Irish Times 29/03/13

The previous post on EU corporation tax revenues reminded me of an article for The Irish Times that was published in the Friday business section about a month ago.  I don’t think it was available online and was based on this post.  Here is a scan of the piece and the text is reproduced below.

Increasing headline rate of corporation tax will do little to unravel ‘Double Irish’

Ireland's headline rate of corporation tax is 12.5% despite some pressure to increase it.  Such pressure seems to have been successful in getting Cyprus to increase its corporate tax rate as part of its EU/IMF programme and now only Bulgaria has a lower corporate tax rate in the EU than Ireland.

However, it is not necessarily the headline rate but the calculation of the tax base that is the most important feature of the Irish corporate tax regime.
Recent data published by the Revenue Commissioners show that, in 2010, companies in Ireland reported an aggregate gross profit of just over €70 billion. On these profits, companies paid €4.2 billion which gives an average effective tax rate of 6%.

Corporate Tax Revenues

The release yesterday by Eurostat of some tax revenue statistics rekindles the debate of whether Ireland is/is not a “low-tax economy”.  With receipts of 28.9% of GDP (35.4% of GNP) Ireland is below both the EU27 (38.8% of GDP) and EA17 (39.5% of GDP) weighted averages.  One tax that attracts attention is the Corporate Income Tax. 

At 12.5%, Ireland has the third-lowest headline rate of Corporate Income Tax in the EU.  Only Bulgaria and Cyprus are lower (and as part of the recently negotiated “rescue” programme Cyprus has committed to raising its rate to 12.5% leaving only Bulgaria at 10%).

This clearly supports the “low-tax” hypothesis.  But looking at Corporate Tax revenues as a percent of GDP paints a somewhat different picture.

The presence of countries with large financial sectors relative to the GDP is notable.  But the fourth member of that group is not at the top with them. 

Using this approach Ireland is pretty much an average taxer of corporate income.  So which is it?  Both sides in the “low-tax” debate can provide support for their position.

One determinant of the latter ranking is obviously the amount of corporate income in the country.  A graph from an earlier post gave the Gross Operating Surplus of the Corporate Sector as a proportion of GDP.

Relative to GDP there is more corporate income to tax in Ireland than in all but one EU country.  Even with a low rate this alone could push Ireland into mid-table in the previous chart.

With this in mind we can calculate a crude ‘implicit tax rate’.  This is akin to an average effective tax rate.  In the chart below it is simply Corporate Income Tax Paid divided by the sum of Net Operating Surplus and Net Mixed Income.  The 2011 figures are missing for five countries (Bulgaria, Greece, Malta, Portugal and Romania ) but the remaining data produces the following chart, where the EU27 and EA17 are simply the unweighted arithmetic averages.

The missing countries are unlikely to alter the result.  Here it can be seen that Ireland is a “low-tax” country on corporate income.  The implicit rate in France is almost four times greater, which may go some way to explaining the pressure applied to have the Irish headline rate changed as part of the rescheduling of Ireland’s loans from the EU in the summer of 2011.  The other half of the “Double Irish” – the Dutch Sandwich – shows up with the Netherlands also being a low-tax country for corporate income.

The position of Cyprus seems incongruous.  It has (for the time being) the joint-lowest headline rate of corporation tax in the EU but has the highest implicit rate.  This is confirmed by the implicit rate calculated by Eurostat (see Table 86 on page 257 (pdf page 259) which is reproduced below). 

The above implicit rates are different to Eurostat’s because missing data mean Ireland is excluded from the Eurostat table but the relative ranking is generally the same for the countries included in both.  The difference is mainly due to the treatment of dividends with dividends paid excluded from the calculation of corporate income (dividends are included in the tax base for the corporate income tax but it is done on a withholding basis).  The methodology used by Eurostat and their results for the implicit corporate income tax rate are below the fold.

GDP and International Comparisons

It is frequently stated that Gross Domestic Product (GDP) figures for Ireland are not suitable for international comparisons because of the distorting effect the presence of MNCs here and their use of tax arbitrage activities.  Gross National Product (GNP) is sometimes provided as an alternative (though a hybrid is probably best).

GNP is GDP plus net factor income from abroad (the flows of wages, rents, interest and profits into and out of a country).  The outflow of MNC profits means net factor income is negative for Ireland and GNP is less than GDP.

This can easily be seen using data from Eurostat.  Here is a chart of Gross National Income (GNI) as a proportion of GDP for 2011.  GNI is GNP plus net transfers from abroad (the flows of foreign aid, EU contributions/subsidies and other transfers).  GNI is largely the same as GNP.

For most countries the difference between GNI and GDP is small.  Ireland and Luxembourg are clear outliers.  International comparisons based on GDP (such as tax revenue statistics) do not take this into account.

Here is a similar chart but this time from Eurostat’s Institutional Sector Accounts.  This shows Gross Disposable Income of the household sector as a proportion of GDP. (Data for Malta and Bulgaria is not available).  Gross Disposable Income of households is

1. Self employed profits + net property income + wages earned = Gross Income
2. –  taxes paid – social contributions + social transfers = Gross Disposable Income 

Again, Ireland is towards the bottom of the chart but it is no longer in a small group of outliers.   It is difficult to determine the reasons for the relative rankings in the chart.  That is not the purpose and the reasons are manifold.  There may be something to the ranking but I’m not sure.

The purpose is simply that while some dislike the use of GDP in an Irish context because of the relative gap to GNP, maybe there are some in other countries who dislike GDP because it does not reflect the relative disposable income of their household sectors.  National and Sectoral accounts have something for everyone.

[I should be noted that Household GDI is 66% of Irish GNP which is bang on the EA17 average as a % of GDP.]

Finally here is Gross Operating Surplus of the corporate sector (financial and non-financial corporations) as a proportion of GDP.  Gross Operating Surplus is gross value added less wages paid less production taxes.

10-year yield at 3.49%

Here is a snapshot of Irish government bond yields as calculated by this website (go to Live Quotes ⇒ Bonds ⇒ World Government Bonds and select Ireland).

Really?

Recapitalising the Banks

The issue of further capital for the banks has attracted some attention in recent days.  Prof. Brian Lucey had a piece in Saturday’s Irish Examiner and yesterday’s Sunday Business Post led with the headline ‘IMF warns of new €16bn black hole in Irish banks’.

The issue in the SBP piece is actually about the contingent liabilities of the State rather than the banks and the IMF have actually been making the same point for at least a year.  Here is a quote from the IMF’s fifth review issued this time last year with the same 10% of GDP (€16 billion) contingency.

Recognition of contingent liabilities would constitute a one-off increase in the level of debt. Ireland’s contingent fiscal liabilities relate to the covered banks, the IBRC, and NAMA. There is no expectation of losses from these entities as the covered banks have been recapitalized under PCAR 2011, the IBRC meets capital adequacy requirements, and NAMA received assets at heavy discounts—averaging 58 percent—to protect its viability. Under the standard scenario, the assumption of 10 percent of GDP in contingent liabilities by the Irish government would raise the debt-to-GDP ratio to 124 percent in 2012 and cause it to peak at 129 percent in the following year, but starting from 2014 debt would start to decline steadily, reaching 123 percent by 2016. However, the debt trajectory would be higher if the higher debt level resulted in higher interest rates on new market funding.

Although the level and composition of the contingent liabilities have changed over the year (NAMA Bonds, ELG guarantees, ELA Guarantees), and are subject to further change because of the IBRC liquidation, the IMF have not adjusted the 10% of GDP contingency in their scenario analysis.  It is not clear that they have given this issue much consideration recently.

In fact if we go all the way back to the IMF’s first review (May 2011) we find this graph in the annex on public debt sustainability (page 41).

And even before November 2010, the IMF included a ‘one-time 10% of GDP contingent liabilities shock’ in their debt sustainability analysis.  Check out page 37 of the Article IV Report on Ireland published in June 2009.

So the IMF is not warning of a ‘new €16 billion black hole in the Irish banks’ but the broader question still stands:  will the Irish banks need more capital?  Maybe or maybe not.  When Craig Beaumont, the IMF Mission Chief to Ireland was asked as part of the conference call on the publication of their latest report on Ireland (the ninth review) he was non-committal as can be seen below the fold.

Yield Curve

This site gives a snapshot of Irish government bond yields at different maturities.

Net Income changes since 2008

Here is a summary table of changes to net income at different gross annual incomes since 2008.  There is two figures for 2009.  The first corresponds to Budget 2009 introduced in October 2008 and the 2009* figures are the result of the Supplementary Budget introduced in April 2009.

All the figures are derived from this tax calculator which is the source of any errors and omissions.  The figures are based on a single, private-sector, PAYE worker aged under 65 who does not have a medical card.  No allowance is made for pension contributions, medical expenses or the like.  The table is merely to highlight some of the relative changes that have occurred in net pay.  Net pay is the starting gross figure in each column after the deduction of Income Tax, the Universal Social Charge (or the Health and Income Levies as appropriate) and PRSI.

As can be seen a worker on €15,000 has seen their net pay fall by €399 as a result of the introduction of the USC in Budget 2011.  This represents a drop of 2.7%.  The reductions increase through the income distribution.  At an income of €250,000 the reduction is just over €20,000 leading to a 13.3% fall in net pay. 

Around two-thirds of this reduction resulted from the measures introduced in the April 2009 Supplementary Budget.  The changes were a reduction in the thresholds and a doubling of the rates for the Health and Income Levies as well as an increase in the (now abolished) PRSI ceiling.  Some details of these changes are here.  The Income Levy had only being introduced the previous October and the two levies were subsequently merged into the Universal Social Charge in Budget 2011.