Irish Economy

And it’s hard to craft a Budget when you’re watched by Olli Rehn: Open Letter to soon-to-be European overlords

16 Nov 2010

"Have no fear, the one thing Ireland is most certainly not doing is shooting ourselves in the foot with our corporate tax policy. Indeed, relative to the size of the economy, Ireland brings in almost twice as much in corporate tax revenues than Germany."

Dear Olli Rehn and colleagues,

Welcome to Ireland. Honestly, we mean that. As you might have noticed, it’s all gone a bit Fawlty Towers here of late. Thanks to the management, things are a right mess and everything they do to fix it only seems to make things worse. So, when we heard the EU Health and Safety inspectors were on their way, we thought this might just be the thing for us!

Unlike our bigger brother across the water, you see, we actually have a lot of time for the EU. We see past the regulations about how curvy a banana needs to be and see instead a Europe that has done an awful lot for Ireland. We’re not really talking about the billions in Regional Development Funds. Clearly they helped, but looking around the world today, it would be naive to think that economic growth is as simple as throwing €1bn a year at something. No, instead we mean the wider economic and political benefits, such as being part of a large and stable common market and more recently a stable interest rate and currency environment. These benefits have helped Ireland become Europe’s answer to Singapore or Hong Kong, a trading and investment hub that helps bridge continents.

Imagine our surprise, then, when we heard you, Mr. Rehn, say not once but twice that “Ireland will not continue as a low tax country, rather it will become a normal tax country”. What could you mean, we thought? A natural place to start looking was every country’s two largest sources of tax revenue by far, sales tax and income tax.

Well, surely you didn’t mean VAT, we said. Ireland’s 21% VAT rate is higher than France’s, Germany’s, the Netherlands’, the UK’s… you get the picture. Indeed, according to the OECD, the Irish government gets significantly more VAT revenues, relative to national income, than most EU countries.

So, if not indirect taxes, we thought, perhaps you meant income taxes? No, that would be silly, we assured ourselves. Latest OECD figures reveal that Ireland’s all-in marginal rates are among the highest in Europe. For someone earning the average industrial wage, 45% of their next euro goes in income tax. Only Hungary can boast a higher tax regime. Certainly, we can do with fixing our income tax credits – which seem particularly generous to lower earners compared to those elsewhere in Europe – but our income tax rates are, if anything probably too high, I’m sure you’d agree.

If you’re with us this far, you might be interested in learning that we’re now about two-thirds the way through the typical EU country’s base of taxation revenues, and if anything Ireland looks like it’s a slightly higher tax country than the “normal EU country”. Not to worry, we’ll battle on. Do you mean customs and excises perhaps? Hmmm, it’s unlikely as customs are now controlled by EU policy while Ireland’s excises on alcohol, tobacco and fuel are certainly not low by international standards.

So, here we are 85% of the way into Ireland’s tax base and it doesn’t look like we’ve a problem. Next up is, however, corporate tax and it seems the European Parliament – at least two prominent members, Markus Ferber and Sven Giegold – have argued that: “If Ireland needs the European Resolution Fund, its corporate tax rate has to be doubled.”

Really? Is corporate tax, which comprises less than 10% of the “normal EU country’s” tax revenues, what all this is about? Are you honestly worried that, by potentially undertaxing companies based here, Ireland is doing itself permanent fiscal harm? Perhaps you might take a look a “Exhibit A” below. Based on OECD figures, it shows the size of government’s corporation tax revenue, relative to the economy as a whole. You’ll see Ireland nestled in the Top Five for governments getting lots and lots of taxation revenues out of companies based here.

Corporate tax revenues, % of GDP, by country

Corporate tax revenues, % of GDP, by country

So, have no fear, the one thing Ireland is most certainly not doing is shooting ourselves in the foot with our corporate tax policy. Indeed, relative to size, Ireland brings in almost twice as much in corporate tax revenues than Germany. (Don’t worry, we won’t run off trying to give the Germans tips about how to run their public finances just yet!) The fiscal success of Ireland’s corporate tax policy is clear from this first glance, before even considering the second-round effects on VAT and income tax of having more than 150,000 extra jobs in the country due to foreign investment into Ireland.

Perhaps what threw you was simply the fact that 12.5% looks low. In fact, Ireland’s effective corporate tax rate is about 15.5%, a little bit below Portugal’s, Estonia’s and Luxembourg’s (which are all below 20%) but above those of Hungary, Cyprus and Iceland. But in a sense that’s completely irrelevant. It’s not what you have, it’s what you do with it. And Ireland has used its corporate tax rate – combined with its openness to workers and its gateway location between the US and Europe – not just to the benefit of Ireland’s Exchequer, or indeed the wider Irish economy, but to the benefit of the whole of the EU.

Ireland’s low corporate tax rates, highly skilled labour force and ease of doing business made it in 2009 yet again the world’s most successful country at attracting foreign direct investment jobs per capita. Our investment promoters, IDA Ireland, will no doubt tell you that a huge chunk of the time, Ireland is fighting off competition from places like Singapore and Switzerland, so every time Ireland wins, the EU wins.

Cutting to the chase, we all know Ireland has a huge fiscal problem. That’s why you’re here. To fix it by 2014 or so, Ireland certainly needs to address two areas where it is not a “normal EU country”, namely introduce an annual property tax and reform its income tax credits. Together, these could raise €6bn of the €15bn in savings needed and would leave no part of Ireland’s taxation system unlike those of a “normal EU country”. Ultimately, though, Ireland’s huge non-banking deficit stems from basing permanent spending increases on the back of temporary taxation revenues. Therefore, the bulk of the adjustment will come from bringing government spending back into line, not knee-jerk taxation measures that may win votes in DĂĽsseldorf while making matters even worse in Dublin.

Ten year ago, Prof John O’Hagan, who has more than likely taught more undergraduates about the Irish economy than anyone else, changed the subtitle of his “Economy of Ireland” textbook from “Policy and Performance of a Small European Country” to “Policy and Performance of a European Region“. In Ireland, you see, we have known for a long time that we are not – and can never be – a scaled-down version of a major economy like the USA. Instead, we are North Carolina on a different continent. And, just like North Carolina, we need to be able to ensure our prosperity by attracting and retaining skilled labour and capital to our shores.

So no-one in Europe wins if, for reasons of economic illiteracy, Ireland is forced to double its corporate tax rates. Ireland’s government deficit will worsen: capital is mobile and, without a large domestic market, Ireland will attract less capital here than otherwise. The wider Irish economy will lose out, with fewer jobs for Irish people living here and fewer jobs to attract skilled migrants to here… and the government finances lose out yet again through lost income tax and VAT receipts. And the EU loses, as R&D and business support service jobs that would otherwise go to a region of the EU economy go somewhere else instead.

All we ask, then, is that when telling us what to do next, please make sure you make the right recommendations, not the easy ones.

Yours,

Concerned Irish Citizen.

PS. I like Creedence Clearwater Revival too.

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41 Comments

  1. Donal O'Brolchain said on November 16, 2010 | Permalink

    Ronan,
    Great. Just what we needed to know.

  2. Liam Kidney said on November 16, 2010 | Permalink

    You should try and get this article published in the times or the independent. It is excellenty written and gets rid of any of the misconceptions which are being fed out by the media and the top German politicians. If we lose our corporate tax rate we are putting 150,000 high tech jobs at risk. Why should we be made do this? It would be the death knell to this little country on the peripheral of Europe.

    It is terrible that the whole country are being punished by the mistakes and greed of so few….What annoys me so much is that the bank employee wages at all levels but particularly at the top have not being cut. Why have they not being forced to cut wages and pensions? They are bust! If it was a private company that is the first thing you would do for survival.

  3. Joseph said on November 16, 2010 | Permalink

    Great post Ronan. Joseph

  4. Kevin said on November 16, 2010 | Permalink

    Finallly an aritcle that points out – clearly – that we are not a low tax economy….

  5. Paul Mara said on November 16, 2010 | Permalink

    That chart is very interesting. There seems to have been a significant rise in money coming from corporations almost everywhere in the EU. I wonder if it is possible to correlate the rise with any other statistics.

  6. Robert Henson said on November 16, 2010 | Permalink

    Ronan,

    An excellent and well balanced article highlighting the importance of the 12.5% corporate tax rate to the Irish economy and, in particular, why Ireland is actually a high-tax jurisdiction.

    Rob

  7. Cian Collins said on November 16, 2010 | Permalink

    Well done. Excellent article. I’d be sending that one into the Irish Times!

  8. A de Burca said on November 16, 2010 | Permalink

    Great article Ronan! Desperately needed.
    A.

  9. BD said on November 16, 2010 | Permalink

    Excellent article. Hopefully some of the mainstream media at home and abroad picks it up.

  10. Alice Charles said on November 16, 2010 | Permalink

    Ronan,
    As ever the only Economist that is says it like it is and is constructive. I think you might want to give the Minister for Finance a quick call and offer your help! The other economists are just interested in publicity, but you come up with evidence based answers / solutions and thats what we need right now!!!
    Alice

  11. Matt said on November 16, 2010 | Permalink

    Sounds like the rest of the EU wants some of that sweet, sweet mobile capital currently parked in Ireland.

  12. Damian said on November 16, 2010 | Permalink

    Ronan, surely a lower corporation tax rate should lead to a higher tax take as a % of GDP. Instead we get a slightly average corporate tax take!
    Your figures for effective tax rates seem to be based on a sample of “61″ companies in 2008 – hardly representative of a country that has received record investment over the last few years and not at all consistent with your OECD figures. It is well known and widely reported that effective rates for many MNCs, due in part to transfer pricing are lower than statutory figures – often averaging around 2-3%. This would put your tax take figure in perspective.
    A high VAT take relative to income tax is generally not something to shout about as it regressive and often reflects an inability to raise taxation from income. This is borne out by the unusually high numbers that fall completely outside income tax.
    I would also suggest you take a second look at the OECD income tax data. It is slightly selective to pick “all in” marginal rates, let alone for 2009. In 2007, just before the crisis, the all in for someone on average income was much lower – depending of course on which table you select!
    This is hardly a system to lecture Europe about – it’s dysfunctional!

  13. Terry Hobdell said on November 16, 2010 | Permalink

    Very interesting I have always believed that European corporation Tax rates were actually lower than their headline rates as they had far more allowances and set offs,and they never managed to explain this to inward investors who understood our “low 12.5%”

  14. Mark said on November 16, 2010 | Permalink

    Dear Ronan,
    So you are ready to bend over for the so-called European overlords ie. banking cartel ! The people that died for this country would be turning in their graves !

    The fundamental long term problem is who issues credit! and Ireland could be creating its own credit and money by refinancing its asaets and creating our own fractional reserve banking system. The UK, USA, Sweden, Denmark etc(another small country) all issue their own money). With all due respect your pandering to and psychological dependency on the ECB and /or IMF is misplaced imo – do you feel a need for foreign rule and have our corporate tax rate set by a so-called foreign master ?. This country will be shackled to paying a foreign banking cartel (ECB or IMF) for generations if this is the prevailing attitude ! Also you have failed to incorporate any understanding of the scientific issue of peak oil which will make GDP growth more unlilkely due to rising oil prices – significant GDP growth would be required to pay the interest on foreign controlled debts.
    Bring back Brian Boru :-)
    Regards..

    http://sustainableireland.blogspot.com/2010/11/forget-imf.html

    http://sustainableireland.blogspot.com/2010/11/ireland-say-no-to-any-bailout-by.html

  15. Mark Dowling said on November 16, 2010 | Permalink

    How much more would Ireland get if the Dutch didn’t let patent income leak out to Bermuda virtually untaxed because Ireland doesn’t tax intra-EU transfers?

  16. Jonathan Leonard said on November 16, 2010 | Permalink

    Ronan

    Brilliant post and one that should get sent to Mr Rehn. Why do so few people in Europe and our own government get that we are not a low tax country?
    Keep up the good work.

  17. Michael Connolly said on November 16, 2010 | Permalink

    I really do get more than a little peeved when people start with “The people that died for this country would be turning in their graves” Times are very different and any correlation between the 1920 and now is meaningless. I believe that using such a comparison only reflects someone who still lives in the past. A very good article by Mr Lyons and it should be sent to all media in Ireland and specially to the Financial Times in London as they have taken great pleasure out of our current economic problems. Perhaps they are trying to justify why they stayed with sterling

  18. Michael FitzGerald said on November 17, 2010 | Permalink

    Good post Ronan,
    You could also mention about our high VRT tax – to get the last few drops of blood.
    Rgds, Mic.

  19. DMM said on November 17, 2010 | Permalink

    There are few things more tedious or intellectually depressing than watching someone construct an elaborate argument based on an obviously false premise – and this is exactly what you have done Mr. Lyons.

    The only thing worse than this is reading the various comments which followed your piece, comments which only show that Irish people seem to have lost their abilities to reason independently and perform basic critical analysis.

    Let me break it down for you:

    1. The Irish corporate tax rate IS low. After massaging the figures above in order to find a supposed “effective” tax rate even you can only find three other minor European countries which supposedly have lower rates. Frankly – Iceland and Cyprus are non-normative fringe nations and Hungary is still emerging from its communist past. Who cares if their rates are lower than ours? We’re supposed to be a stable ‘grown up’ economy. Are they the best you can come up with to bolster your case?

    2. Secondly, and much more importantly, it doesn’t matter what proportion of our tax base comes from collections of corporate taxes, what matters is our rate in relation to other European countries who we are in competition with for direct investment. Answer me this – how would Ireland react if tomorrow the German government announced a zero % corporate tax rate and Intel etc. moved there? Would you consider that fair or would you consider that an act of economic war from a Eurozone partner?

    In economics (and other circles) such behavior is known as a “race to the bottom” and it is generally regarded as being self-destructive. Basically we are abusing our position by setting a corporate rate which is far lower than the norm for developed European countries. This is NOT something we should be proud of.

  20. Ronan Lyons said on November 17, 2010 | Permalink

    @DMM
    There are few things more tedious than getting into a long and fruitless argument with a troll, so with that suspicion, here goes:
    (1) I have not massaged any figure nor have I said Ireland’s corporate tax rate is not low. I have stated both the headline rate (which as all headline rates are is only part of the story) and a measure of the effective rate, stated that both are low and stated – for the purpose at hand, i.e. Ireland’s deficit – that neither of these is relevant. Perhaps I can make my argument a little clearer for you: Ireland’s corporate tax is low and this is an important part not only of our FDI strategy (and thus our jobs), but also of government finances, delivering a higher intake than most other countries. This is not massaging facts, just stating them.
    (2) You have missed the point that often as not, Ireland is competing with non-EU states for investment. When Ireland wins, the EU wins in these cases. Germany has every right but no incentive to set a zero corporate tax rate. I notice you picked Germany and not Malta and Cyprus who have set rates lower than Ireland and are perfectly entitled to do so. None of this is economic war. It’s just natural fiscal policy that reflects how large a domestic market is, and thus how likely capital to goes there of its own accord.

    In economics there is no theory of the “race to the bottom”, that is a political argument. Allow me to take your argument to its logical conclusion: who in the world loses if everywhere set a corporate tax rate? As long as there is an income tax that covers capital income, no-one.

  21. DMM said on November 17, 2010 | Permalink

    When Ireland “wins” by attracting direct investment via a low corporate tax rate the EU demonstrably does NOT win. This might become obvious to you when you when you realize that the majority of Ireland’s foreign investment comes from OTHER EU COUNTRIES. So we are effectively cannIbalizing the EU tax base by luring them here with atypically low rates.

    Followed to its logical conclusion what you are advocating would result in corporations paying virtually zero tax. This is not socially or economically beneficial to anybody, least of all to smaller businesses who have to pay most of their tax in payroll rather than corporate taxes and who will not be able to then compete with larger corporations. Had you thought of that?

    I’m glad that at least you have now had the courage to admit what you truly think about this issue – you emphasized it yourself in bold in your last post: you do not believe that corporations should pay taxes. That is a burden that should only be borne by the little people – ordinary citizens and small business, right?

    The only thing that surprises me is that you didn’t go further with this genius idea of yours. Why stop at tax policy? Ireland should also scrap all environmental regulations in order to lure foreign corporations. Also, get rid of the minimum wage and those stupid bans on child labor – then we’d get amazing direct investment and finally be able to compete with China. Why didn’t we think of this before?

    I can’t believe that I am actually taking the time to respond to someone who finished his last post with the statement that “In economics there is no theory of the “race to the bottom” . Good luck with preaching to the credulous.

  22. Ronan Lyons said on November 17, 2010 | Permalink

    @DMM
    You are clearly not for turning but I’ll try my best to spell it out a little clearer:
    (1) Can you point me to the economic theory of the race to the bottom? Is it labour economics? Trade economics? Industrial organisation theory? Game theory? Most of Ireland’s investment comes from the US, incidentally, not the EU, so worth getting your facts right.
    (2) Your logic on corporation tax is incredibly fuzzy. Think about the incidence of taxation. Corporations are, to put it crudely, collections of capital (shareholders) and labour (workers), all of which is ultimately owned by people. Corporations also have customers, again people. When a government charges a corporate tax, it is not – as your simple worldview implies – striking a victory for people against heartless corporations. It is putting a wedge between money presented to the corporation by its customers and money its gives back out to its capital and labour. As I stated earlier, if you don’t – for whatever ideological reasons – like capital earning an income nearly as much as you like labour earning an income, that’s fine. Punish capital income with a higher income tax than you do with labour and you’re done.
    Charging a corporation tax of, say, 80% of its profits, will only result in some combination of a higher price for consumers, less money for workers or less money for shareholders, and no matter what that combination is, you could have achieved the same result via income tax (on capital and labour).

    It might be worth having a read around the blog before accusing me of being some sort of straw-man mindless corporatist advocate against any form of regulation. That of course is an entirely different discussion but the short version of my philosophy on this is: society determines the rules and then the markets play by them, while society monitors that as efficiently as possible.

  23. DMM said on November 17, 2010 | Permalink

    @Ronan Lyons

    Is there a “Race to the Bottom” in Corporate Taxes? An Overview of Recent Research

    http://www2.warwick.ac.uk/fac/soc/csgr/research/keytopic/race/Lockwood_Overview_May03.pdf/

    A general summary of this phenomena, and funnily enough Ireland is name-checked in the first paragraph as being an outlier in relation to EU corporate tax rates.

  24. Chris Mortimer said on November 17, 2010 | Permalink

    Bang on Ronan, I agree with Liam and Cian’s idea of looking to get it published in national and UK media somewhere. You could also try spreading it on Facebook and it may get picked up via that channel?

  25. Ronan Lyons said on November 17, 2010 | Permalink

    @DMM
    Happy you found an article on it, but that article is about how setting corporate tax is a strategic (i.e. thinking about others) action, not an isolated one. That is a maintained hypothesis of the blog post.
    You seem to either consistently miss or ignore the point, however, that ultimately corporate tax is a substitute to, not complement of, income and consumption taxes.

  26. Tom said on November 17, 2010 | Permalink

    @Ronan – great article, well argued and thoroughly informative.

    @DMM – you got schooled.

  27. DMM said on November 17, 2010 | Permalink

    Yes, setting corporate tax is a “strategic” action in that it is done with a view of luring capital from other economies, that was my point from the beginning. Did you miss that?

    The point of my posts, and the MULTIPLE arguments and literature reviews which I referenced was to demonstrate that this is widely held to be self-destructive behavior This is the point that you smugly continue to i ignore. Why is that?

    I can see now that you are trying to be a classic academic economist. In other words someone who doesn’t have the first interest in real world effects, rather you prefer to create hypothetic theories and then completely ignoring whether they intersect with the real world in any way. I took the trouble above to demonstrate the real world effects of what you’re talking about and you ignored it – good for you. I won’t waste any more time on you.

    @ Tom – keep up the credulousness, do you have a poster of Ronan on your bedroom wall?

  28. JD said on November 17, 2010 | Permalink

    Good post Ronan. Do you think we could get away with increasing it at all, and if so by how much?

    Does the need for such a low comparative corporate tax rate suggest a need to improve our attractiveness in other areas or is a low corporate tax rate something you think we’ll need for the forseeable future.

    JD

  29. MRL said on November 18, 2010 | Permalink

    Germany, netherlands,Denmark ahve huge, massive tax breaks for infdividulas investing in Merchant ships
    owned all over the world , but with a crafty leasing / bareboat structure showing
    the Management ( on paper) to be in the residents country but actually the management is retained by the shipowner wherever they chose . Ther German owners have huge operations in Cyprus and Singapore etc . So thery should looik at their own tax releifs before questioning ours

  30. Ronan Lyons said on November 18, 2010 | Permalink

    @JD
    Great questions. I argued last year that Ireland could increase its rate to 15% without much fuss (we’d still have the lowest effective corporate tax rate in the OECD, to my understanding at least). However, people have subsequently told me that the Government has committed to keeping Ireland’s rate at 12.5% until 2025 at least, so I’m not sure there’s much wriggle room politically.

    More generally, I think – as I indicated when trying to debate with DMM – that agglomeration forces are strong when it comes to capital. In simpler terms, capital is attracted to labour and other capital. So large domestic markets like the US or Germany are always going to be able to “get away” with taxing their companies higher, while Malta – which is neither a big market nor beside one – will have to lower its rate to attract capital. Luxembourg is probably a good intermediate case – not a large domestic market but beside a whole load of markets. Their headline rate, incidentally, is 21%.

    Where does that leave an island of 4.5m on the edge of Europe? Closer to Luxembourg (and maybe even Malta) than Germany I would have thought.

  31. Damian said on November 18, 2010 | Permalink

    Ronan, Can I suggest an alternative letter to Olli based on your responses to the above.

    Olli, it seems you’ve got me all wrong – what I meant to say is that we are really a low tax country at least for corporates – because it’s our right and we are worth it! (I mean a small open economy on the edge of Europe, what else are we good at!)

    But that’s got absolutely nothing to the fiscal problems, how could it (tax and fiscal policy no relations – not even close) – its the banks silly – that’s why we can’t bail ourselves out of this one! But failure to regulate the banks has got nottin to do with lax tax collection – different parts of the govt you see – and sure everyones at it loike – look at the Italians and the Greeks. It’s also why we can’t provide a decent public health service or at least one as good as our European friends – but that’s cause we’re more like a state in the US. We’d rather fleece the fantasic reserve army of labour on consumption taxes – and cut services to fit the cloth – better to charge capital two or three percent.

    And don’t worry if we attract a few British companies to the IFSC – there’re not even in the Euro anyway – our gain eh – I mean Europe’s gain – an anyway Osborne thinks we’re good for it too.

    Because I’m – I mean we’re worth it (every last cent of it that you can give us)

  32. Ronan Lyons said on November 18, 2010 | Permalink

    @Damian
    Given you mention health, I’m curious as to your position on Ireland’s expenditure in that area, which is the highest in the EU15, despite the fact that we have by far the youngest and healthiest population.

  33. John Hogan said on November 19, 2010 | Permalink

    Excellent article. I am Irish having spent the last four decades in Hong Kong and NZ. I did not understand the Irish situation and reading articles like this is excellent in explaining it. Mind you I think many in the Irish Govt didn’t and still don’t understand it either – so I’m in ‘good’ company.

  34. DMM said on November 19, 2010 | Permalink

    God, this blog is just painful to read. Ronan Lyons – above you claim that the reason we have to have lower corporate tax rates than other established European economies is because other large European countries are inherently more attractive because of “agglomeration forces” – that direct investment is attracted to countries which themselves have large amounts of capital. What absolutely merciless twaddle. Can you point to one real world instance of that that would apply to the EU?

    Take any of the large non-European corporations who have based themselves in Ireland – Microsoft, Apple, Intel, whatever. They are basically using Ireland as their European headquarters for localization and distribution. These corporations have to base themselves SOMEWHERE in the Eurozone so that they can access the European market without exposing themselves to currency fluctuation risks. By making our corporate tax rates drastically lower than all other European states we have played the spoiler and effectively bribed them into coming here.

    “So what” say you, since this is just fair competition in your opinion. It isn’t fair because as has been repeatedly pointed out to you above this will always result in a situation where other countries in turn have to lower their corporate taxes in order to compete. This has already happened with corporate tax rate having fallen on average of 10% across the EU over the past ten years.

    The Irish economy is essentially a basket case. The sad reality is that the only reason that we do not care about lowering corporate taxes while the mature European countries do is because we never bothered our arises to create any meaningful level of domestic industry. We are essentially a nation of shopkeepers, we didn’t bother our arse to invest any of the plentiful money that was floating around for the past fifteen years into developing any Irish owned industry.

    The Germans, French, Scandanavians on the other hand took the time and trouble to slowly and carefully build up their domestic industries and consequently if they are forced to lower their corporate tax rates in order to compete with us they will lose vast amounts of revenue. The only way they can make up that revenue is to tax the ordinary work force and that is what you are essentially promoting – the transfer of wealth from individual workers to the shareholders in corporations.

    Tough luck Europe everyone on this blog seems to be saying. Right, just one problem – without the European multi billion euro bailout announced today this country’s government and banking system would have been forced into outright bankruptcy over the next couple of months. Do you dispute that?

    So go ahead – sneer at the Europeans, sneer smugly at Olli Rehn and condescend to lecture them on why they’ve got this corporate tax thing all wrong while at the same time telling them the account numbers where their bailout funds should be lodged. And then tell yourself that you’re apparently “an economist”. Good luck with that.

  35. Ronan Lyons said on November 19, 2010 | Permalink

    @DMM
    I’m going to stop your trolling at this point. I’m not sure what fights you’re taking to this blog but (a) the entire point of this blog post is because Ireland is dependent on European money of some sort, not in some sort of ignorance of that fact, and (b) there is no-one anywhere that I can see arguing that increasing Ireland’s corporate tax rate will improve FDI into Ireland and thus its deficit. The post above was written in the context of attempts to close Ireland’s deficit.
    You appear incapable of conceiving two basic rules of economics. Firstly, all your bluster cannot hide the fact that corporate tax is not a tax on companies in some sort of abstract way, it’s ultimately another indirect tax on individuals. Secondly, you appear so completely ignorant (sneering, one may say) of agglomeration forces – despite astounding facts of economic geography such as four fifths of the US economy on 3% of its land space – that my normal suggestion to people, to visit Barrow Street or Galway’s medical devices sector, where Ireland’s indigenous industry sits side-by-side with multinationals, and see agglomeration forces at work in Ireland, is probably a waste of time.

  36. Damian said on November 19, 2010 | Permalink

    Ronan, the demographic profile of a population is not the only predictor of how much you should invest in health. It would be if the fundamentals of a good system were already in place. You challenge a previous contributor to visit Galway & Barrow St. – let me suggest two visits to you:
    1. A children’s hospital and an old folks’ home: the investment and treatments required for the former are generally far more complex, time consuming and expensive than the latter. The necessity to invest in cystic fibrosis services (something for which we should hang our heads in shame) does not sit well with your idea that we spend too much!
    2. An A&E ward on your average weekend – think overtime and pointless service provision for a mainly young population that would be far better invested elsewhere. That’s before you even consider the high cost of treating young to middle age diseases like blood cancers, heart diseases – I mention these because we have not traditionally performed well in these areas.
    How does this relate to expenditure – well you seem to assume that the decline in public expenditure/income from the 1980s onwards is somehow costless. Take a look at the decline in health investment over this period. If you were proud of the Irish health system in the 1970s, when we almost invested 1.8% GDP in health, than imagine how we could actually start to invest less – we managed 0.4% in 2003. That is without taking into account a growing population who are rightly demanding a service equivalent to the other European countries. Sooner or later you have to pick up the can for poor investment.
    The above is not to excuse inefficiencies in the system, but it does seem that people are coming around to the idea that centres of excellence are a good way to go and that it doesn’t make sense carrying out some procedures are a local level – but this will cost money – and many of these reforms have already taken place in other countries
    So you can maintain an effective tax corporate tax rate in the region of 2-3 percent, continue to charge fees for point of access health care (which is free in many EU countries), squeeze consumers further by asking them to take health insurance and pay a health levy, have your mates above complain abour high VRT etc, take structural funds (in the 1990s/2000s) and now a bailout from the EU, and maintain that we must reward capital above all else.

  37. Elissa said on November 19, 2010 | Permalink

    I hate to break in here. But I don’t think DDM is saying that raising the corporate income tax wouldn’t be bad for Ireland. Clearly it would be.

    But this is not just about Ireland, or what’s good for the Irish economy. Ireland needs money from the EU. Specifically from Germany. And they have to take their own interests into account. And helping Ireland attract investment and tax revenue away from Germany isn’t exactly in Germany’s best interest. And there’s no conceivable reason why they should have to hand over German taxpayer money in order to help Ireland do so.

  38. Henry said on November 19, 2010 | Permalink

    Ronan, Fair play for your article however I too fall into the category of cynic when looking at the data you have presented.

    Surely our GDP is artificially high due to allowing companies flush their profits through ireland and then repatriating out of Ireland? If so then the real graph would have ireland topping out that list by a long way?

    Also where is the debate in Ireland at the moment about the morals of the low corporate tax rate? Surely its wrong for us to allow these companies to be flushing all of these profits through our systems?

    We are literally taking money out of the pockets of our neighbours and handing it over to corporations while keeping a small portion for ourselves – Why is that a good thing?

    It seems that even to suggest that the low corporate tax is a bad thing is somehow unpatriotic. Its the Bush school of thinking – “If you don’t like the low corporate tax rate then you must hate Ireland”.

    My suggestion is that we keep the 12.5 but tighten up on what is eligible at that rate. We have to stop the large scale corporate tax avoidance that is being perpetrated through our system!

    PS I’m not an economist so go easy on me!!

  39. Peter Tucken said on November 25, 2010 | Permalink

    I’m hoping to stand corrected but is the element relating to income tax the opposite of the below article?

    Great site, etc.

    http://www.ronanlyons.com/2009/07/28/a-little-quiz-on-irelands-income-tax/

  40. Ronan Lyons said on November 26, 2010 | Permalink

    Hi Peter,
    The article here is about the marginal rate (i.e. what percentage of each additional euro is taken in tax), while the link you’ve given discusses the average rate all-in (i.e. looking over all income, what percentage goes in tax). An ideal tax system would have as small a difference between the two as possible, to minimise perverse incentives such as “I don’t want to work an extra two hours this week as that would push me into a higher bracket and I’ll be worse off”. Ireland – clearly – is far from the ideal.
    Thanks for the comment and the chance to clear that up,
    Ronan.

  41. Gloria Vargas said on December 24, 2010 | Permalink

    Excellent article. I am Irish having spent the last four decades in Hong Kong and NZ. I did not understand the Irish situation and reading articles like this is excellent in explaining it. Mind you I think many in the Irish Govt didn’t and still don’t understand it either – so I’m in ‘good’ company.

3 Trackbacks

  1. [...] [...]

  2. [...] — and less urgent need for the help on offer from Europe, with its dark implications for some totemic Irish tax advantages. Nor are Ireland’s latest fiscal reforms voted in [...]

  3. [...] the point of who’s doing who a favour. Let’s leave aside, for the moment, the fact that the rate is a huge revenue raiser, that such things are a sovereign right and that Ireland is not being picked on for its low rate [...]

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