Northern Ireland Economic Reform Group Report on Corporation Tax
ICAI Follow Up
Mr Shane McAteer
Committee for Finance and Personnel
Committee Office, Room 419
Parliament Buildings
BELFAST
13 March 2008
Dear Mr McAteer
Institute of Chartered Accountants in Ireland briefing for the Committee for Finance and Personnel on 5 March 2008
I refer to your letter of 11 February last. I am very pleased that the Committee found our briefing to be informative.
You requested further information concerning:
- ICAI concerns with the assumptions used in the economic models in Varney’s first report
- Evidence of how indigenous businesses in the Republic of Ireland have benefited from increased Foreign Direct Investment
which I will now attempt to address.
ICAI concerns with the assumptions used in the economic models in Varney’s first report
The Varney Review contains careful and well worked analysis of economic consequences. It is however based on a non-dynamic approach to the consequences of corporation tax reductions – that is to say it does not take account of any economic growth uplift as a consequence of reducing the tax rate. Sir David offers his reasons for this approach at paragraphs A.36 and following, which are based on economic theory.
We believe however that it is more relevant to have recourse to actual experience, as evidenced in the Republic of Ireland, rather than the theoretical approach. The actual economic evidence from the Republic of Ireland strongly indicates that a reduction in corporate tax rates strongly contributes to economic growth. Further, the economic literature from the OECD, and indeed from the Irish Department of Finance, suggests a direct correlation between increases in GDP and increases in tax revenue.
The decision by Sir David not to use the “Dynamic” model is fundamental to the economic conclusions he draws. If he is wrong, and we contend that he is, his economic analysis will underestimate the positive impact on tax yields of a rate reduction, and will overestimate the costs of rate reduction measures.
The Committee may already be aware that the Confederation of British Industry published a significant consultative document on UK tax policy in recent days (and since our presentation of evidence). This document, titled UK Business Tax: A compelling case for change argues strongly that UK tax policy evaluation should be based on the dynamic model. It also argues that the competitiveness of British business is increasingly compromised by the UK corporate tax system.
The evidence which ICAI is presenting on the economic consequences of corporate tax reduction is thus not a minority view prompted by self-interest.
Evidence of how indigenous businesses in the Republic of Ireland have benefited from increased Foreign Direct Investment
ICAI members have first-hand experience of the positive effects on all business from increased FDI. This experience is borne out by official statistics and reports in recent years, and we offer some key findings here.
The Irish development agency Forfas publishes annual comparisons of the development of both FDI entities and indigenous businesses in the Republic of Ireland in manufacturing and internationally traded services companies.
According to the Forfas Annual Business Survey of Economic Impact 2006:
Sales by FDI entities increased from €81bn in 2002 to €102bn in 2006. Over the same period, sales by indigenous enterprise increased from €23bn to €26bn. It is to be expected that the FDI sector would show higher increases, as new FDI investment by internationally established enterprises comes in to the country. Indigenous growth is on the other hand organic, deriving from existing business expansion or new business formation.
The key point here is that sales in this key area of economic activity increased for both indigenous and FDI businesses.
Another important measure is employment growth, which reflects real economic activity with positive social effects. Total employment in the economy has risen from 1.764m in 2002 to 2.095m in 2007.
Again to quote a Forfas Study published in March of this year, total full-time employment among Irish-owned companies in manufacturing and internationally traded services is virtually identical to total full time employment among Foreign-owned companies in the same sectors. Furthermore, both Irish owned and Foreign owned companies have shown almost identical levels of employment growth in the years since 1997.
Lastly, the growth in corporation tax yields from the FDI, manufacturing and internationally traded services is matched by the overall yields from all companies in the economy. Since 1999, this category has accounted for approximately 40% of total tax yields on a continuing basis.
This fact strongly suggests that the commercial success and capacity for wealth creation of indigenous business is bolstered by the markets provided by FDI companies for goods and services. Approximately 20% of sales by FDI companies goes directly into the economy, according to the latest Annual Report by IDA Ireland.
We therefore conclude that:
- Indigenous business prospers in tandem with FDI, and maintains its contribution to the Irish Exchequer
- A significant driver of indigenous business growth is the spend by FDI companies in the Irish economy
- Both indigenous industry and FDI companies retain their capacity to create and sustain jobs
I trust that this goes some way to answering the points raised by the Committee, and we will be happy to provide further information or explanations if required.
Yours sincerely
