Corporation Tax - The Deal Breaker?

Recently, much fevered and fearful discussion has taken place over the seeming suggestion by Olli Rehn, European Commissioner for Economic and Monetary Affairs, that Ireland might have to relinquish its relatively low corporation tax rate of 12.5%, and adopt a more continental tax rate. This, it is claimed, will scare away many of the foreign Multi-National Corporations (MNC) which have established in Ireland.

Despite the fact that, as Central Bank Governonr Patrick Honohan noted on Vinnie B's show on Monday, Ollie Rehn never actually threatened our corpo tax rate ("Ireland can no longer be a low tax economy" does not mean higher corpo tax- he may be referring to the inevitable rise in our income tax) the kerfuffle that ensued following Rehn's comments did give me pause for thought - would we really be screwed if we raised the corpo tax rate?

Jaysus, would we ever! By way of illustration, let me tell you about a certain US MNC, operating in a realtively high-tech sector, which I am dealing with as part of my day job. Currently, I'm "on safari" at their facility in the southwest of the country, and being on the ground with the exporting economy has been very revealing. Business for this MNC is flying - they have just hired a whole new bunch of people, and they are planning to seriously refurbish their premises. But what's astonishing is the make-up of their workforce - 75% of the staff employed in their facility are East European.

At first, I assumed this was purely a result of Poles, Slovaks and Czechs being prepared to work for less. But today, in a coffee break conversation with the Chief Financial Officer, I was told that this preference for labour from beyond the Carpathians is about more than merely sourcing low-cost workers. The fact is, there just aren't that many Irish people who are able to do the work - we don't tend to have the right skill set. So, when people hear about Irish jobs (like in Dell in Limerick) heading off to Eastern Europe, it isn't just about the hourly pay rates in a given industry - it's also about the fact that the Irish have not been studying the right subjects or learning the right skills.

In this context, it's clear just how vital our low corpo tax rate is - we don't beat the competition in cost, nor in skill-sets; we can only offer foreign direct investors in Ireland a low tax rate that won't eat into their profit. At the moment, large chunks of the native Irish workforce can't get into the exporting sector - but at least the Poles who earn their money in Limerick, Clonmel or Leixlip spend their money in Irish shops, rent Irish houses, and save in Irish banks. If our corporation tax is raised we can kiss even these secondary benefits of exports goodbye.

The British Are Coming! The British Are Coming...

...with a lower corporation tax rate for Northern Ireland. That loud banging you can hear is the last nail being hammered into the coffin of the Republic's economy. Currently, the North has the same rate as the rest of the UK, i.e. 28%, versus the Republic's 12.5%. I think it's safe to assume that the Stormont administration will push for a rate as close to the Republic's as possible, and London will give it to them, as hopefully it will get private sector business in Northern Ireland moving and reduce the almighty strain the 6 counties place on the national purse.

So then, let's see, we will have two economies competing with one another, with comparable corporation tax rates, one with a minimum wage of £5.80 per hour , the other with a minimum wage of €8.65 per hour (£7.20). Plus, energy is cheaper in the North.

Hm, I wonder who will win?