Irish News op-ed piece on Varney Review

Strange. When is a conclusion not a conclusion? When it's in a report by Sir David Varney! It's hard to understand the outcome of the Varney review on Northern Ireland Tax policy, which concludes that there is no case for special tax arrangements for Northern Ireland, but then proceeds to a second review to examine incentives for growth.

Let me be clear from the outset, the organisation I represent, the Institute of Chartered Accountants in Ireland, has made the case to Sir David and other decision makers of the need for a reduced rate of tax for companies in the North, comparable with what's available in the South. We do this because we know it's a vital element in stimulating economic growth and productive job creation. And we know this because we've seen it work first hand. So I was always going to be disappointed if Sir David rejected the arguments for it. However, even if I wasn't looking at the report from this angle, I'd be disappointed. It's quite hard to see how the report advances the cause of Northern Ireland in any way.

There is consensus on the need for economic development in Northern Ireland, and to reduce its dependence on public funding to support the economy. There's only two ways for Government to support an economy. One is by direct grant aid, the support of public sector employment and investment. The other is through tax policy, taking less out directly, partially in the hope that more may be collected indirectly. Sir David's apparent conclusion is that in tax policy terms, everything is just fine.

I'm not going to bewilder you with statistics (take a look at the report itself for that) so I'm going to confine my observation to pointing out that money, like people, tends to go where it's treated best. All other things being equal, businesses establish and prosper where the tax take is light, and Northern Ireland is more than equal in so many key areas with its educated English speaking workforce, stability, communications and legal systems. Businesses, though perhaps taxed lightly themselves, employ people, who themselves are taxed on their earnings. People are also taxed on what they spend – on VAT, on Customs and Excise, on Stamp Duty when they buy properties. It all becomes a virtuous circle, and everyone benefits, even the tax man. Such was, and indeed is, the case in Ireland where the reduction in corporate tax rates was more than compensated for in increases in the actual amounts raised from all other taxes, including corporation tax itself.

A reduced rate of Corporation Tax isn't really a business incentive. Instead it's a rethink on tax policy, a decision by Government to allow businesses to earn and prosper without undue levy, and reap the rewards of greater employment and greater spending power within the community at large. Businesses are not stand-alone, they operate within a chain of customers and suppliers. A universally applied reduced rate allows every link in the chain to be strong.

There is one caveat – the rate must be targeted at real commercial activity – manufacturing, service provision, selling. In Ireland, income from investments and rental surpluses is not eligible for the reduced rate.

There's no such creativity evident in Varney. He did not rise to the challenge of creativity, but there may be a small ray of hope. The report does acknowledge that “A move to a differential corporation tax rate for Northern Ireland would be possible in principle.” What is now required is the will to realise this possibility.

Belfast Telegraph – the impact of a lower CT rate in Ireland

What happens when you reduce the rate of Corporation Tax? Well, in Ireland's experience, it's not what you'd expect. Few initiatives have underlined the difference between economic theory and economic reality as the progressive reduction of a tax rate from 50% to its ultimate level of 12.5% in 2003, and this rate has applied since.

Firstly, and most notably, the corporation tax take increased! Outside of a recession, you'd expect tax takes to increase year on year, but in our case, the increase was dramatic. Since we started the reduced rate adventure in 1996, corporation tax revenues have gone up by an average of 14% per annum, seemingly immune from the vagaries of recessionary and inflationary influences. The corporation tax yield is an excellent barometer of underlying corporate activity. The essence of a low corporation tax rate is that it provides the incentive to earn. All other incentives, tax based or otherwise, create an incentive to spend. This perhaps is the difference which makes the low rate effective in stimulating growth.

Secondly, other tax incentives become far less costly for the Exchequer. It's almost trite to point it out, but it's frequently overlooked. Halve the tax rate, and you halve the cost to the Exchequer of all tax allowances and deductions. This also contributed greatly to yields.

Rather than focus on corporate activity per se, the taxing emphasis has moved towards catching cash when it leaves a company. In Ireland, benefits in kind from companies – company cars, cheap accommodation and the like – have become difficult and costly in tax terms. A withholding tax on dividends is universally applied, with no corresponding credit to the company. New anti avoidance tax law was introduced to make it all but impossible, short of going into liquidation, to take cash out of a company and not pay income tax.

But how have companies responded? Very well, as it happens. That most elusive of economic generators, Foreign Direct Investment, continues to grow. Perhaps more significantly, even as our cost base increases, multinationals tend to remain in Ireland. Indigenous enterprise has also prospered, and has become the main driver of job creation.

It's easy now to forget that almost every conceivable form of tax relief was tried in the Republic before we arrived at the winning formula of a universally available 12.5% rate. We gave businesses tax breaks when they increased their stocks, apparently ignoring that money gets made when stock is sold. We threw additional tax allowances at entrepreneurs when they bought new machinery, even when it was purchased with grants. We let exporters make profits tax free, and then let them pay tax free dividends out of those profits. These worked, but only to a point.

A low Corporation Tax rate isn't just another tax incentive. Rather, it's a fundamental change in tax policy. It's a decision to tax money when it is spent, rather than when it is earned. It's a headline incentive for indigenous companies planning expansion, and for multinationals planning foreign investment. Other tax incentives aren't alternatives. In our experience, they just modify the status quo.