The change of tone by the Government on the outlook for corporate tax is notable. Previously, ministers had relied on data from the Revenue Commissioners and a report by economist Séamus Coffey as indicating that the strong surge in corporate tax receipts in recent years was broadly sustainable. This is still the hope, certainly for the next couple of years, but Minister for Finance Paschal Donohoe struck a notably cautious tone this week, warning that the reliance of corporate tax receipts on a small number of companies did create risks.
The growth of corporate tax payments in recent years, and their concentration on a small number of taxpayers, are both striking. Corporate tax has almost doubled in the past three years and now represents 16 per cent of total tax revenue. The top 10 multinational taxpayers account for 37 per cent of corporate tax revenue – and this amounts to 6 per cent of all taxes collected in the State. As the department puts it: “The public finances are, therefore, exposed to firm- and sector-specific shocks, as well as to potential policy changes elsewhere.”
The Coffey report, published last year, does provide some reassurance. Multinational restructuring, allied with rising business profits, seems to have been a factor in pushing up tax receipts here in recent years. Coffey felt that the revenues should be sustainable over the next three years, though it was impossible to be definitive. As the department said in its report on tax trends published this week, the experience of recent years suggests that caution is nonetheless appropriate.
We know from the economic crash that basing ongoing spending plans on transient revenues is a recipe – sooner or later – for disaster. Then, taxed based on transactions in the property sector, such as stamp duty and VAT on new homes, collapsed. Together with the impact of the collapse on overall tax revenues, this left a massive hole in the public finances.
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Corporate tax revenues are unlikely to collapse so dramatically, but they could take a hit, either from some reversal in the fortunes of a few of the companies involved or the impact of changes in US or EU tax policy. A cooling in global growth over the next few years could also affect the growth of these revenues.
Against this backdrop, the message is clear. We simply cannot base new spending programmes on revenues that might come under pressure. There will be significant pressure to spend money on day-to-day and investment projects in the next few years – many of them worthy of more cash. But we need to be cautious, too, to keep our debt burden declining and create some room for manoeuvre in the years ahead. To end up having to cut spending and increase taxes again in the face of another slowdown would be unforgiveable mismanagement.