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Labour sees low corporation tax as ā€˜economic imperativeā€™ Back  
When Ruairi Quinn became the first Labour Party Minister for Finance in 1994, the economy didn't grind to a halt. Quite the contrary, writes Derek McDowell
Ruairi Quinn killed off the notion that Labour was "bad for business". It is my job to bury the notion once and for all.

Of course, the Irish experience is far from unique. All over Europe social democratic parties, many of them in Government, have forged an effective partnership with business. Nobody could seriously suggest that Hans Eichel, Dominique Strauss Kahn and Gordon Brown are in any way "anti-business". Far from it.

Indeed, in some ways the parties of the centre left are in a better position to set up a transparent and efficient relationship with enterprise than are the parties of the centre right. Many of the latter are prone to the sort of cronyism which comes from a relationship with the business community which is far from selfless. There are myriad examples of this in the Irish experience.

I believe that most of the business community would be much happier in dealing with Government and indeed other public authorities if they were sure in the knowledge that nobody else had the inside track.

There are some very basic principles in relation to taxation of profits:-
ā€¢ Profit is a good thing. Government should look to help business in extracting normal levels of profit.
ā€¢ Super-normal profits are an indicator of imperfect competition. Inasmuch as super-normal profits occur in an important sector of the economy (e.g. retail banking)
ā€¢ All income should be taxed at the same rate unless good reason can be adduced to justify discriminatory treatment.

In May, 1997 the then Minister for Finance, Ruairi Quinn, announced that Ireland would seek agreement from the European Commission to reduce Corporation tax on trading income to 12.5%. Fianna Fail, then in opposition, indicated that they would pursue a 10% rate. In the event they did not pursue this when the current Government was formed and agreement was subsequently reached that a non discriminatory rate of 12.5% would be introduced.

This compares to a standard income tax rate of 24% and a capital gains tax (CGT) rate of 20%. On grounds of equity it is difficult to stand over such a low rate of corporation tax. In terms of the practical realities of the Irish economy there is no other way.

In an article published in the autumn report of the Central Bank, John McCarthy calculates that foreign direct investment (FDI) in Ireland boosted growth rates by 3% per annum for most of the 1990's. Put another way, the economic miracle of the last decade would not have happened were it not for FDI. There are many reasons why Ireland has been able to attract higher per capita FDI than most of our European partners but such work as has been done on this issue suggests that our corporation tax regime is the single most important factor. Indeed, given the labour market constraints which are becoming increasingly apparent, it is likely that tax will loom even larger in the future in deciding the location of FDI.

No responsible politician can ignore these material facts of life. In the circumstances, a low corporation tax regime is an economic imperative. That said, there are clearly consequences which flow from such a low headline rate:-

ā€¢ We must adhere strictly to the EU guidelines on unfair tax competition. Failure to do so will endanger the 1998 agreement.

ā€¢ A clear distinction must be made between trading income and passive income
ā€¢ It is possible that smaller companies will delay the distribution of profits so as to delay the payment of Income tax or even to eliminate it altogether by converting it into a future capital gain or gift. If this happens a surcharge on undistributed profits should be introduced. Such a measure is not a back door means of increasing the headline rate. Rather it is an ant avoidance measure only.
ā€¢ Tax based incentive schemes such as BES and urban renewal should be rigorously assessed in terms of their effectiveness in stimulating development and employment. Tax shelters of this kind cannot be justified if they do not bring about development which would not otherwise have happened.
ā€¢ We must continue to tackle tax evasion by Irish taxpayers but we must also be clear that Ireland should not be used as a haven for those looking to evade taxes in the countries where they are tax resident.

Notwithstanding the planned reduction in corporation tax, there is still scope for further targeted reductions in business taxation. The tax system should be used to encourage greater financial participation by the workforce in larger companies. The SAYE scheme introduced in the 1999 Finance Bill was a start but the take-up has been disappointing. We must look again at incentivising share option schemes. However, such schemes must be used as a means to bring about broad based participation rather than simply as a way of paying managers larger salaries.

There is also a role for tax incentives in encouraging the use of clean fuel and clean technology.

There is a significant measure of consensus between the political parties in relation to the taxation of profit. This is an unequivocally good thing. It is important that business should know where it stands. For our part we will contribute to the creation of a stable and productive environment into the future.

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