Clare Daly (Dublin North, Socialist Party)
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33. To ask the Minister for Finance if he has undertaken a cost benefit analysis of the effect of increasing Ireland's corporation tax rate; and if not, the reason this sector has been excluded from tax increases. [1508/14]

Michael Noonan (Limerick City, Fine Gael)
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It is possible to estimate the full year yield to the Exchequer of increasing the standard rate of corporation tax. I am informed by the Revenue Commissioners that the full year yield to the Exchequer, estimated in terms of expected 2014 profits, of increasing the standard rate of corporation tax from 12.5% to 13.5% is tentatively estimated on a straight line arithmetic basis to be about €326 million.

However, while such an estimate would be technically correct it does not take into account any possible behavioural change on the part of taxpayers as a consequence. In terms of an increase in the 12.5% rate, estimating the size of the behavioural effects is difficult but they are likely to be relatively significant.

To give the Deputy an idea of what the effects of such a change would likely be, an OECD multi-country study found that a 1% increase in the corporate tax rate reduces inward investment by 3.7% on average. On this basis, it would take only a 2.5% increase in the rate (to 15%) to decrease Ireland’s inward investment by nearly 10%. This OECD study assumes the average applies across the board but in fact the effect is likely to be more extreme for Ireland, given the economic challenges faced by a small island such as ourselves.

The very major importance of maintaining the standard 12.5% rate of corporation tax to Ireland’s international competitive position in the current climate must also be borne in mind. Ireland, like other smaller member states, is geographically and historically a peripheral country in Europe. A low corporate tax rate is a tool to address the economic limitations that come with being a peripheral country, as compared to larger core countries. Ireland’s low corporation tax rate plays an important role in attracting foreign direct investment to Ireland and thereby increasing employment here. Recent research by the OECD also points to the importance of low corporate tax rates to encourage growth.

Cost benefit analyses aside, it also would be difficult to justify such a move in the context of Ireland’s stated position that we will not change our corporation tax strategy. Even a marginal change would undermine both our long held stance on this issue and the certainty of business, domestic and international, in our resolve to maintain that position.