Wednesday, 1 December 2010

Time up on the tax scam

James Wickham: One of the bizarre features of current Irish politics is the way in which national independence, national sovereignty and even national identity have all become entangled with Ireland's low corporation tax rate. Everybody knows that this is increasingly a tax scam and an open invitation to social dumping. Nonetheless, it appears that to criticise it shows that you are not really Irish and outside of the great national consensus. It's perfectly understandable that the low tax rate is supported by the short-sighted adherents of untrammelled free markets, slightly bizarre if it's supported by national(ist) socialists (Sinn Fein etc), totally incomprehensible if it's supported by a political party like Labour which claims to be a European social democratic party.

There are two reasons why the low tax rate is problematic.

The first is obvious, and the reason why it is increasingly reviled across Europe. It creates a race to the bottom, putting pressure on other countries to reduce their corporation tax rate. Furthermore, if firms choose to re-locate part of their operations in Ireland from elsewhere in the EU, other countries lose part of their tax revenues. This undermines member states' ability to finance their social spending. Tax competition between members of a common political unit undermines the ability of the members to act collectively, whether these units are local authorities within a national state or the member states of the European Union.

Clearly, if corporation tax is to be used to attract foreign direct investment, this should be part of a European Union wide regional policy. The failure to do this is now coming home to roost. If a member state persists in development through tax competition, then other states and other regions will try to prevent it. Of course you can defend the tax rate in the name of national sovereignty, just as there are people in Somalia who feel proud of Somali pirates who prey on international shipping. That hardly makes the victims of piracy likely to tolerate it. The tax rate, in other words, is a brilliant way of creating enemies in general and of undermining the European Union in particular.

The second reason is less obvious but arguably more fundamental. To the extent that it becomes central to economic policy the low tax rate ties Irish economic growth to the fortunes of mobile businesses. For decades a key issue for progressives has been the ability of private enterprise to escape national control. Individual companies, like the global super rich, are very happy to receive the benefits of state spending, ranging from law and order to a well educated labour force; they just don't like paying for them.

If a country builds its FDI policy purely on its low tax rate, it has less incentive to develop the social and physical infrastructure or the effective governance from which mobile business also benefits along with the rest of the citizenry. This can be clearly seen in Ireland. Historically low tax rates certainly did attract FDI, but research usually found that this was only one element in location decisions, along with education, infrastructure etc. Today it seems that this is no longer the case. For example, none other than Craig Barrett (former chief executive of Intel) at the Farmleigh Global Irish Economic Forum (Irish Times, 26 September 2009) stated that of all the original reasons for Intel locating in Ireland, tax was now the only one remaining.

Concentrating on tax, in other words, is the classic easy way out: you don't tackle the problems, you don't create real advantages, you just cut the tax rate and wonder why your state is incompetent and your neighbours don't love you any more.


Rory O'Farrell said...

I think its important to clarify that countries like Belgium and Germany actually had lower effective corporate tax rates than Ireland over the past decade.

I think this can help shed some light on the discussion. On the one hand we can say if we increase corp tax we will become even less competitive as Germany and Belgium have lower effective rates. On the other hand it shows that our tax rate isn't the big attraction people claim.

I think the hysterical reaction for some quarters against changing the tax rate can easily be explained. Its in MNE's interest to pretend they are here for our tax rate to dissuade the government from increasing it. Its in the government's and IDA's interest to pretend we have a particularly low rate so as to attract firms, even if this isn't really the case.

I think pan-European tax competition is pointless unless we have a harmonised tax base. Otherwise tax competition will just be conducted by playing with exemptions.

I don't think raising corp tax will have the apocalyptic effects some claim. Also we could bargain to get something in return from the EU (like making them pay for their own bank bailouts). That said, I'd put greater emphasis on closing loopholes that do exist (even though we have less loopholes than Belgium and Germany) for companies like Google or U2 than on changing the rate.

There is a nice table over on irisheconomy with corp tax revenues/GDP.

sam macdonald said...

it is also important to note that ireland's low corporate tax rate, and poorly developed transfer pricing laws have the poitential toundermine the tax base of low income countries in Africa/Asia etc

Anonymous said...

Tax competition between members of a common political unit undermines the ability of the members to act collectively ... if corporation tax is to be used to attract foreign direct investment, this should be part of a European Union wide regional policy.

Clearly you're still labouring under the delusion of the EU as a benevolent if slightly paternalistic force, that can be trusted to do the best thing for its (slight wayward) peripheral children.

Have the events of the last week not thought you anything?

They will nail us to the mast in a heartbeat when their own interests are threatened. And you can be sure that a EU-wide regional investment policy would be all Fruit of the Loom and no Google.

Anonymous said...

Craig Barrett Intel stated that of all the original reasons for Intel locating in Ireland, tax was now the only one remaining.

But would you, or anyone else on this site, be in favour of the radical measures required to restore the now-lost pull factors?

We have a situation where half the maths teachers in the land are effectively unqualified. Yet we're surprised when abysmal teaching of maths leads to abysmal results. Rather than weeding out the incompetent and the unqualified, all the fault is laid at the door of the kids themselves for not choosing honours maths. If the unions and their apologists insist on sheltering incompetent educators, there should be no surprise that we have to rely on a low tax rate instead of radically improving educational outcomes.

paul sweeney said...

There is a lot of anger against those who dare suggest that this sacred cow may be on the wane as an attraction to FDI. It usually comes from those who led the boom / bust and obviously, the bosses of IDA funded MNCs.
In my analysis of what was then Ireland's economic success, conducted with several key players, I found that there were many inter-related reasons for the success. However, five factors were more important. These were a) membership of the European Union and at a fortuitous time, the Single market; b) FDI; c) low company taxes, d) the young, abundant, educated and English-speaking workforce and e) Social Partnership. Other factors were important too such as its small size, institutions and favourable demographics.
Importantly, several of the people I interviewed were clearly conscious that impact and draw of the low CT was on the wane. That clear thinking is what Ireland needs. Not anger. Not excoriating those that dare question conventional "wisdom." Had there been more critics of tax cutting and de-regulation during the boom, maybe it would not have ended in such a crash.
Finally the obsession with FDI was convenient way of ignoring indigenous firms. This will become much more important as FDI moves to Asia in the coming years.

Damian Tobin said...

There is a remarkable tendency among MNCs be it in Ireland or China to threaten departure for cost-base reasons – where do you go after China! But none of these threats are consistent with global FDI flows, since most occur between high-cost developed economies (despite the rise of China).
It is also worth noting that the UK has revised downwards corporate taxation on patents from 28% to 10%. This was criticised by the IFS as being of sole benefit to large companies and subsidises activities that would have taken place anyway. (
It seems odd that we might tolerate without question the subsidy of activities at an effective rate often less that 5% that would take place here anyway even if the corporate tax rate charged was 15%.
@ anonymous: the point of whether it's a “google” or a “fruit of the loom” is often neither here nor there. The bottom line is employment – that can be from a high tech foreign company or a low tech domestic manufacturer. Very few complain that many IFSC companies are “back office” or that many so called PC manufacturers are essentially assembly plants.

Anonymous said...


Knowledge-based back office jobs are much, much preferable to working in a sweat shop. And by the way,the days when we were in the business of PC assembly are long, long gone - the likes of Gateway2000 and even Dell are a distant memory at this stage.

The old plea of "jobs, any ol' jobs, just give us jobs" hasn't been appropriate development policy for this country for decades. And unless you want us to go back to a 1980s standard of living, the only game in town is moving up the value chain. Which necessarily requires us to eat our EU partners' lunch, as we simply don't have the human capital (yet) to build it up indigenously.

It would take many years and a complete re-invention of our education system to enable a native advanced economy to emerge. And that simply is not going to happen, given how good the incumbent educators are at (a) preserving the status quo and (b) convincing themselves that their broken system is world-class, and through grade inflation getting world-classier all the time!