WASHINGTONThe Irish bailout recently approved by the European Union and the International Monetary Fund is serving as a pretext for governments (France, Germany), multilateral institutions (the Organization for Economic Cooperation and Development) and others to bully Dublin into raising its corporate tax rate, currently set at 12.5 percent. Ireland is resisting fiercely but the outcome is uncertain. The tussle foreshadows what in years to come will be one of the great ideological fault lines.
Ireland’s European competitors have always hated the comparatively attractive tax conditions that lured billions of dollars worth of investment to the island in the last 15 years. The deluge of long-term productive investments made possible by numerous reforms, including taxation, allowed Ireland to surpass Britain and Germany in income per person at the end of the 1990s. And in the last half-decade, American companies have invested more money in Ireland than in China, India, Brazil and Russia combined. This made other governments in the European Union look bad, prompting various leaders and bureaucrats to speak of unfair tax competition and the need to “harmonize” the differentiated tax regimes (meaning, of course, that low-taxing regimes should be harmonized with high-taxing ones, not the other way around).
Ireland’s sovereign debt woes are now being blamed in part on low taxation. In fact, Ireland did not have a sovereign debt crisis before the bursting of the real estate bubble. Dublin’s high debt and the fiscal deficit have a very recent history. They have to do with the rescues and nationalizations of financial institutions stemming from the worldwide crisis of 200708. The sovereign debt problem was triggered by the response to the financial crisis, not by Ireland’s low fiscal revenue. In fact, Ireland’s fiscal revenue generated by corporate taxation represents almost 3 percent of gross domestic product, against just over 1 percent in Germany.
If the cause of Ireland’s sovereign problem was low corporate taxation, how would one explain the fact that bond markets have punished Greece, Portugal and Spain, where corporate taxation is between two and three times higher? Ireland did many things wrong in the years running up to the financial crisis, but offering investors relatively low levels of taxation and high levels of security was not among them. Not allowing any of the banks with serious insolvency issues to fail after the bubble burst, therefore socializing the losses caused by reckless loans, is the reason the Irish are now burdened with so much fiscal debt.
Ireland is unwillingly becoming a laboratory in the battle of ideas over taxation in the wake of the colossal amounts of public spending that various forms of “stimulus” and “rescue” have demanded of taxpayers worldwide. Passions are already running high in the United States over the imminent expiration of the tax cuts signed into law by George W. Bush.
In a world where taxation is certain to rise given the obsession with using monetary and fiscal support to prevent a depression, those countries that do manage to keep their heads cool and preserve attractive tax regimes will stand to benefit. International capital will be more desperate than ever to find attractive shores in such an environment. Ireland will reap the rewards if it is able to withstand the pressure to raise its corporate tax rate.
A study by Oxford academic Dalibor Rohac published by Italy’s Bruno Leoni Institute under the title “Tax Competition: A Curse or a Blessing?” provides evidence that with increasing capital and labor mobility, competing tax regimes bring advantages to countries. Some central European nations that adopted relatively low flat taxes against much domestic and international uproar are now among those that by and large have recovered reasonably quickly from the meltdown. “In the real world,” concludes Rohac, “tax competition emerges as a means of subjecting governments to more discipline and allows individuals to escape the burden of prohibitively high taxation.”
The Irish have suffered many humiliations of late. Some of them they deservedfor lending and borrowing like crazy. But they do not deserve the humiliation of being bullied into adopting the wrong tax regime simply because the current one makes the rest of Europe look bad.
Alvaro Vargas Llosa
Alvaro Vargas Llosa is Senior Fellow of The Center on Global Prosperity at The Independent Institute. He is a native of Peru and received his B.S.C. in international history from the London School of Economics. His weekly column is syndicated worldwide by the Washington Post Writers Group, and his Independent Institute books include Lessons From the Poor: Triumph of the Entrepreneurial Spirit, The Che Guevara Myth and the Future of Liberty, and Liberty for Latin America.
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