City AM: Matthew Elliott: Britain needs tax cuts to prevent City companies fleeing to Ireland

Hardly a day goes by without news of another big company leaving the UK to escape the crippling burden of regulation and high tax.  First, in 2006, the Lloyd’s insurer Hiscox departed to Bermuda.  Now, Shire Pharmaceuticals – a FTSE-100 company - are leaving for Ireland.  United Business Media and WPP, one of the world’s largest advertising groups, are also believed to be planning to leave for Ireland.  High tax rates have undermined Britain’s competitiveness as a place to do business to such an extent that major firms are starting to leave.  This process is costing Britain investment, jobs and future tax revenues.

Many of these firms are moving to Ireland, a country that has had enormous success attracting new international investments.  Britain’s future prosperity depends upon our politicians learning lessons from the incredible performance of Ireland’s low tax economy.  Between 1994 and 2003 they cut their rate of corporate tax from 40% to its current rate of 12.5%.  That policy has delivered spectacular economic results.

In 1993 Ireland was significantly poorer than the United Kingdom, with income per capita 28% higher in the UK.  Its economy then took off, with average real terms economic growth between 1994 and 2006 of 7.4%.  In contrast, the UK managed just 2.9% real terms growth in the same period.  Today the Irish enjoy income per capita 20% higher than we do in the UK.

   

Ireland has been so successful in expanding its economy by attracting international investment that it has even led to corporate tax revenues growing more quickly than they are in the UK.  Between 1998 and 2006 UK corporate tax income increased by 69%, a reasonable performance.  However, Ireland’s corporate tax revenue grew by an incredible 186%.

This means that Ireland has not just increased income and investment but now enjoys the revenues that can fund further tax cuts.  Bold decisions in the mid-nineties created a virtuous cycle that stands in stark contrast to Britain’s fiscal position which leaves so little room for manoeuvre.

Ireland’s economic performance is an incredible achievement.  Some have tried to put it down to EU subsidies but that argument doesn’t stack up.  Benjamin Powell, in an article for the Cato Institute in Washington showed how Ireland enjoyed higher subsidies (4 per cent of GDP) in a period of low growth between 1973 and 1986 than it did during a period of high growth from 1995 to 2000 (3 per cent of GDP).  He also pointed out that other countries getting just as much subsidy, such as Greece, did not enjoy the same record of growth.  Ireland’s incredible economic performance has been the result of tax cuts, not European subsidies.

The economic benefits of corporate tax cuts have been confirmed more broadly; Ireland’s success is not an isolated, freak event and can be replicated in the UK.  The American Enterprise Institute found that the corporate tax rate that maximises corporate tax revenue as a share of GDP has been steadily falling, reaching 26% by 2005.  World Bank reseachers found that a 10% increase in the effective corporate tax rate reduces investment, as a share of GDP, by 2 percentage points and that high corporate tax rates increase the size of the informal economy and reduce entrepreneurship.

Modelling for the TaxPayers’ Alliance by the Centre for Economics and Business Research found that phased corporate tax cuts of 2 per cent each year until the Irish level of 12.5% was reached would bring a range of benefits: If such cuts were made then, by 2021, GDP would be 8.7% higher, investment would be 60.9% higher and disposable incomes would be 9% higher thanks to a 13.5% boost to wages and salaries.  Although such a programme would cost £3.8 billion initially it would increase revenue by £28.7 billion in 2021, thanks to higher income tax and VAT receipts.  Within eight years such a programme would bring a net increase in revenues.

Many other developed economies have taken advantage of the clear economic benefits of cutting corporate tax.  The average corporate tax rate in the OECD has fallen from 36% in 1997 to less than 28% now.  Britain has been left behind; even with a cut to 28% our rate will be above average.

Robust corporate tax cuts can bring economic benefits of vital importance to Britain’s long term prosperity.  Any politician serious about the future of our economy should aim to deliver them.