#1The Irish Economy and its Tax System: Implications for Northern Ireland John FitzGerald, TCD Northern Ireland Fiscal Commission, 20th May 2021#2Outline • The Structure of the Irish Economy • Corporation Tax • Indirect Tax • Direct taxation and the Labour Market#3Irish Economic Convergence, GNI per head, PPS EU15=100 120 EU entry 110 100 06 90 80 60 70 0 60 60 50 40 1960 1965 1970 1975 -Ireland GNI* 00 1980 1985 1990 1995 2000 2005 UK GNI 2010 2015#4Convergence story • . The surprise was Ireland's failure to converge post-War Rapid convergence post-1990 because changed failed polices. • Failed to adopt free trade in 1945. EU entry 1973 • Failed to invest in education like rest of Northern Europe Benefitted from globalisation within the EU • FDI - Corporation tax important in 1970s and 1980s • EU Single Market 1993 very important Today Labour Force skills vital. Specialised into tradable goods and services with a high income elasticity of demand#5Education - cohort of 1951-5 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 90 0% Educational Attainment, birth cohort 1951-55 Portugal Spain Italy Greece Ireland Northern Ireland France EU15 Netherlands Lower Secondary EU27 Romania UK Denmark Slovenia Finland Poland High School Tertiary Germany Latvia Estonia USA#6Education - cohort of 1981-5 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 90 0% Educational Attainment, birth cohort 1981-85 Portugal Spain Italy Romania Northern Ireland Greece EU15 EU27 Netherlands UK H Denmark France Lower Secondary High School Tertiary Latvia Estonia Germany Ireland USA Finland Slovenia#7Measuring national output and income GDP: from that deduct profits of MNES • GNI: problem it includes the depreciation of the MNES • Huge depreciation on IP of MNEs and aircraft (of aircraft leasing companies) • GNI* Adjusted GNI - after deducting much of depreciation of MNES • Broadly comparable to GNI for other countries • NNP deducts all depreciation - probably a better measure but not widely used internationally. Thus usable for understanding the economy but not for measuring relative performance#8Measures of Growth Average Annual 2013-2019 2014 2015 2016 2017 2018 2019 NNP adjusted for redomiciled PLCs 8.0 3.7 5.5 2.3 7.1 3.9 5.1 NNP 7.8 1.5 6.2 1.3 7.3 3.2 4.5 GNI* from NIE 8.8 -0.3 5.9 4.6 6.8 1.7 4.6 OGNI from NIE 8.8 13.7 7.5 6.3 7.3 3.4 7.8 GDP from NIE 8.6 25.2 2.0 9.1 8.5 5.6 9.6 Modified Domestic Demand 6.2 5.4 6.1 3.0 2.5 3.5 4.4 Employment 2.6 3.4 3.6 2.9 2.9 2.9 3.1#9Contribution to Growth, by industrial sector, constant prices 2013-2019, % Total Foreign Domestic Agriculture, forestry and fishing Industry 3.2 0.0 3.2 8.4 3.8 4.5 Construction 9.0 0.0 9.1 Distribution, transport, hotels and restaurants 18.3 6.1 12.2 Information and communication 14.3 6.6 7.7 Financial and insurance activities 3.6 0.3 3.3 Real estate activities 6.0 -0.1 6.1 Professional, admin and support services 19.2 5.8 13.4 Public Admin, Education and Health 9.8 0.1 9.7 Arts, entertainment and other services 2.5 0.0 2.6 NNP after profit repatriations 94.4 22.5 71.8 Factor Income - other, excluding Redomiciled PLCs -5.6 1.1 -6.8 NNP adjusted for redomiciled PLCs 100.0 21.4 78.6#10Government Revenue, % of GNI* Direct taxes of which 2010 2011 2012 2013 22.6 25.1 26.0 24.8 2014 2015 2016 2017 2018 2019 24.6 24.7 24.1 23.9 24.8 24.6 Income Tax 8.1 Corporation Tax Social Insuramce contributions Indirect Taxes 7.1 7.8 8.3 10.9 10.5 10.6 10.3 10.4 10.4 3.1 2.8 3.3 3.1 3.1 4.2 4.2 4.4 5.2 5.1 7.4 8.6 8.4 8.1 7.9 7.6 7.5 7.5 7.5 7.4 14.0 14.1 14.5 14.1 14.3 13.8 13.4 13.2 12.9 12.8 of which: VAT Excise Total Taxes Total Revenue 7.8 7.7 8.0 7.5 7.5 7.3 7.1 7.1 7.1 7.1 3.8 3.9 3.8 3.6 3.4 3.4 3.3 3.2 2.7 2.7 36.6 39.2 40.5 38.9 38.9 38.5 37.5 37.1 37.7 37.4 42.9 46.0 47.6 45.4 44.9 44.2 42.7 41.8 42.2 41.7#11Profits share and Corporation Tax Profits as % of GVA Share of Corporation Tax 2008-2012 2014-2018 2017 Germany 40.3 50.5 2.5 France 54.0 59.3 2.3 Other EU 63.8 9.4 UK 39.0 50.1 4.0 US 81.3 91.6 56.8 Japan 68.0 83.5 1.9 Domestic 32.5 45.4 20.2 Total 71.6 84.5 100.0#12Corporation Tax • Originally low corporation tax attracted FDI employment to Ireland • Non-US firms not permitted to exploit opportunity by domestic tax authorities . Bulk of corporation tax is paid by small number of US firms. Exceptional profit margins because location of IP in Ireland. • • In individual companies, such as Apple, IP held by separate subsidiary from company employing large numbers in Ireland • • Employment decision separable from where IP is held and tax paid (or not paid) . Trump tax reform may have benefited Ireland because GILTI rate 10.5% • Very vulnerable to changes in US tax law - e.g. proposed Biden reforms? • OECD process would have impact. Department of Finance estimate up to €2bn • With US tax reforms total of €6bn could be at risk: c. 3% of GNI*, but direct employment impact likely to be low#13Indirect Taxes • Undue dependence on stamp duties on property before 2008 crisis • Since then greatly reduced • Two major tax heads - VAT and Excise - c. 10% of GNI* • Carbon tax of €33.5 a tonne rising to €100 a tonne by 2030 • Revenue hypothecated for tackling climate change and compensating losers Carbon price floor not applied in Northern Ireland. • ⚫ If it had been it would have forced the Republic to follow suit which would have been good for climate change Periodic concerns about revenue loss across border • Concerns also about “fuel tourism" adding to Irish emissions • Studied in 1980s and 1990s North and South of border#14Cross-Border Shopping Table 1: Extent of Cross-Border Shopping Country Border Region Year Proportion of Expenditure Regional National % % Ireland Border Counties 1986 10 2 Denmark <50 kms 1985 3 1 Denmark Sonderjylland 1991 5.7 0.9 Netherlands Zuid-Limburg 1991 8.5 0.6#15Cross-Border Shopping Table 3: Maximum Distance Irish Shoppers Will Travel, Kilometres Price Difference, % Size of Shopping Bundle, ECU's 2.5 5 7.5 10 100 125 5 150 5 10 175 5 20 200 10 20 225 5 10 30 250 5 20 30 275 10 20 40 300 10 30 50 Conclusions: Not a major constraint on independent action However, fuel "laundering" on the border has been a serious trigger for crime#16Direct taxation and the labour market • Ireland had low average tax rate up to financial crisis. Rose substantially post 2009 • Most of direct tax is paid by those in top half of income distribution - very progressive • Ireland has been part of British Isles labour market for 150 years • Over a long period Irish wage rates were determined on that market • Up to 1960 Irish wage rates were 60% of UK • Between 1970 and 2010 similar wage rates • Modelling suggested that over that period Irish people would work in Ireland for c. 90% of the real after tax GB wage. This drove migration in both directions • Pushed government to cut marginal rates of income tax in late 1980s to avoid brain drain • Since late 1990s Ireland has attracted major immigration of skilled labour#17Average personal tax rate 35 34 % of personal income 29 29 www 30 31 32 333 28 27 27 46 26 1995 1998 2001 2004 2007 2010 2013 2016 2019 -Ireland ➡UK#18Ireland v UK, Wage Rates 1.1 1 0.9 0.8 0.7 0.6 0.5 Wage Rates, Manufacturing: Ireland relative to UK 0.4 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011#19Relative average earnings by education Ireland relative to UK, % 2002 2018 All Employees 94 115 Lower Secondary 99 97 Upper Secondary 98 101 Third level 80 114 Northern Ireland average earnings are, in turn, 90% of UK average earnings However, in spite of the difference in earnings, there is very little cross-border Labour movement from North to South#20Income distribution - after tax and welfare 40 40 38 36 34 32 30 28 26 24 22 20 1995 1998 -Ireland 2001 Gini Coefficient 2004 2007 2010 2013 2016 2019 Poland Portugal -Sweden -United Kingdom#21Implications • . Corporation tax - if there was ever an opportunity for Northern Ireland it is over • Research for DETI shows that educational attainment is a major driver of FDI Surprisingly the Northern Ireland labour market seems less part of the British Isles labour market than the Republic. The effects of direct taxation on labour mobility is probably low • Indirect taxes - cross border effects limited. However, in tackling climate change, lack of co- ordination within UK and on the island could be problematic. Need to price carbon across the UK. Could Northern Ireland go it alone? • Other possible fiscal instruments ● • . Water charges, public service obligations, local property taxes Can provide some additional fiscal space but first two are regressive and Northern Ireland cannot offset this with changes in welfare Obviously on expenditure side Northern Ireland has some scope to make better use of its resources