Wednesday 17 October 2018

Happy birthday low corporation tax

It's 50 since we introduced it and now we're enjoying its benefits

NOVEMBER 2006 marks the fiftieth anniversary of the emergence of low corporation tax as the key element of Ireland's industrial development strategy.

This may come as a surprise to many people. Popular history ascribes the turnaround in Ireland's economic fortunes to TK Whitaker, the youngest-ever Secretary of the Department of Finance, whose galvanising report on Economic Development appeared in 1958, and to Seán Lemass, who implemented elements of this new thinking when he took over from Eamon de Valera as Taoiseach in 1959.

But this account overlooks the importance of the policy innovations of the second inter-party government of 1954-57, particularly the introduction of Export Profits Tax Relief (EPTR) - the forerunner of Ireland's low corporation tax regime - in November 1956.

One link between the two key dates - EPTR and "Economic Development" two years later - is the appointment in 1955 of Dr Whitaker as Secretary of the Dept of Finance - the most powerful civil servant in the bureaucracy - at the spectacularly young age of 39.

He therefore oversaw the policies adopted in the following year. These would shape industrial policy and overall development strategy for the next 50 years. The IDA had already been established, in the face of Fianna Fáil opposition, by the first inter-party government, with a mandate to initiate proposals for the creation of industries and to attract foreign industrialists.

The second coalition government gave the IDA the power to offer industrial grants - hitherto employed only as a means of diverting new industrial activity to the less developed western regions - right across the country.

Of greater import was the introduction of EPTR, which allowed 50pc tax remission on profits earned from increased export sales. Besides the direct impact it had in encouraging increased export orientation on the part of domestic firms and triggering an inflow of new foreign firms, it also helped Fianna Fáil to finally ditch its ideological objections to foreign industry.

Upon returning to power shortly thereafter, Fianna Fáil expanded the tax remission on export profits to 100pc and eased the legal restrictions on foreign ownership that it had enacted in the 1930s. The senior Fianna Fáil figure, Kevin Boland, later wrote of his shock and bewilderment "to find that the principle of Irish ownership of industry, which was central to the Republican policy as I had always understood it, was gone".

The ideological shift occurred because the success of EPTR was so immediately obvious. Manufactured exports, which had remained stagnant for years, grew by 18pc in the year following the introduction of EPTR and doubled between 1956 and 1960; manufacturing output and employment bottomed out in 1957 and began to grow inexorably from then, and national income, recovering from the balance of payments crisis of the mid-1950s, turned around the following year.

Ever since, one of the most notable features of the Irish economy has been its success in attracting foreign direct investment (FDI). Foreign multinationals account for one out of every two jobs in Irish manufacturing and one out of every five in services - far higher proportions than recorded elsewhere in Europe or, indeed, in most of the world.

The inflows of FDI associated with the Single European Market and the global high-tech boom of the 1990s were in turn one of the driving forces behind the emergence of the Celtic Tiger economy.

Underlying Irish success in the FDI stakes is the country's low rate of corporation tax. Other factors are also important, of course, including our English-speaking environment and Atlantic location, which provides a bridge "between Boston and Berlin".

EU membership is crucial, as are the Western European standards of governance that generally prevail. (The foreign-dominated industrial sectors have been insulated from the kind of behaviour that has attracted the attention of the Tribunals and Inquiries of recent times, which have been focused on areas such as property, retail banking, beef and domestic telecommunications).

In the words of Padraic White, former managing director of the IDA, the low rate of corporation tax represents "the IDA's unique selling point, giving Ireland a critical advantage in winning new investment. The tax incentives remain to this day the unique and essential foundation stone of Ireland's foreign investment boom."

The evidence is clear that this foundation stone was laid before the policy innovations of Lemass and Whitaker had time to come into play. Dr Whitaker himself has generously observed that Gerard Sweetman, the Fine Gael Finance Minister who implemented the changes in 1956, was "singularly unfortunate in that his government was overthrown before the ideas which he implemented could bear fruit". It is fitting that the 50th anniversary of this key innovation should be remembered this month.

Frank Barry is a professor of economics at UCD

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