The price of falling EU corporation tax rates: €107 billion

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I noted a fascinating blog on Irish corporation tax this week. Written by Michael Taft of Unite, Ireland, he said:

According to Finfacts:

'Michael Noonan, finance minister, signalled in a statement last Thursday that his Department is preparing a report on the corporation tax rate that is expected to be ready by the end of March as part of a publicity offensive to counter claims that Ireland's effective rate (actual tax paid or provided for in an accounting period as a ratio of reported net income) is in low single digits.'

Apparently, the Government has ditched its previous claim that the effective corporate tax rate is 11.9 percent – when the study this was based on was shown by Dr. Jim Stewart to be defective as a comparator.  Now it needs a new study to substantiate an old claim (it helps that the Government has already predetermined the conclusion, now they just have to fill in the numbers).

What Michael Taft then went on to do was suggest what that true rate of Irish corporation tax might be, saying:

This blog has always endeavoured to assist the Government.   So I'd like to point the Government to some reasonably robust numbers.  It can use either Eurostat or its own Central Statistics Office.  Either way, they show Ireland has a low-low effective corporate tax rate.

One part of the equation – how much corporate tax rate is paid – is easy to determine.  What is more difficult to estimate is the level of profits.  Both Eurostat and the CSO use the category ‘entrepreneurial income’.  Eurostat defines it this way:

‘. . . net entrepreneurial income . . .  approximates the concept of pre-tax corporate profits in business accounting. ‘

The CSO defines entrepreneurial income as

‘ . .  a more comprehensive measure of corporate profitability.’

So, armed with this ‘more comprehensive measure of corporate profitability’, what are the effective corporate tax rates for EU-15 countries – combining both financial and non-financial companies?

Now what is staggering is how low those rates are, almost universally. But equally note that the three places in the EU most commonly considered to be tax havens are confirmed as such by this analysis, with staggeringly low rates of tax precisely because they use those ow rates to ensure profits are shifted into their jurisdictions form other places. As Michael notes, it's not chance that:

These happen to be the countries that the EU Commission is investigating for corporate tax practices.

As he also notes:

Back in 2000, the effective corporate tax rate in the Eurozone was 18.4 percent.  By 2011, this had fallen to 12.5 percent.  This may not seem like a lot but it is.  This is equivalent to approximately €107 billion reduction in Eurozone corporate tax revenue.  €107 billion.

Imagine if that revenue was available to the Eurozone:  less tax on labour, more expenditure on public services and social protection, higher investment in telecommunications, renewable energy, and education (let’s not forget that there are 76 million people in the Eurozone at risk of poverty and social exclusion).  That €107 billion would mean a significant boost to domestic demand which would, in turn, mean more prosperous markets for exporting firms to operate in.

Instead, there’s less of all that

Michael is right on all counts. The UK has heavily participated in this trend since 2010. We're all paying the price.