Ideology and the Corporation Tax Debate

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As the Scottish independence referendum approaches, most polls and observers suggest that the Yes campaign will just fall short but at the same time secure of greater devolution to Holyrood. Against this backdrop, Northern Ireland Finance Minister Simon Hamilton has given the strongest indication yet that the Tory-led government is prepared to hand Stormont the power to reduce corporation tax for the region. The relative absence of a debate around this issue in the Assembly is a reflection of the consensus between all five Executive parties’ on cutting the tax. Only the Green Party has voiced opposition to a reduction in the headline rate, while the local media has proved unable or unwilling to facilitate a serious discussion about its merits and demerits.

It is not surprising that the UUP and DUP are giving this proposal their uncritical support. The former is a local embodiment of Toryism with a tendency for highly conservative social views. The latter gives representation to an aspiring middle and petit bourgeoisie and with every new scandal that transpires the stench of shysterism emanating from the party grows stronger. Both purport to represent large sections of the Protestant working class, yet have enthusiastically welcomed the prospect of introducing welfare reforms that will remove up to £750m annually from the local economy. Not only will these cuts hit Northern Ireland harder than other regions of the UK, but disadvantaged areas are on course to suffer the biggest loss per adult of working age.1 The two Unionist parties are concerned that Stormont may lose approximately £100m this year in fines for its failure to introduce welfare reforms, but are prepared to countenance the much more devastating cut that anything close to full implementation of the Welfare Reform Bill will bring about. This says something about the ideological position of mainstream Unionism and its contempt for the working class.

The increasingly polarised nature of the welfare reform debate is an apt demonstration of how Sinn Féin’s electoral success presents an opportunity and a problem for the party. By adopting an austerity-critical approach in the South, it has managed to capitalise on working-class disenchantment with a toothless Labour Party and emerge, along with socialists and independents in the Dáil, as the most vocal opponents of Fine Gael’s class war. At the same time, there is pressure on the northern Executive to introduce Tory cuts in the manner of a regional council. It is widely believed that, with the support of senior figures such as Alex Maskey and Eoin Ó Broin, Gerry Adams intervened to ensure that his colleagues in the North reversed an earlier decision to endorse parts of the Welfare Reform Bill. Various media reports suggest that this is the reason for Leo Green’s acrimonious departure from Stormont, where he held the position of key Sinn Féin strategist.2

Since then, Adams has come out definitively against welfare cuts, asserting that the republican movement’s natural inclination is to resist the Tory administration’s ‘attack on the most vulnerable, the sick, the disabled, those out of work because of Westminster’s policies, and those on low incomes’. He has rejected accusations that this newfound opposition to welfare cuts is motivated by populism and political expediency, insisting that the 2016 general elections do not factor into the equation.3The problem with this is that Sinn Féin’s record as the DUP’s coalition partner calls into question its ideological commitment to anti-austerity politics and to challenging the neoliberal consensus. As the responsible party of government, Sinn Féin has overseen the closure of Belfast City Hospital A&E, the introduction of vampiric PFI/PPP schemes, the installation of water meters in new-build homes, and voted in favour of the Public Sector Pensions Bill as well as the June monitoring round, which took £77.9m out of the Executive’s annual budget. Radical alternatives, for example presenting an illegal budget or withdrawing from the Executive and joining the labour movement in protesting against all Tory cuts, appear to have been discounted at this stage.

Progressive taxation is a cornerstone of Sinn Féin thinking in the South, featuring heavily in alternative budget submissions and election manifestos. However, the policy of seeking ‘a common VAT regime, a harmonised income tax and corporation tax’ lays bare a fundamental contradiction at the heart of its project.4 Realistically, the only prospect of achieving a ‘harmonised’ corporation tax rate is through the devolution of tax raising powers to Northern Ireland and a levelling down to the headline rate of 12.5 percent paid (in theory) by companies based in the South. There is abundant evidence to suggest that this could be one of the most cataclysmic economic adjustments in Northern Ireland since the ceasefires.

To begin with, the respected economist and tax expert Richard Murphy has presented a number of strong objections on behalf of the British Trade Union Congress (TUC) and Irish Congress of Trade Unions (ICTU). First, any attempt to introduce a reduction unilaterally is likely to fall foul of EU legislation. Second, northern policymakers fail to understand that what makes the South such an attractive prospect for ‘investment’ is not necessarily its corporation tax rate, but its relaxed tax regime more generally. This is geared towards the financial sector and enables a number of large multinationals to pay little or no tax. Membership of the Eurozone also provides a gateway to the single European market, which Northern Ireland cannot offer at present. Third, lowering the corporation tax rate necessitates a departure from the UK tax system, which, in the unlikely event that Westminster makes such a concession, could also see the introduction of significant barriers to trade with Britain. Finally, it is estimated that, in addition to the considerable administrative burden that the northern government will inherit, the cost in terms of lost subsidies to match lost tax revenues will amount to something in the region of £300m per annum.5

These arguments are supported by diverse sources. PricewaterhouseCoopers (PwC), hardly a bastion of alternative economics, puts the annual financial shortfall at £280m and estimates that it could take decades before this is recouped in the form of private sector investment. PwC is concerned that the Executive has overestimated the role of corporation tax as an investment location driver and that small, indigenous businesses are unlikely to benefit even in the best case scenario. Foreign investors based in the UK have ranked corporation tax 17th in a list of investment drivers, prioritising instead ‘language, culture and values; infrastructure; skills; and proximity to markets’. This explains why, despite a corporation tax rate of 26 percent, Sweden has attracted FDI in excess of the European average, while a number of Eastern European countries with corporation tax rates closer to 10 percent have attracted much lower levels of investment.6 A 2011 study by the OECD confirms that tax rates and labour costs are of ambiguous importance in determining levels of investment by firms operating in a number of productive industries. The recurring theme that emerges is that the OECD identifies a number of other important location determinants: market proximity; access to an educated and skilled workforce; the existence of high quality infrastructure; and the availability of public and government knowledge centres.7 Whether Northern Ireland possesses any of these attributes in sufficient strength is highly debatable.

Donagh Brennan has found that laudatory references to Irish example are predicated on a flawed reading of the evidence. Most significantly, he debunks the oft-repeated claim that reducing the headline corporation tax rate has historically attracted greater investment to Ireland, and demonstrates that the introduction of lower flat rates has more often preceded a real decline in FDI. The effect on job creation in the productive economy is negligible, while the quantity and quality of jobs created by foreign-owned firms in the financial sector does nothing to justify the generous tax breaks offered by the state. Whilst the 12.5 percent rate of corporation tax acts as Ireland’s ‘for sale sign’, reducing the tax base available for public expenditure, it is the IFSC’s tax haven qualities that sees the exorbitant profits of large multinationals flow through a postcode in Dublin without any discernible benefit to the Irish economy.8

Despite this evidence, it would be a mistake to think that the type of rentier capitalism described above is not regarded as an attractive model for Northern Ireland. Alas, the political class, economic commentators and sections of the media regularly greet the announcement of job creation in the financial and legal services sectors like clapping circus seals. The significant cost incurred by Invest NI in the form of subsidies does not seem to register,9 nor is it deemed problematic that the jobs may be linked to the unsustainable business of speculation. Thankfully, in the short term, the Executive is unlikely to assume the necessary powers to promote the same level of financialisation and speculation that has taken root in the South. However, the impending cut to corporation tax, combined with the prioritisation of finance, insurance and real estate, is a sign of Northern Ireland’s ‘double transition’ from conflict to peace and from social democracy to neoliberalism.10 The allure of the get-rich-quick Celtic Tiger model has proven too much for northern politicians and policymakers to resist,11 while the harsh lessons of the shitstorm that emerged out of it are slow in being digested.

The cut in corporation tax alone has the potential to instigate a race to the bottom and to devastate working class communities that are already suffering extreme deprivation, a high risk of physical and mental health, abnormally high suicide rates, falling incomes, child and adult poverty, social exclusion, physical dereliction, and high levels of unemployment and benefit dependency.12 Because of the Azores judgement, which states that a central government cannot subsidise tax cuts by a regional administration, the £300m gap in public finances will have to be plugged with cuts to public expenditure, resulting in the loss of public sector jobs and/or downward pressure on wages. It is difficult to envisage this having anything other than a detrimental effect on the health service, for example, which employs 10 percent of the total workforce and is already in crisis, struggling to cater for Northern Ireland’s ill and needy. With the threat of sectarian conflict still looming, Northern Ireland can ill afford another hit to living standards and the social instability associated with these deprived conditions.

And so we return to the role of ideology. For the Tories of the North, the primary motivation for reducing corporation tax is the desire to see the region drawn further into the world of neoliberalism, austerity and speculative economics. For Sinn Féin, the policy of ‘tax harmonisation’ is tied to the nationalist political strategy of inching towards Irish reunification. Everything, including the ill-conceived Border Poll campaign launched in republican strongholds, is geared towards the spectacle of 2016, when the party is likely to enter into coalition with Fianna Fáil and therefore gain office in both parts of the island. The creation of a de facto all-Ireland economic and political framework is what makes a flat rate of 12.5% so attractive, though this blinkered nationalism involves what Orwell describes as an ‘indifference to objective truth’, a neglect of politically inconvenient economic evidence.13 It also jars against the socialist rhetoric that Sinn Féin has deployed, effectively, to establish itself in people’s minds as a party of the working class majority. To paraphrase Conor McCabe, ‘I haven’t read all of Connolly’s works, but I don’t think low corporation tax is in there.’

It makes sense for Stormont pursue the devolution of fiscal powers in the interest of breaking its dependence on Westminster, but at what cost?

Notes

Image of the Citi offices in Belfast’s Titantic Quarter from the Titantic Quarter website.

Show 13 footnotes

  1. NICVA, The Impact of Welfare Reform in Northern Ireland (Belfast, 2013).
  2. Gerry Moriarty, ‘Former Sinn Féin official settles discrimination case against party’, Irish Times, 14 August 2014.
  3. Gerry Adams, ‘Welfare cuts a blow to Protestant and Catholic families’, An Phoblacht, 2 September 2014 (reprinted from the Irish News).
  4. Gerry Adams, ‘Gerry Adams Uniting Ireland speech’, Monaghan, November 2010, Uniting Ireland.
  5. Richard Murphy, Lowering Northern Ireland’s Corporation Tax: Pot of Gold or Fool’s Gold? (Belfast & London: ICTU & TUC, 2010).
  6. PricewaterhouseCoopers, Government Futures: Corporation Tax – Game changer or game over? (Belfast, 2011); Stevie Nolan, ‘Corporation Tax and Voodoo Economics’, Social Justice Review (Winter 2011), p. 12.
  7. OECD, Attractiveness for Innovation Locational Factors for International Investment (Paris, 2011).
  8. Donagh Brennan, ‘Ireland’s For Sale Sign: The 12.5% Corporation Tax Rate’, Irish Left Review, Vol. 1, No. 1 (January 2013), pp. 27-43.
  9. Lesley Houston, ‘Why legal eagles love roosting in Northern Ireland’, Belfast Telegraph, 28 August 2014.
  10. Conor McCabe, The Double Transition: The Economic and Political Transition of Peace (Belfast, 2012).
  11. ‘The Irish economy: A model of success – What central Europe can learn from Ireland’, The Economist, 14 October 2014.
  12. Institute for Fiscal Studies, ‘Child and working-age poverty over the next decade: an update’, IFS Briefing Note BN144 (London: 2014); Paul Nolan, Peace Monitoring Report No. 3 (Belfast, 2014); Kellie O’Dowd, ‘“Peace will bring prosperity”: Northern Ireland’s big lie?’, OpenDemocracy, 9 June 2014, New Policy Institute & Joseph Rowntree Foundation, Monitoring Poverty and Social Exclusion in Northern Ireland (York: 2014); Mike Tomlinson, ‘Legacies of the Troubles’, Poverty and Social Exclusion UK.
  13. George Orwell, ‘Notes on nationalism’.
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