Monday, November 22, 2010

Irish tax: all's fair in love, war and sovereign bank rescues

Ireland and the European Union have come to some kind of a bare-bones agreement over a rescue for its bankrupt economy. The details are still to be hammered out, and Irish Prime Minister Brian Cowen said that the issue of Ireland's low corporate tax rates "has not arisen." Fireworks still to come, then, and we guess this will give Irish politicians time to manage public opinion to allow for the possibility of higher corporate tax rates.

We note a video interview with Edward Hadas, assistant editor at the Financial Times' highly influential Lex column, who had these things to say on Ireland having to give up its predatory low corporate tax rate:

Maybe all’s fair in love, war and sovereign bank rescues . . they are going to see if they can't squeeze the Irish to abandon a little bit of sovereignty, as the Irish see it, but from the European point of view, to play fair in the tax wars.

Those last words - 'to play fair in the tax wars' - are exactly the right way to talk about this. The Brazilians talk of tax competition in terms of a "guerra fiscal" - fiscal war. This is economic warfare: not just between nations, but also between the masses of ordinary citizens and wealthy individuals and corporate interests who seek to free-ride on their backs via tax havens.

So-called tax competition involves countries setting out to poach each others' tax revenues. This kind of competition is entirely unfair. It gives wealthy capital owners and large, offshore-diving corporations advantages over smaller firms and ordinary working Joes that have absolutely nothing to do with real productivity, real competition, or producing better or cheaper widgets. It is simply about transferring wealth from poor to rich. That is all. There is nothing fair about it - and the Europeans are dead right to want Ireland to play fair.

That is one reason why Richard Murphy is right to point out why headlines like this, from Swissinfo,
Cantonal eyes smiling at Irish economic woes
are so sickening. (Perhaps those gleefully smiling eyes might like to look at this.) Hadas then goes on with something that appears, at first, to be supportive of tax havenry, but he then changes tack:
"To be fair to the Irish, there is some evidence that low corporate tax rates do in fact gain you a competitive advantage in international relations
. . .
It was one of the implicit subsidies that the EU gave Ireland - they allowed it, as the Europeans see it, to have low taxes and attract investment and get rich. Now, though, the case is it is not at all clear that Ireland will be hurt that much by a higher tax rate, and it is now appropriate that Ireland should play fair - at least that’s a good argument."

Indeed. (And we should add that this is a rat race the Irish set out upon -- and the trouble with rat races, of course, is that even if you win, you are still a rat.) Hadas has more.
You can get a certain advantage from low corporate taxes, but eventually the government has to provide goods and services, and someone is going to have to pay, and the poor beleaguered irish taxpayers are going to end up paying.

It is a really hard case for the Irish to make at this point that they should have such an advantage over the people who are giving them the money to dig themselves out of the hole that they themselves dug.
That last one is so good that it may go onto our quotations page. The latest Lex column notes, in addition, that Ireland's implicit tax rate on capital and business income is less than three fifths of the eurozone average. That is some aggressive poaching going on.

The academic literature on corporate tax rates is inconclusive at best, Lex notes. So the decision on Ireland's tax rates is likely to be made

"on the basis of a well established political principle: he who pays the piper calls the tune."

Which in this case, as Hadas notes, is not just a matter of raw politics: it is what is right, too. And one last thing, courtesy of Alex Cobham of Christian Aid: a reminder of something the British Conservative Party politician George Osborne, now British Chancellor (finance minister) said in 2006:
"I want to examine whether we could not adopt elements of Ireland's simple and effective approach."
We wonder if he's quite so effusive about Ireland's miraculous economy now.


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