The rumour mills were buzzing over the weekend that, despite the Government’s stance that the country’s corporate tax rate was off the table, a deal was being discussed between Ireland’s Minister for Finance Michael Noonan and some of his European counterparts. The “deal” in question was a swap of sorts: in return for Ireland budging on corporate tax, there would be a one percentage point cut in the interest rate on the European part of the IMF-EU loan.
The arrogance on the part of Ireland’s European partners is flabbergasting. It is not even the case that the concession being offered to Ireland recognises the very different position Ireland is in, compared to countries like Greece and Portugal.
Ireland is not Greece or Portugal
Greece and Portugal are in need of loans from their closest partners because of profligate Government spending for a generation. Ireland’s track record on fiscal policy has been far from ideal, but nothing like the problems faced in Greece or Portugal. Ireland’s problem was not about how much revenue the Government raised and spent, but how it did this.
For example, when 2008 rolled around, the ratio of the national debt to the size of the Irish economy was about 30%. In Portugal, the figure was 70%, while in Greece – as in Italy – it was over 100%. A bit like Spain (40%), Ireland’s government had mismanaged the economy but did so in a low-debt way, at least during the good years.
No, Ireland has had to borrow at punitive rates from its closest allies because it made the decision to protect those who had lent to Irish banks… principally banks based elsewhere in Europe. The two-year banking guarantee should have been used as a period for winding down insolvent banks but instead Ireland found its banks stuffed to the gills with ECB funding so that existing bondholders could escape, which they by and large have.
The result is that Ireland’s taxpayers have taken a banking bailout bill of €70bn, in the name of European solidarity. The payback from those who benefited elsewhere on the continent? Nothing at all. In fact, Ireland is giving more: each of the countries lending to Ireland will do so at a large profit, so taxpayers elsewhere not only take no hit on their banks’ dodgy lending to Irish banks but actually make a profit.
That was a bitter enough pill for the Irish taxpayer to stomach. But now, in addition to having their banks bailed out by Irish taxpayers and making a profit on the whole thing, Ireland’s closest partners – in particular France and Germany – want to go a step further and meddle in Ireland’s sovereign fiscal affairs.
Hypocrisy and economic illiteracy
Late last year, there was much talk of Ireland’s sovereignty having been lost, as the IMF came into town and set out a plan for the next few fiscal years. But the IMF’s plan was one obvious to anyone with a passing interesting in fiscal sustainability: it involved improving Ireland’s deficit by setting out a plan for cutting spending while normalising those one or two areas of taxation that are out of step – in particular overly generous income tax credits and the lack of an annual property tax.
What France and Germany want to do is completely different. For a start, it is economically illiterate and hypocritical. It is economically illiterate because available evidence suggests that raising corporate tax rates reduces inward investment. Ireland is a hotbed for inward investment and so has much more to lose, from lost jobs and exports to lower government receipts due to income and consumption foregone. Raising Ireland’s corporate tax rate will not improve investment into France or Germany – countries like Switzerland and Singapore will gain – but such a move will worsen Ireland’s deficit and – ironically? It’s hard to tell any more – make it more dependent on loans from allies.
It is also hypocritical, because countries like France hide effective corporate tax rates as low as 8% under much higher headline rates while they want to punish Ireland for having effective rates similar to the headline rate of 12.5%. The message from the EU seems to be clear: countries in the EU are less sovereign than US states like North Carolina, New York and Delaware, who can all set their own corporate tax rates.
Perhaps most importantly of all, though, a “corporate tax rate for interest rate” swap is just a bad deal for Ireland when you add up the amounts involved. Ireland’s EU partners are lending €45bn as part of the EU-IMF deal. Suppose all of that were drawn down now. What would one percentage point gain Ireland? €450m a year – an amount that is largest in real terms in the first year and will gradually shrink in importance, due to inflation and growth.
And what would such a move cost? Well, Ireland’s currently attracts about 10,000 new jobs a year through foreign direct investment. Suppose a move on tax was either a five point increase in the rate (to 17.5%) or a move through some Consolidated Corporate Tax Base scheme that had a similar effect. An OECD review from 2008 suggests that this could put up to a quarter of Ireland’s new FDI at risk.
Deal or no deal?
What economic impact would this have over five years? Let’s be very generous to our EU partners and leave aside entirely revenues raised from corporate taxes – in effect, let’s assume the new changes don’t really affect existing FDI, just new FDI that Ireland would like to attract. Ireland currently hopes to attract 50,000 new jobs through FDI by 2016. If one quarter of those do not happen, that’s about €625m in salaries that the Irish economy is out of pocket.
Indeed, using the rule of thumb that ten new jobs from investment create a further seven new jobs indirectly, it’s more likely that the Irish economy would be €1bn less well-off per annum by 2016. The government would alone miss out on more than €450m, through foregone tax revenues on income and consumption. And whereas the benefit of a lower interest rate would fall in real terms over time, the costs would rise, as each year the new pot of FDI coming into Ireland is smaller than it would otherwise be. This is shown in the graph above.
If you were in charge of the Government’s coffers, would you pay €1bn for something worth less than €500m? You don’t have to be the Minister for Finance to figure out that’s a bad deal!