In the run-up to the budget all manner of proposals are being put forward –tax measures, spending cuts. We debate what sacrifice this or that groups can make to bring us to the bail-out targets. There is no end of combinations and computations. But the one thing that is totally off the table – the one thing that we should never, ever mention – is what contribution the business sector can make to repairing the public finances. Pensioners, the unemployed, low-paid, families – we debate the different ways they can make continued sacrifices. But the business sector has been ring-fenced, protected, safe-guarded.
The following estimates what contribution, in terms of tax and social insurance revenue, the Irish business sector could make if it made the same contribution as the average business sector in the EU-15 – and how little Irish business actually does contribute.
Never mind nominal tax rates – it is the effective tax rate that matters; the percentage of taxation on profits when reliefs, allowances and exemptions are taken into account. Tom Healy, Director of the Nevin Economic Research Institute, has an important post on this subject – pointing out that there are different benchmarks in assessing the effective tax rate. For the purposes of international comparison, I will use two estimates: net operating surplus and net entrepreneurial income.
Net Operating Surplus: this traditional measure of profitability is the amount of value-added left to companies after payroll costs and consumption of fixed capital (decline in the value of fixed assets); in short, sales minus costs. This is from Eurostat – here and here:
Ireland, unsurprisingly, is at the bottom of the table. On this basis, the Irish business sector would have to pay an additional €6.7 billion into the Exchequer to reach the average of other EU-15 countries.
Entrepreneurial Income: this is probably the better measurement. The CSO describes it as ‘. . . a more comprehensive measure of corporate profitability’. Here is Eurostat again:
In this tabulation Luxembourg beats Ireland to the bottom (it’s worth noting that the EU’s investigation of corporate tax practices have targeted the three countries at the bottom – Netherlands, Ireland and Luxembourg). On this basis, the Irish business sector would have to pay an additional €5.5 billion to reach the average of other EU-15 countries.
To summarise this section – the Irish business sector would have pay between €5.5 and €6.7 billion just to reach EU corporate tax averages.
The second category through which employers contribute to public finances is employer’s social insurance (or PRSI in Ireland). Here there is more certainty as to the actual effective contribution rate.
Again, Ireland is a bottom-dweller, sharing this position with the UK. Employers’ PRSI revenue would have to more than double to reach the average of other EU-15 countries – an increase of €6.4 billion.
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If we were an average EU economy, if we had an average business sector, if we had an average balance of taxation revenue – then we should expect between €11.9 and €13.7 billion more in tax and social insurance revenue from the business sector. But we don’t have an average economy or business sector. The main problem is that much of the corporate profits that are taxed here are not generated here – they are ‘imported’ from other economies to take advantage of our low tax rate (but do not, under any circumstances, confuse this with being a ‘tax haven’ – it is merely ‘tax efficient’; and a gold star to anyone who can explain the difference).
In any event, we don’t ask the business sector to assist in the fiscal crisis. In fact, we give them even more subsidies. In the last budget there was an extension of the Employment and Investment Incentive, R&D tax credits, relief for start-up companies, and real estate investment trusts.
The Irish business sector is not a partner in the drive to repair our public finances. It exists outside and apart. Repairing public finances is for little people. Even when a small increase in the corporate tax rate –2.5 percent – and a small increase in employers’ PRSI – 1 percent – could, together, raise close to €1.5 billion; even when after such increases the Irish business sector would still be at the bottom of the corporate tax and social insurance tables; even this small contribution cannot be countenanced.
Now, how about cutting even more home helps. And those disability groups – they have more money than they know what to do with. And, of course, those darned social protection payments. Who needs the help of the business sector when there are so many who can take up even more of the burden?
Bring on Budget 2014.