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Corporate tax reliance leaves us 'highly vulnerable to the relocation of even one large company'

The ESRI has been looking at the impact Budget 2019 will have.

Image: Shutterstock/ptnphoto

THE IRISH EXCHEQUER’S reliance on income from corporation tax that is “highly volatile and concentrated among a small number of firms” leaves us highly vulnerable to the relocation of even one large company, the Economic and Social Research Institute (ESRI) has said.

The ESRI made the statement as part of its examination into the gains and losses from Budget 2019.

Paschal Donohoe’s announcement in the Dáil in October saw an increase in the entry point to the higher rate of income tax, a reduction in one of the USC rates, increases to social welfare payments and an increase to the minimum wage. 

The ESRI concluded that the provisions from the Budget provide a “small net takeaway from households on average”.

This comes in the form of an average reduction in households’ disposable income by 0.7%, compared to what would have happened had tax and benefit thresholds, excise duties and benefit payments risen in line with the forecast average wage growth.

In other words, the measures taken by the government will actually leave people slightly worse off when you compare it with how it would have been if the measures matched how wages are expected to rise. 

Lower income households are hit slightly harder under the provisions of the Budget (0.8%), due to the decision to freeze personal and employee income tax credits in cash terms, and to increase the maximum benefit payments by less than wage growth.

Higher income households will on average see a 0.5% reduction in their disposable income, as cuts to the USC and a rise in the income tax higher-rate threshold partially offset increases in overall taxation.

ESRI research officer Barra Roantree said: “Freezing personal and employee tax credits when prices and wages are rising amounts to a real terms tax rise, which take proportionally most from lower-to-middle income households.

Tax cuts in this budget were focused on the 25% of households that contain a higher-rate income taxpayer.

corporate tax hit

One area the ESRI notes that there was no increase to taxation despite the “strong economic case” was in duties on alcohol, motor fuel and carbon. 

On the lack of an increase to carbon taxation, it said: “Delaying taking action raises the prospect of large European Union fines, along with the size of future carbon tax increases that will ultimately be needed.”

In its conclusion, it notes the risks to the public finances currently facing the government.

The ESRI wrote: “As highlighted by the Irish Fiscal Advisory Council and the Parliamentary Budget Office, the Exchequer has over recent years become increasingly reliant on receipts from corporation tax, which are highly volatile and concentrated among 18 a small number of firms.

This leaves revenues highly vulnerable to the relocation of even one large company, changes in the international tax environment, or a large macroeconomic shock (such as a no-deal Brexit).

It suggests that the government should look to more stable sources of revenue in future Budgets.

Another risk it identifies is a the “tendency” from successive governments to announce current expenditure with much larger effects in the long-term. 

For example, the €361.6 million increase to welfare payments next year rises to €500 million in subsequent years. This, however, is not met by tax rises and “no provision has been made in department expenditure ceilings to account for these known costs”. 

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Sean Murray

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