Corporation Tax: change nothing and nothing changes

“Doing the same thing over and over and expecting different results is the definition of insanity.”

The various, and dubious, attributions of this statement - to Einstein, Mark Twain, Ben Franklin and others – indicate the appeal of its simple message:

Change nothing and nothing changes.

Scope’s previous article on corporation tax – highlighting the case against reform – noted that Northern Ireland’s economy has only twice made substantial and sustained realignment with the wider UK, both surges coinciding with large amounts of public spending.

Central government splurges are not on the table right now and it is not clear when they will be again.

If the local economy is to blossom in the short - and medium - term future it will be for different reasons.

KPMG’s Head of Tax Eamonn Donaghy has in recent years led the Grow NI campaign to devolve corporation tax powers. Scope spoke with him prior to the Stormont House agreement which set these changes in train, and his thoughts were equivocal and measured.

He began by saying corporation tax is “not a silver bullet”, and immediately admonished himself over the use of cliché.

The choice of words may have been altered but the message remained consistent: if we don’t do anything to rebalance and reinvigorate the economy, these things will not happen by themselves.

Change nothing and nothing changes.

Talisman

Donaghy accepts that NI has issues with skills shortages, that businesses look at productivity as well as costs, and that wider circumstances play a part in attracting foreign direct investment (FDI).

But he is adamant that a lower corporation tax rate could be transformative for the local economy – not necessarily on its own, but as a first step and part of a concerted effort on many fronts.

Rebalancing the economy will, he said, be driven by two things – the business community taking the lead “because waiting for politics has not been hugely productive” and also “recognising that in order to stimulate private sector growth we will have to try and do something we haven’t done.”

He also notes that reducing the rate could be an effective marketing tool, providing positive news about Northern Ireland for the business community, when we should all be wary that overseas perceptions of our home are not what we would want them to be – with even our most visible success twisting the knife into local life.

“I accept corporation tax isn’t a panacea, but it might be a talisman. There’s a big debate about skills to be had, there’s a big debate about reallocation. And infrastructure is, of course, hugely important to potential investors.”

Two-jump race                      

Donaghy said the debate over corporation tax needs to be split in half, a two-fence steeplechase, with the hurdles being devolution of the power and the second being an adjustment of the rate.

This first obstacle is now all-but cleared – and is a move with no downside, according to the KPMG executive.

He says there will be no costs for simply devolving the power, that this an increase in local democratic agency, and will allow us to move on to “the real debate” about how we spend our money.

Opponents of lowering the corporation tax rate point to predicted costs of £300m if NI decides to match the Republic or Ireland’s rate of 12.5%. The costs represent Westminster’s reduction of the block grant to reflect a lower tax take from NI.

Donaghy says a reduction of £300m from the local economy with no benefits in return is “highly improbable”, and slams the “lack of imagination” that says lowering tax rates must necessarily lead to lower tax takes – before noting various times and places where the opposite has happened.

“In 2012/13 the revenue lift from corporation tax was just £500m. If you drop the rate from 20% - which it will be in the UK next April – to 12.5% then you get a cost of about 40% of £500m, which is £200m.

“Can I guarantee lowering corporation tax rates works? No, I can’t guarantee it works, but can anyone guarantee there will be absolutely no increase in profits here? No. Can anyone guarantee that there will be no expansion of existing companies? No.

“Further to that, £300m is just over one percent of our total spend. [Considering the worst-case scenario] Would a business spend that much on a marketing campaign? There’s a discussion to be had about that.

“I went to New York with InvestNI, in the big pond of FDI, and places like RoI are able to fish right in the middle of that, whereas in Northern Ireland we’re fishing in a more restricted area.”

Tax havenots and NI open for business

Another argument against the reduction of corporation tax is that it is just another little step in the race to the bottom, whereby jurisdictions incrementally undermine each other with ever-lower business rates in the fight for FDI, ultimately increasing inequality and sending money from the less to the more wealthy worldwide.

But the Grow NI spokesperson thinks time is running out for places like and the Cayman Islands and Bahamas, more effective global rules are on their way, meaning we now approach a time of peak opportunity for other jurisdictions offering competitive taxes, infrastructure and skills – rather than simple tax havens.

He feels we could attract more than just cost-focused manufacturing investment, and bring profitable arms of companies to NI, such as sales hubs and research and development.

Grow NI’s campaign has received support from the five Executive parties in Northern Ireland, as well as a huge number of businesses and business groups.

Although support is not universal, it estimates that its private sector supporters have between them about 250,000 employees locally.

Donaghy points particularly to the support from the Federation of Small Businesses (FSB), noting that very few of its members pay corporation tax, but that they recognise the potential benefits to themselves that come from a healthier private sector and general economy.

Scope also put it to him that some people would suggest that, as local Head of Tax for one of the Big Four, he will of course lobby in support of tax cuts that could directly benefit some of his clients.

He takes this on the chin, saying he is providing his own analysis as best he can and noting that, as a recently departed chair of a homeless charity, he knows very well how tough cuts to benefits can be.

“But then you ask why we have 66% of our economy spend in the public sector, and you ask is that really necessary.

“I’m apolitical on this. I’m not here to preach politics, neither green or orange or left or right. It’s about trying to grow the economy and create jobs.

“I think most people accept that our economy is not properly balanced, we are far too heavily focused on the public sector, a spillover from the Troubles. What’s happened is a public sector expansion has been a product of creating jobs in NI, picking up the slack our private sector has left.”

On this point, there is broad agreement: the local economy is not well. Lower corporation tax is not a guaranteed fix, but whether or not you think it will work, does anyone expect things to be any different if we change nothing at all?