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.