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An American in Ireland by The Yank

Ireland's corporate tax rate not a factor in economic bust

Posted on Friday, May 21, 2010 at 02:05 PM
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During the Celtic Tiger years there were all sorts of articles in the press outside Ireland trying to explain why we were having such a boom. Some were better informed than others and just about everybody better than Tom Friedman, who declared that it was thanks to "free" college education and national health care. (Can we now blame college professors & doctors for the bust?!)

Given all the attention the Celtic Tiger received it's hardly a surprise that there are many who are now trying to explain what went wrong. Again, however, some are way off the mark. This week we had two prime examples.

Richard Murphy on the Guardian's web site and two economists, Peter Boone & Simon Johnson, on the New York Times' web site identified Ireland's low corporate tax rate as a primary cause of the burst-bubble economy we have now. They are wrong, wrong, WRONG.

Ireland's 12.5% corporate tax rate is one of the best things that the Irish government has done from an economic policy perspective. The low corporate rate is one of the (often the only) key incentives to attract footloose capital to Ireland, which is after all a fairly underpopulated, small island with difficult transport links to Europe's main population centers. The recent disruption to Irish commercial life caused by the volcanic ash made that pretty plain.

There is a lot of guff spoken about how foreign companies are attracted to Ireland's "well-educated population", but there is no way that any American (or other) company can objectively assess the Irish education system and compare it with any other EU nation's. The best we can hope for is that we believe our own propaganda so that we make a convincing case to those corporate heads who are looking for an EU base.

It is true that we have a younger population, which I'm sure helps bring in companies like Oracle, Microsoft, Google, Facebook and others. Still, I doubt that would be sufficient if not for the fact that those companies know, without a doubt, that their profits here will be taxed at 12.5%. The tax rate is so important that no major political party makes a case against it and it is often spoken of as being so crucial to Ireland's economic well-being that the Irish government would block any EU move to force a change (sort of a nuclear option).

I don't know what their motives might be, but these gentlemen would be better served investigating the effect of being part of an economically inappropriate (for Ireland) currency union or the failure of government regulators to control the banks than to deny the success and benefits of one of the government's few genuine successes. 12.5% is what it is and where it should stay.


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DennisQ | May 31, 2010, 02:56 AM EDT
You're right - the low corporate tax rate should not become a scapegoat. Big Capital dispenses favors capriciously, and then moves on. When multinationals leave whole countries in the lurch, the damage will be long-lasting. The most enterprising young people who became managers and bought homes are out of work and can't pay their mortgages. They'll have to emigrate to start afresh. The social cost to the Irish will be enormous.

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TheYank | May 28, 2010, 09:55 AM EDT
DennisQ,

Yes, the point where the marginal costs outweigh the benefits must be acknowledged and when a MNC crosses that line they should be shown the door. However, the marginal costs to the nation are not always in synch with the marginal costs to the government, who will weigh the impact in a constituency before they make any decision in the nation's interest.

I still think the low corporate tax rate - and all the costs that accompany that - are a good bet for Ireland.

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DennisQ | May 28, 2010, 07:45 AM EDT
Corporations can get so finicky that they can raise their demands to just short of the point where it's simply not worth it to have them. In economic jargon, this is the point where marginal cost equals marginal benefit. Don't want us calling the shots? Fine, we'll take our act to Singapore. Or Chile. In world history this explosion of private power is unprecedented - governments don't know what to do about it.

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TheYank | May 27, 2010, 10:52 AM EDT
DennisQ,

The thing is, you can only go so low on the corp tax rate before other issues become paramount: ease of hiring/firing, cost of electricity and other resources, tax code similar to the home nation's, etc.

The difference between 35% and 10% is great. The difference between 10% and 7 - probably not so much.

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DennisQ | May 27, 2010, 03:56 AM EDT
There's nothing uniquely Irish keeping multinationals in Ireland. 12.5% is a good corporate tax rate until some other country offers 12%. The underlying reality here is that nobody knows what to do about the multinationals. Regulate them and they leave; entice them with tax breaks and they get away with as much as corruptible politicians will let them.

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