Demi’s Basic Business Questions: What is Corporation Tax?

We often see headlines about Ireland’s low corporation tax – some are critical, others ecstatic about it. A pretty common question people have is what exactly is corporation tax, and how does the tax big corporations like Google and Facebook pay affect someone like me, the average college student. The aim of the following article is to give a bite-sized introduction to corporation tax and give some guidance on whether it is to be loved or hated.

Firstly, a definition. Corporation tax is the tax companies pay in countries they are resident in on the profit they earn from their business. In Ireland, the tax is at 12.5%, significantly lower than other countries. The average corporation tax rate in Europe is 25.3%, for example. 

Similarly to when we looked at why it is not feasible to print more money in order to combat financial crises, we are brought back to one of the fundamentals of economics – the law of demand. Generally, when something costs more money, less people want it. When something costs less, more people want it. Pretty reasonable, right?

The law of demand can easily be applied to our low corporation tax scenario. If it costs less money to make profits in Ireland (due to the low corporation tax), more corporations will want to set up here. It is argued that this is a positive phenomenon as it leads to Ireland becoming an international hub for multinational companies. Where there are increased companies, there are increased jobs. This reduces the number of skilled young people, university graduates etc. emigrating in search of work. Increased employment boosts the Irish economy and is often something to smile about. 

However, on the other side of the coin, those who are against our competitively low corporation tax level make strong arguments. They point to the profits that corporations such as Twitter and Facebook make and suggest better use for those profits, such as contributing to social welfare schemes. It is also argued that we are putting ourselves at an advantage at the expense of fellow European countries. The discrepancy between corporation tax rates is so high that it is a significant challenge for them to compete. This can be seen as unethical. 

There are numerous points to be made on either side of the debate but it is up to you decide where your opinions lie. 

If you have any more Basic Business Questions you are interested in me tackling, please do not hesitate to email me at dadenira@tcd.ie

Yours in Learning,

Demilade

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