyone not entirely committed to living here has long puzzled me. But this problem does not have a magic bullet solution, and the IOM did not simply become as attractive as it is to business overnight, or just by copying slavishly the successes of others. It is the very proximity and consequent access to the like of Wales and Ireland, but with different regulations, that offers some advantage to well established hubs. Its not something that will simply act as a cash magnet, or something that will create real business from the ground up, which is what we really, really need.

    The big mistake in tourism in the wee six has been to copy others rather than look carefully at who and what we actually are. This corporation tax lark reeks to me of the same monkey see monkey do school of economics, not at all a good way to go…..

  • Zeno3

    Brian, I’ve been saying the same thing for years.
    But it’s worse than that. The first to benefit will be local businesses. They are already here and trading and making profit, but we will be handing them extra money that comes straight out of the Block Grant. The most vociferous demands for a cut are coming from them. A local business making 200k profit will be better off by £15k if there is a reduction to 12.5%. How many jobs are they going to create with that?
    Almost all businesses here make less than 200k, so all we are doing is giving money away to people who certainly don’t need it and are offering nothing in return.
    I don’t see any of the big corporates calling for a cut in NI and promising jobs.

  • Dan

    If the Executive is to fund any cut in tax, it should be to remove the ludicrous air passenger duty which is bumping up prices to ridiculous levels.

  • Owen Smyth

    Imagine that we can’t control how much taxes we collect from large businesses. The question could be “Is it beneficial to have large companies working in Northern Ireland?” I would say it is as these companies can bring plenty of jobs to NI.

    To be fair I don’t think that there is any economic reason to favour large businesses, I think any size of business should not be taxed. Taxing a business is simply taxing those who have done something productive, which seems like a punishment for doing something right.

  • Zeno3

    ” I think any size of business should not be taxed. ”

    Interesting. How would we pay for Health ,Education, Social care, Police and Fire Services to name but a few? I don’t believe tax income from individuals comes close to covering that.

  • Zeno3

    The idea here is that if we pay businesses to come here ( in the form of tax cuts) and hope that they might produce jobs. There is no guarantee that any jobs will be created as the proposed cut stands. Why not simplify the whole thing and remove the risk completely?

    You could for example say Create 1000 Jobs and you will pay no Corporation Tax.

    You could have a sliding scale for Tax related to Job creation.

    That way we would be actually getting something for our money instead of just throwing it at already rich businessmen in some vague hope or wish that they create jobs.

    OR we could just do this and hope.

    http://i.imgur.com/JYAVWj7.gif

  • Johnny Irish

    The DUP’s logic is preposterous.
    Paying off thousands of public sector employees to finance a tax subsidy for the rich.
    And will these corporately clever companies generate enough jobs to negate the losses in the public sector? ie thousands ?? Little chance !!!
    And job losses in the public sector hits private businesses .It is they who will lose most. Public servants buy goods and services and if there are less of them then that means there are less spending in the private sector.
    The DUP are proposing taking salaries out of the pockets of ordinary people to place into the off shore accounts of big businesses.
    Money circulates and we all gain. We all contribute towards one another’s salary. That’s how capitalism works. The DUP propose taking money out of circulation.
    Mad men!!

  • Tacapall

    Your not that naive Super are ya ?

    http://www.theguardian.com/business/2013/nov/07/britain-tax-havens-queen-secrecy-justice-network

    “Britain rules the world of tax havens, Queen warned”

  • chrisjones2

    Paying off thousands of UNNEEDED public sector employees

  • Zeno3

    “but the NI Government getting full fiscal control to create a niche business environment is the direction to move.”

    You really have to be joking. It took something like 7 years to come up with a by law on the height of hedges.

    http://sluggerotoole.com/2010/01/30/the-saga-of-high-garden-hedge-legislation-or-election-discounting-devolutio/

  • Zeno3

    “The DUP’s logic is preposterous.”

    What you mean sacking people and using the money saved to give to already rich businessmen in the vague hope they will create jobs is a bad idea?

  • Johnny Irish

    Unneeded ??
    The civil service was historically bloated but has been trimmed significantly in recent decades.. There is not much fat left !!
    Services will deteriorate and there will be threads here giving off about the incompetence of our public services !!!
    Public servants buy goods and services. They feed the private sector economy. Less of them spending means less business in the private sector. Which in turn leads to a downturn in the economy.
    Meanwhile the fat cat corporates syphon off the tax savings to safe havens!

  • carl marks

    so the plan is; lose steady well paid jobs and replace them with minimum wage causal jobs! good thinking!

  • carl marks

    LOL

  • chrisjones2

    Presumably the system will be designed to maximise the tax relief to

    1 those businesses making (secret) political donations
    2 property developers who are ‘well connected’

  • carl marks

    Is this the trickle down effect Reagan tried when he was president, most of the tax cuts ended up being spent on art and property as investments and didnt produce much in the line of Jobs!

  • NMS

    The Irish offer to multinationals is considerably more complex than just a low/no CT rate.

    I would remind UKNI readers that the first Irish tax incentives date back to the 1950s and the work of the First Commission on Taxation which reported sporadically into the 1960s, see for example the sporting exemption introduced in Finance Act 1963.

    The benefits of these incredibly generous tax incentives only really took hold after EEC membership and more importantly huge investment in education. It took nearly twenty years to see the real benefits of the earlier changes.

    Looking at current multinational investment in Ireland, a number of things strike one immediately,

    1) They are focussed in three main areas, a. ICT, mainly software, b. Pharmaceutical, c. medical devices, particularly stents

    2) The number of employees has not increased substantially in ten years, however the quality of the employment has.

    3) A high proportion of the employees in some of these companies are not Irish. In some cases, for example IBM, around 10% are not from the EU (based on work permit stats).

    4) Some of the companies in Ireland for a long time have changed radically. Microsoft started as a copying and packaging operation, it is now involved in everything from R & D to managing sales throughout the EMEA region. IBM has moved from manufacturing to software development, apart from servicing the local market.

    Is UKNI able to offer the same level of service? For example, if a software company wanted 200 work permits asap, would they get them? Would you get 200 software engineers willing to move to Belfast from India and would they be safe? It is unlikely that the local economy could provide the range of qualified workers required. Another effect would be on existing businesses, whose staff would leave for the better pay and conditions.

    My own view, from having spent many years dealing with these companies is that UKNI is where Ireland was in the 1960s in relation to multinational investment. The cost of the tax expenditures being talked about, plus much of the money wasted on so called community projects, would be better spent on radically improving education. You might then be in a position to compete. Otherwise the suggested changes will only attract brassplate operations of no value.

  • Zeno3

    Odd thing about this is it mirrors SF’s much ridiculed United Ireland economic plan.
    SF’s version was do away with duplication, which really means put an awful lot of people on the dole. Then more jobs will magically appear.
    The DUP version is put a lot of people on the dole and use the savings to create…………. wait for it……………. JOBS.
    If only we had politicians who were not obsessed with creating unemployment.

  • Brian O’Neill

    NMS can you send me an email to brian@sluggerotoole.com Thanks.

  • carl marks

    that would be of no concern to those not getting taxed, they could then afford private health care, their own security guards and put a fire plaque on the wall of their houses in gated community’s.
    and basically F*#k the rest of us!

  • NMS

    Done.

  • Comrade Stalin

    I think Brian you have missed the main point.

    For a start writing a critique of the whole idea of cutting corporation tax is to ignore the tax jurisidiction immediately to our south which has a reduced rate of corporation tax at the centre of its economic strategy. There is rare consensus across both public opinion and among politicians and strategists that Ireland’s tax policy has delivered benefits, and indeed Irish politicians who would make noises about raising the corporation tax rates would quickly find themselves unelectable. It’s curious that you would try to argue that this policy does not work.

    The first part of your article says there is no point in introducing a reduced corporation tax rate because the big hitters don’t pay it anyway. But, Amazon, Starbucks, Google and so on are relatively unusual cases. Run your finger down the FTSE250 or the Dow Jones and you’ll find most of the companies paying large amounts of corporation tax.

    Your next point is how we compete with Estonia, but the comparison makes no sense. You are comparing a country within a major Western democracy with strong ties to Europe and the United States to a former Soviet republic where English is not commonly spoken. All this proves is that corporation tax is not a magic bullet; but it does not invalidate the potential that corporation tax reductions have to spur economic activity.

    The next part is something to do with high street multiples crowding out small businesses, which is pretty irrelevant at this point given that this process started decades ago and is now more or less complete (few independent small businesses remain in the proximity of Royal Avenue).

    Your final point is basically the only relevant downside to corporation tax reductions (and, ironically, you are contradicting your earlier point that major corporations have no significant tax liability in the first place). Brass plate head offices are a problem that we haven’t seen a proposed solution to yet.

  • Zeno3
  • Brian O’Neill

    Thank you for your comprehensive reply.

    I picked Estonia as an extreme example of how there will always be countries with lower tax rates. As you can see here a lot of countries have low tax levels:
    http://en.m.wikipedia.org/wiki/Tax_rates_of_Europe

    The success of the Republic is not solely due to the low tax rate but we are preparing a post on that so I do not want to go into it in too much detail here.

    As for the FTSE 100 yes there are lots of reputable companies but a quarter of the FTSE 100 do not pay any tax at all:
    http://www.dailymail.co.uk/news/article-2287216/Revealed-One-UKs-companies-pay-tax.html

  • Old Mortality

    So here’s your prescription by implication: increase public sector employment at the same time raising public sector pay by 25% on average and the rest of us will prosper by selling things to them. Perfect solution. Nobody suffers. Everybody wins.

  • Accountant

    The NI economy is dysfunctional. We cannot afford public services at their current cost. And on a day not so far away, UK is going to call time on our subsidy (and RoI will never be able to pick up our tab). Relative to the cost of living, the public sector is overpaid (this doesn’t mean they don’t do a good job, but the size of our public sector is not affordable). I don’t want a pay cut, but relative to the cost of housing, etc. public sector workers here are overpaid. Striking is not going to help.

    Will cutting corporation tax transform our economy ? We won’t know until we try. Don’t give me all this “Low tax was only 1 small part of the Celtic Tiger” crap; if that were true, why has the Irish government said its low rate is sacrosanct ? Anyone pretending that low tax rates in Ireland took years to take hold and was only part of the economic package/development has forgetten that the Ireland of the ’60s was a banana republic – NI has the legal system, the banking support, currency, etc. of the UK and a great education system, so we’d be starting from a much stronger base than ’60s, ’70s, ’80s or even ’90s Ireland. Yes there will be a huge value leakage from a cut in CT (current NI firms will get a windfall [can we have a bank super-tax ?] – and Treasury will win even more than we do through increased PAYE, VAT and National Insurance [can we bring this in to the Block Grant “net cost” negotiation with Treasury ?]) – but securing one hedge fund or one of Shire plc, United Business Media or WPP (who are all now apparently Irish companies) would recoup the £300m-£400m in one slug.

    What’s Plan B ? If we can’t think of one, shall we go on strike instead ?

  • Brian O’Neill

    Interesting you meantioned WPP. They have moved back to the UK from Dublin. Proof the UK system is not that onerous?

    http://www.theguardian.com/media/2012/aug/30/martin-sorrell-wpp-london-move

  • Zeno3

    The cost is estimated at between £400 million and £700 million.
    To save £400 million and fund the CT cut. It would take around 18,000 jobs paying 22.5k to be cut. If the £700 million turns out to be more accurate then it will take over 30 thousand Job cuts to fund it. Yet even though there is no guarantee that any jobs will be created , you want to put thousands of people on the dole and spin the wheel?
    And what for? So the British Exchequer can cut the Block Grant be better off?

  • Zeno3

    “Low tax was only 1 small part of the Celtic Tiger” crap; ”

    Low corporation tax combined with facilitating the numerous tax dodges carried out by the corporates like Apple and Google and Starbucks et all is the reason Ireland can attract the big companies…………. and don’t get me wrong they have been very clever in their trade off for Jobs provided. BUT we can not compete with them. It is impossible.

  • Johnny Irish

    Where did you pluck those figures from ?
    The dup want to take money out of circulation to give to multi nationals in the possible chance they may use it to create new jobs. But shareholders and off shore accounts are more likely to be the beneficiaries.
    Public servants buy goods and services. They spend their money in the private sector. In NI especially, the public sector needs the public employees to spend their money .
    The private sector can not replace the amount of public service jobs lost. Therefore less money is circulating in the he private sector.
    It’s simple cause and affect.
    In these austere times the public,service must play its part. That should mean pay freezes and a block on recruitment..Natural wastage will gradually erode employee numbers.

  • Zeno3

    A lot of your posts have vanished. Must have been too radical.

  • Bryan Magee

    If few (existing) companies would benefit from a cut in Corpo Tax then it would not cost much in terms of a cut to the block grant.

  • Superfluous

    I am a director of an AIM listed company which targets mostly Asian customers and I’ve worked between 5 different jurisdictions in the last 15 years (including a recent stint back in NI). So yes I am speaking as an employee, although not a totally naive one when it comes to what businesses may like about a jurisdiction (I hope). I’m making the simplistic point that in NI there doesn’t appear to be any high level roles for me (and there are elsewhere) – I could possibly shift from my niche and go be a management cog in an outsourced call-centre, but there’s no high level jobs in a global facing company headquarters – and there are on the Isle of Man. The point is a very similar (geographic, cultural, weather!) territory is doing something which NI isn’t, and it’s obvious that the main difference is fiscal independence.

    Anyway in regards to creating business from the ground up – even if it doesn’t transform an economy overnight I believe that even attracting a few high level companies to Headquarter can create a virtuous circle. I was working in southern Europe 10 years back, in a company that had been tempted to shift because of tax. I was tasked with employing locals who almost all had no clue about the industry – a decade later I visit conferences in London and meet some of these locals now running their own business in the same industry. It’s the same with the Isle of Man – half our b2b relationships are with local companies who have local owners (who shouldn’t really have been anywhere near our industry, given their remoteness to the main business hubs of the world). You attract the companies with a competitive environment and the locals learn from those businesses and run away with it themselves. The virtuous circle needs to start somewhere and control over your own tax system is a good place to start.

  • Brian O’Neill

    You are missing the key point:

    ‘Over three quarters of VAT and/or PAYE registered businesses with a main
    (or registered) address in Northern Ireland had total employment of
    less than five..’

    This means that Doctors, Pharmacists, solicitors, IT workers, shop owners basically any one who is self employed will get their tax bill cut in half.

    If you are employed would you be happy to pay 3 times the tax of your neighbour who is self employed?

  • Ian James Parsley

    I have a lot of sympathy with this piece.

    I have two particular add-ons.

    First, I am concerned by the administration of this (you touch on this with the brass plate issue at the end). I don’t think a straightforward reduction in CT for anyone who happens to register at Companies House on Chichester St is viable.

    Second, I disagree that businesses merely employ “who they need”. Many may be willing to take a risk for growth at 12.5% CT they are not currently taking at 20%. However, business organisations have not been clear about this. For me, job creation should be an absolute requirement, not just a useful occasional consequence.

    To me, if we are to do this at all, I think the reduced tax should apply to specific export industries to enable them to bring money in from outside NI (thus creating wealth and jobs from external money).

  • Bryan Magee

    If that’s your point then I agree —— I’d favour cutting the rate for large companies only for that very reason.

  • Bryan Magee

    This post is a good reality check as to the long term nature of such policy.

  • SeaanUiNeill

    Oh dear, Superfluous, “control over your own tax system is a good place to start” but only if the people who control it have even a modicm of understanding about finance. Which rules out Stormont……

  • Superfluous

    “only if the people who control it have even a modicm of understanding about finance”

    I could go on for hours about this, but I think the great thing about the low tax economies I’ve lived in is that Government power is much reduced (through a lack of top down bureaucracy). So yes, when faced with an idiot like Gregory Campbell managing the state I’d prefer it be a very small state.

    Anyway I don’t doubt such reforms will be difficult to introduce into NI, since a big state (through public employment and benefits) is very much embedded.

  • Bryan Magee

    If they don’t pay tax at all it won’t be a costly policy as far as the block grant is concerned.

  • SeaanUiNeill

    Could not agree more! No-one has the least idea about how to do anything without trainer wheels.

  • Bryan Magee

    It would be good to see tech and manufacturing benefit from it. UCUNF (who we have to thank that it is part of government policy to consider this) argued I recall that the tax could be applied selectively to key industrial sectors.

  • Comrade Stalin

    The Irish government’s economic policy (which is basically challenged by nobody including Sinn Féin) is to offset the tax losses of low corporation tax by having higher levels of other taxes, and by controlling public spending – for example the RoI has no national health service to pay for. Most working citizens, with a car, a couple of kids and so on will pay more tax in the RoI than in the UK especially if you count VHI and healthcare costs. This is arguably a price worth paying if it delivers economic strength.

    Contrast this with the situation in NI where this has been on the table but we are only now talking about where we will find the spending cuts to pay for it.

  • Comrade Stalin

    Corporation tax cuts were being mooted long before UCUNF came into being. We have the Irish government to thank more than anyone else, as we’re nicking their idea.

    As IJP says tax cuts do not necessarily get diverted straight into profits (although some of this will inevitably happen). Bear in mind that giving away profit as dividend runs the risk of falling behind your competitor who decides to reinvest. Of course, the flexibility of the labour market is an issue; and in IT particularly, it isn’t that flexible which suggests we’re likely to see some wage inflation if this goes ahead.

    My own employer will happily tell you that the coalition’s corporation tax reforms (which provide a more favourable tax structure for R&D) have resulted directly in a reworking of the company spending plans to take advantage of this. I’m sure they are not the only ones to make that calculation.

  • Bryan Magee

    Your points are good.

    “Corporation tax cuts were being mooted long before UCUNF came into being. ”

    They were certainly discussed by NI parties. But the point that I was making is that considering them wasn’t a part of UK government policy until the Conservatives put it in their NI maifesto. Though we still haven’t heard the Prime Minister’s decision yet – apparently he decides this month.

    (By the way on a completely separate matter I thought Naomi Long was very good in her cross-examination of Peter Mandelson yesterday, on the NI Affairs Committee. He tried not to answer, but she kept on asking. By far the best performer on the Committee.)

  • Bryan Magee

    Though I think you make a valid point, the point I am making is that if (as Brian ONeill argues) very little actual tax is paid by large companies (e.g. because there are few of them in NI) then the cost of cutting this tax is low, because the block grant is cut by the reduction in actual tax paid. That is why this poilcy may be cheaper (and hence more worthwhile on cost benefit terms) for NI than (say) Scotland which has more large companies.

  • Comrade Stalin

    thank you for this – most interesting.

  • Comrade Stalin

    Yeah Naomi’s great. I wouldn’t mess with her.

  • Comrade Stalin

    um, but the whole idea of cutting corporation tax is to encourage new companies to set up here.

  • Guest

    How the reduction in the block grant is calculated will be important.

    If NI’s taxpayer *loses out* through a fall in block grant each time a major company invests then in theory NI could end up with very little block grant left while London gains from the increase in income tax and vat!! So it seems unlikely that they would do it that way.

    There was a lot of discussion on this point but I have not seen the final agreement (assuming it has been finalized).

  • Bryan Magee

    Lets take a trivially simple example to illustrate the point. Suppose at period 1 there are no companies and no tax.
    Period 2 a tax cut, companies come, and pay £X of tax revenue at the lower rate.
    They would have paid £Y had there not been a tax cut.
    How much is the block grant cut by? £(Y-X)? So if X>(Y-X) the NI taxpayer is actually better off.

  • Comrade Stalin

    Bryan, sorry, yes I missed your point. Indeed this is a problem and it is the detail that will determine whether introducing a corporation tax cut is a good idea or not.

    Sammy Wilson is one of those who thinks not for precisely this reason; the loss to the block grant would be too high.

  • NMS

    Man of Steel, I have been asked to develop the issue further and hope to have finished shortly. Your comments will, as always be full appreciated