Corporation Tax and Northern Ireland’s (Economic) Walking Dead

Northern Ireland is a funny, self-obsessed place. And the arguments in favour or against the idea of a reduced corporation tax rate tend to be somewhat navel-gazing. Today people were picking fights with me on twitter because I’d suggested that reduced corporation tax here would make Northern Ireland more attractive for business. But, as some suggested to me on Twitter, a reduction would do nothing for the least privileged in society. Jeez. Alex Kane, the political journalist, suggested that lowered corporation tax wasn’t a priority and that “no groundwork had been done”.  I’m not sure what groundwork is needed for reduced tax.

My point is this. Tax removes money from businesses and consumers and gives the money to the government. Implicitly there’s an argument within this arrangement that governments are better at spending money than the people from whom they take it.  When governments take money from businesses they take money away from entrepreneurs, from shareholders and from (potential) employees.  Businesses are taxed on their profit – profit that originates only from the business-owners’ willingness to take risk, invest, trade. So in many respects corporation tax is one of the worst forms of taxation because it takes money away from the people who create wealth. With more money to invest they’d create more wealth, more employment, and more income tax yield.

Countries with high corporation tax rates include Suriname, Pakistan, Togo, Benin, Republic of Congo, Cameroon, Chad, Libya, and Vietnam.  Enough said.

So why should Northern Ireland have a lower corporation tax rate? Simple. We share a land-border with the Republic of Ireland and it has a substantially lower corporation tax than here.  As a result, the Republic of Ireland is much, much better at attracting investment. Most of the major technology companies chose Ireland because it has a low corporation tax rate while we don’t.  Many of these firms pay relatively little corporate tax but they pay substantial salary bills and employees pay income tax.  Ireland – and its exchequer – is the winner.

Professors Young Lee (Hanyang University) and Rodger Gordon (UC, San Diego) have computed that a 10% reduction in corporation tax results in an increase in annual growth rate of about 1.2%.  Given that Northern Ireland’s growth is pretty lacklustre and our private sector is puny that would be a pretty handy result.

But here’s the problem.  The Treasury requires a trade-off: a reduction in corporation tax has to be balanced by a reduction in block grant roughly equal to the reduction in tax-take.  It’s highly unlikely that any of our block-grant maximising local political parties would countenance that. They’ll rarely trade-off short term pain for long-term gain – and none of them has any incentive to reduce the block grant. They have zero skin in the game.

My suggestion is that we grasp the nettle sharpish. There would be a double whammy effect. We’d massively increase our attractiveness to investors at the same time as reducing our dependence on public debt. And our dependence needs reduced.  And it’s not just about our playing our part in reducing the UK deficit – I can see that there are many, locally, who couldn’t care less about that. But, more importantly, it’s about transplanting public sector dependent chunks of our economy that are the economic equivalent of the walking dead.

Free market libertarian. Businessman. Small government advocate. Former Vice-Chair, Conservative Party in NI. Fellow, Institute of Economic Affairs. Former Regional Chair, Business for Britain (the business voice of VoteLeave).