Thursday 29 April 2010

Is a 12.5% Corporation Tax rate possible in Northern Ireland?

Northern Ireland's political parties are almost unanimous in supporting a reduction in the Corporation Tax rate to 12.5% – for Northern Ireland only. The south has a 12.5% rate, of course, and the belief appears to be that this low tax rate above all other factors is what has helped the south to overtake the north economically. Ironically, even unionists support north-south harmonisation in this regard.

Would it be possible for a new British government to change the corporation tax rate in Northern Ireland only?

There are two factors that would come into play: political considerations, and legal considerations.

Politically, it would be extremely difficult for any British administration to make a specific case for Northern Ireland – and not for disadvantaged areas of Britain. While Northern Irish producers might claim that they are competing against southern producers, this is really only true on the island of Ireland, and even then they are only a small part of the competition. Why, for example, should Scottish producers trying to sell into Ireland be disadvantaged vis-à-vis Northern Irish producers? Why, indeed, should Northern Irish producers be given a clear tax advantage when they sell into Scotland? Ditto for Wales, and the north of England.

Any advantage given to Northern Ireland only would be extremely unpopular in other parts of the UK, and would be seen as unfair and discriminatory. Any British government that introduced such a measure would be handing a political weapon to the SNP, Plaid Cymru – and if it was done by a Tory government – to Labour. And there is no reason why Northern Ireland uniquely should be given such a leg-up – it is a backward region, of course, but not dramatically more backward than many others.

Legally, the situation is fuzzy. Corporation taxation is a national responsibility, but the EU is trying to move towards a consensus on the harmonisation of tax rates. In particular the EU is trying to stop 'harmful tax competition', which includes "tax measures (legislative, regulatory and administrative) which have, or may have, a significant impact on the location of business in the Union". The criteria for identifying potentially harmful measures include "an effective level of taxation which is significantly lower than the general level of taxation in the country concerned".

Although no binding rules are in place, all the EU Member States – including the UK – signed a Code of Conduct for Business Taxation in 1997 in which they undertook;
"… not to introduce new tax measures which are harmful within the meaning of this code. Member States will therefore respect the principles underlying the code when determining future policy … "

Given the clear Tory distain for 'Europe', it is not excluded that they would ignore mere 'codes of practice', but a corporation tax rate that applied only to Northern Ireland would be clearly designed to damage the economy of another EU Member State – the south. As a Member State the south has clout – and plenty of latent support in the EU (such is the advantage of having been a good member for 37 years). The Commission would support the south, the European Court would take a very dim view, and at political level (European Parliament, Council) the UK would be in the dog-house for blatantly breaking a code of conduct it signed up to.

And why would the UK want that amount of hassle? To suit whom? A small number of Northern Irish business owners who see an opportunity to make more profit?

There is little doubt why the Tories, in their election manifesto, promised only to "produce a government paper examining the mechanism for changing the corporation tax rate in Northern Ireland" – because that is as far as they intend to actually go, and any commitment beyond that would be a lie.

There will be no 12.5% corporation tax rate – certainly not presented as simply as that. There might be a fudge that allows other regions to benefit, and that, at the end of the day, does not provide much stimulus in Northern Ireland.

The only future for Northern Ireland is either continued welfare dependency (almost 70%!) or severe cuts in public spending that restore the profitability of the private sector by bringing wage costs down sharply. Northern Irish firms will only compete successfully when their costs are lower than their competitors – in the south, in Britain, in Europe – and as long as the public sector provides a better-paid option to private sector hard work this will not happen. The Tories know it, and in their hearts, so do all the Northern Irish parties.

22 comments:

Paddy Canuck said...

This is the problem with a unitary state... too many levers that effect too many people. Devolution's a start but really, the UK should aim at true federalism. Then NI, and Scotland, and whatever other chunks the UK decided to make itself up of, would be free to set the tax rates in their own jurisdictions in matters of subnational competency. Internal rather than external competion... you attract workers and jobs from inside as well as from without.

Anonymous said...

Sammy Mc Nally says..

Horseman,

A thriving Norn Iron is to the benefit of the Plain People of the Republic as the level of cooperation and trade between both parts of the island will also increase - not least people from the South working in the North and people from the North spending their money in the South.

The Republic should welcome harmonisation of both economies in the shape of harmonisation of corpo rates provided the actual power is devolved to Stormo.

I really dont see how you can on the one hand argue for the benefits of a UI and on the other argue against measures that increase all-island economic integration - more of the latter will help bring about the former sooner and of course all the Plain People of Ireland, North and South voted in favour of this in the GFA.

Constitutionally, the British have conceded that the future of Norn Iron is a matter for the people of Ireland alone - so surely we can argue that our fiscal future is also a matter for ourselves.

Henry94 said...

The British government should introduce it as a policy for regions where the public sector is too high a proportion of the economy. It makes sense.

Horseman said...

Sammy Mc Nally,

To be fair (to myself), I did not argue for or against a 12.5% rate - I merely pointed out why it will be impossible for a British government to introduce it.

I would, of course, prefer the whole country to have a 12.5% rate - as it will after reunification!

The calls for a 12.5% rate amongst unionists are purely political - they want NI to poach investment and jobs from the south, so that they can then say 'look, the north is successful in the UK - no need for a UI'. For purely political reasons, of course, I want the opposite. I want the damage that the border creates to be visible, and the benefits of a UI to also be visible. When Corpo Tax is not reduced, and public spending is, then even unionists may be forced to accept that being in the UK is not in their interests. Why would I want a situation where the UK changes the rules just to make it seem in NI (and only in NI) that the UK provides an economically viable alternative?

On a different tack, having different corpo tax rates may actually help north-south economic integration, through transfer pricing. Firms in the south
may take advantage of lower wage costs in the north while keeping their main operation (and thus paying their corpo tax) in the south. Likewise northern firms may set up operations on the southern side to take advantage of the lower corpo tax rate. If they could get the same benefit in the north they'd probably stay there.

The north can be the south's third world.

Anonymous said...

Sammy Mc Nally says

Horseman,

RE. "I want the damage that the border creates to be visible"

I think the politics of the failed state is very pre-GFA . The Nationalist logic in favour of Stormo is to show that the all Ireland economoy will work and synchronisation of corpo rates helps to do that. The problem with the failed state view is that it would be political suicide for a party to advocate that Nationalists must all live in penury to help convince the Unionist Paddies that their interest lies in a UI.

Paddy Canuck said...

Horseman, I'm with you on wanting Ireland reunited, but I don't think you're really being fair. In a larger sense, what's the difference how Northern Ireland gets a 12.5% tax rate and becomes competitive? If it means more jobs and a better living for people, isn't that the most important thing? Yes, reunification would be great, but if it never comes, should we be happy to see Ulstermen outside the Republic have to suffer because the UK is a unitary state with no mechanism to set appropriate regional tax rates?

Even if a UI does come, why should Belfast and Dublin and Derry and Galway and Cork and Limerick ALL have the SAME tax rate? Why shouldn't Dublin be able to tax more, based on its advantages (and in order to pay for superior services), while Cork, say, taxes less in order to attract industry? A single tax rate basically just means most new growth, economic and demographic, is locked-in in County Dublin.

Horseman said...

Sammy Mc Nally,

I agree up to a point. But an all-Ireland economy involves more than just harmonised tax rates - (there are all sorts of issues of infrastructure, company law, labour markets, other taxation, regulations, etc. I certainly want an all-Ireland economy, as that is the really best way to improve all of our living standards - but it requires the de facto removal of the border. The EU is doing a fairly good job at de facto border-busting, but the best guarantee is a de jure removal of the border.

A de jure border-busting would have the incalculable extra advantages of allowing northern nationalists to enjoy the full exercise of their cultural and national rights. The irony is that if unionism had not spent 80 years trying to deny northern nationalists their cultural rights we might not be where we are today! As it stands, though, unionists persist in trying to block the Irishness of Irish people, so the best solution is no border. And it has economic benefits too, so its a win-win proposal.

Anonymous said...

Sammy Mc Nally adds

Horseman,

the fact that Ulster Unionists (DUP and UUO) may want the corpo rate reduced in order to be in competition with the South may sound like a good reason to be 'agin' it but in my opinion that is a strategic mistake (as is your view) - they should be arguing for more synchronisation with Britian.

Anonymous said...

Sammy Mc Nally adds again.

Horseman,

"A de jure border-busting would have the incalculable extra advantages of allowing northern nationalists to enjoy the full exercise of their cultural and national rights"

Nobody is arguing against that - but Nationalists (North and South)have signed up to the GFA and are determined to work it - whereas you are pushing the failed state theorem (as mentioned above) - which might be fair enough if we didnt also have the demographics to back up the current GFA approach.

Horseman said...

Sammy Mc Nally,

If I understand your pov correctly, you are saying that demographically a UI is inevitable, and therefore there is no reason not to make NI a roaring success right away?

Tempting - but do you not think that if NI did become a success under British rule they, and the unionists, would claim that its success was due to the British rule? Lets face it, they only have to fool 10% of nationalists and the UI is put back by another generation.

Also, you say that the GFA is 'in place', but I'm afraid I see incomplete implementation in respect of Irish national rights, and constant attempts by unionism to roll them back. Give us full implementation of the GFA, not just gudging minimalism, and maybe we will be less inclined to see NI as a failed state. At present it is still failing many nationalists.

Anonymous said...

Sammy Mc Nally adds

Horseman,

I take it you at least agree that your position is politically untenable? SF, the current main political flag (tricoluour) bearers for a UI could not argue simultaneously that they want the GFA to be the basis for the way forward and also and they dont want Norn Iron to be an economic success (that is the contradcition at the heart of your arguememt) and it just does not make sense to risk alienating those who wish to have a decent standard of living as well as to consider themselves as Irish.

Nationalists should, with the GFA in one hand and the comfort blanket of improving demographics in the other take all opportunities to improve cooperation and the social and economic interlinking of both parts of the island.

Anonymous said...

Sammy Mc Nally re-adds

Horseman,

I take it you at least agree that your position is (party) politically untenable?

Horseman said...

Sammy,

I cannot talk on behalf of any party, as I am neither a member nor an activist for any party.

It may be that both nationalist parties are truly trying to turn NI into a happy little British province - but I'm not.

Perhaps a 12.5% corpo tax rate north and south is 'harmonisation', but I would only like it as part of a wider N-S economic harmonisation. On its own it just provides unionism with a boost.

Ivan said...

This blog is getting quite a lot of attention over at p.ie:

http://www.politics.ie/northern-ireland/128800-ulsters-doomed.html

Anonymous said...

Most are not fans, they obviously have not taken in the message! They have no clue what UD is about and some are absolute idiots!

hoboroad said...

http://www.nuzhound.com/articles/arts2010/may10_Election_analysis__JCollins_Irish-Herald.php

Seymour Major said...

As for the code of conduct, the Conservatives are hostile to it and will ignore it. There is ample justification for this. Other countries who are part of that code, including ROI, will chose to ignore it if it suits them. Furthermore, the policy of pan-European tax harmonisation is inextricably linked to currency union. The UK is as far away from joining the Euro as it has ever been.

I understand, from Conservative sources that have researced this policy, that the revenue lost by reducing the rate for NI would be about £470m. I also understand that it is proposed to introduce the tax cut is very likely to be part of a "Revenue Neutral" budget. In other words, tax cuts will have to come from somewhere else in the public sector to pay for it.

It needs to be borne in mind, also, that lowering the rate of Corporation tax is a given, if the Conservatives are elected. The only question is what other fiscal reforms might follow to benefit the private sector. Other options include lowering Employer's National insurance contributions for Northern Irish employers and cutting the Business rates. The latter reform, would require the co-operation and approval of NI politicians.

The short term prospect for NI unemployment is bleak, whichever way you look at it, but as the saying goes "No pain, no gain"

hoboroad said...

DUP – 23.5%

UUP – 16.8%

PUP – 1.0%

TUV – 8.7%

SF – 26%

SDLP – 12.5%

Alliance – 8.5%

Green – 1.2%

Others – 1.8%

hoboroad said...

My previous post is an opinion poll published in the Belfast Newsletter this morning.

hoboroad said...

Opinion poll in the Daily Express:

Tories 33%
Labour 28%
LibDems 27%

Paddy Canuck said...

Seymour Major said: "I understand, from Conservative sources that have researced this policy, that the revenue lost by reducing the rate for NI would be about £470m."

But does that figure take into account any kind of objective estimates as to the amount of compensatory tax increase on the basis of the boost it will give to industry and private-sector jobs that actually make a profit?

I find this hard to understand. Unionists go on and on about how Dublin couldn't afford them... the implication being that Northern Ireland is a basket case requiring someone else's blood to be pumped into its decrepit veins night and day... but here we see the Tories clutching their hearts at the idea of losing half a billion quid from Northern Ireland if they lift their boot off its throat (less 12.5%). So what the hell is Northern Ireland then, a vampire or a milch cow?

Anonymous said...

Sammy Mc Nally asks

Seymour Major,

can you confirm if the power to change Corpo tax will be located in Stormo or Westminster if the Tories are elected. If the former they may well have cross party support, including SF, giving us a very interesting turn of events.