The future of a whole generation is at stake
The key questions on reducing corporation tax are 'Will it work?' and 'Can we afford it?' The answer to both is a resounding yes, writes Sir George Quigley
Two points are absolutely key to a reduction in the rate of corporation tax. The first is: will it work? Will the addition of a low corporation tax rate to the policy mix for stimulating investment deliver additional jobs?
To say that it would not means:
- rejecting all the abundant global research evidence showing the positive impact of corporation tax reduction;
- denying the Republic's success in attracting foreign direct investment (FDI) and the vital role which the Republic's Industrial Development Authority attributes to the low tax rate, and;
- supposing that Northern Ireland has not got what it takes to capitalise on the huge new competitive advantage which a low tax rate would provide.
The view that the benefits of a low tax rate manifested themselves in the Republic only in the 1990s with the emergence of the Celtic Tiger flies in the face of the evidence. In the early 1980s, FDI from the US was boosting the Republic's manufacturing base at over 10 times the rate for Europe as a whole. And this when the Republic in terms of macro-economic health, infrastructure, telecommunications was far from ideal as an investment location.
A highly respected economist in Dublin has stated flatly that the growth in international financial services (now employing some 25,000) is primarily due to the extension to this sector of the rate of tax initially applied to manufacturing. There is no substance in the assertion that EU rules would prevent Northern Ireland using the new 12.5% rate to attract financial services.
Without a powerful new policy instrument, the outlook for Northern Ireland is one of sustained economic disadvantage relative to the UK average. DETI's Economic Advisory Group estimates average annual job growth a decade hence as just over 600, compared with over 5,000 with corporation tax reduction. Even the group's projected job growth of some 60,000 by 2030 (based on modest assumptions) would build up to the injection of at least £1.5bn of spending power into the local economy from wages alone.
Northern Ireland desperately needs a growth strategy. Sooner or later the Selective Financial Assistance we have hitherto used to attract investment will be disallowed by Europe and, in the absence of a tax incentive, Northern Ireland will be going naked into the global investment market.
It is disturbing to hear low tax described as a gamble. We must not gamble with Northern Ireland's future. Policy changes must be evidence-based. The case for lowering corporation tax passes that test with flying colours.
The second key point is: can we afford it?
Statistics are always boring, but too many figures have been bandied about which tell only part of the story. The net cost could be a fraction of that usually cited.
The loss in revenue from the existing tax base here is the main determinant of the amount by which our budget would have to be reduced under the Azores Rules. Firm data still having to be obtained, the Treasury provide two 'illustrative' estimates. For year five, for example, these are £225m and £270m. These take no account of the effect of disapplying the 12.5% rate (as in the Republic) to non-trading profits. The Treasury estimates that doing this could reduce these figures by up to £85m.
Another cost is readily eliminated if the Executive takes steps to protect itself against exploitation of the low tax rate. This cost would arise if companies straddling the Irish Sea were allowed to pad profits declared in Northern Ireland. However, under globally accepted principles, a decision could be taken to apply the 12.5% rate only up to the share of the UK profits which is the same as the proportion of UK staff who work in Northern Ireland.
The other cost identified by the Treasury arises if it loses revenue because unincorporated businesses incorporate to take advantage of the increase in the differential between income tax and corporation tax rates. Given the existing substantial differential, the impact of any further increase in incorporation rates seems unlikely to be significant.
The Treasury document also provides estimates of specified 'pluses' (of the order of £100m) which will become available. When these are also taken into account, the estimate for net cost in Year five works out at either £90m or £130m, depending on which of the figures above for lost tax revenue is used. Moreover, these net figures include the full and likely to be hugely inflated Treasury figure of £50m arising from the tax-motivated incorporation issue mentioned in the previous paragraph. If the tax cut is phased in over three to five years, the cost should be entirely manageable.
We are at a crossroads. Do we let down the next generation and condemn Northern Ireland to a mediocre economic future as the permanently lagging region of the UK and with opportunity denied to our superb human potential and an increasing and debilitating brain-drain? Or do we go for it and, over the next 20-25 years, create a model for what can be done by a society coming out of conflict, confident in its abilities and abounding in creative energy?