There’s nothing unfair about the Irish having low taxes
Low corporate taxes are not incidental to Ireland’s economy. They are critical to it
The “double Irish” might sound like an especially strong glass of whiskey. In fact, however, it is something far more potent – a phrase used by tax lawyers to describe the way revenues for multi-nationals are booked through subsidiaries in the country to reduce their global tax bills. But, if the European Union gets its way, it will soon be consigned to history. The bureaucrats in Brussels are bullying the Irish into shutting it down.
That is part of what now looks like a co-ordinated campaign against Ireland’s low corporate tax rates. The European Commission is also attacking Ireland’s tax treatment of Apple, arguing that it amounts to illegal state aid. A full-scale assault on Ireland 12.5pc corporation tax rate, the lowest in the developed world, now appears to be under way.
Plenty of people will sympathise with that. There is a view that lowering rates somehow amounts to unfair tax competition and that, if states stopped playing that game, it would be easier for all of them to raise more revenue from companies. But that is ridiculous. In fact, all competition is to some degree unfair. A sovereign state is perfectly entitled to use whatever resources it has at its disposal to make a living for itself, just as an individual is. In the long run, attacking that right makes everyone poorer.
Lower corporate tax rates were one of the keys to the Irish economic miracle which, until the euro crisis hit in 2008 and 2009, transformed it from a relatively backward, agricultural economy into one of the wealthiest in the world. Ruairi Quinn, the finance minister from 1994 to 1997, and as the son of a car dealer, who knew a bit about how to sell things, slashed the rate to 12.5pc. Over the next few years, multinationals flocked to Ireland, bringing jobs and wealth with them.
In 1990 Ireland’s per capita GDP was 78pc of the EU average; by 2005, it was 120pc. It had jumped from the third division to the Premier League.
It is important to bear that history in mind. Low corporate taxes are not incidental to Ireland’s economy. They are critical to it. Now they are under sustained assault. EU officials have complained about unfair tax competition from the Irish for years with little success.
When the country had to be bailed out during the euro-zone crisis, plenty of French and German politicians wanted its corporate tax rate to be increased as part of the rescue package. The Irish stood firm. Now they are attempting to undermine it piece by piece instead.
One front has been opened on what the Commission claims are negotiated tax deals between the Irish government and big companies. Another has begun on the twist in the law that allows companies to route profits through Ireland. We can expect more in the years to come.
Even if the Irish don’t buckle, it may well still have an impact. Companies want to know what their liabilities are and, if they are worried the EU might use the courts to challenge their Irish tax bills, they may decide it is not worth the hassle of locating there.
The Irish are competing unfairly, we’ll be told. They are engaged in a race to the bottom, which will undermine the ability of any government to tax the corporate sector. They will make it impossible for other European governments to raise the revenue they need to plug their budget deficits and maintain the social spending their electorates expect.
“Fair tax competition is essential for a level-playing field between our businesses,” said the EU’s Taxation Commissioner Algirdas Semeta. “Our social and economic model relies on it, so we must do all we can to defend it.”
That is complete nonsense. There is nothing unfair about setting low corporate tax rates. If the Irish believe that will help them get ahead, they are perfectly entitled to do so.
In a certain sense any kind of competition can be described as unfair: if Samsung come up with a better smartphone, that is unfair on Apple; if Manchester City buys some better football players, that is unfair on United. The same is true for nations: it isn’t really fair that the French are so good at making wine or the Germans cars. Most individuals, firms, regions and nations have something that they are good at doing. If they are sensible, they specialise in that, become even better at it, and sell it around the world.
Tax, whatever the bureaucrats in Brussels might think, is not any different. Countries are perfectly entitled to specialise in lowering them, if that is what they think works for them. In Ireland, the total tax burden comes to just 27pc of GDP, according to calculations by the Heritage Foundation.
That compares with 44pc in France and 37pc in Germany. They have also chosen to load taxes on to consumers and individuals rather than on companies. The VAT rate in Ireland is 23pc, compared with 20pc in France and 19pc in Germany. With a top rate of 41pc, it has personal taxes that are in line with the rest of Europe.
So the Irish have decided to have a significantly smaller state than most other European counties and therefore need less revenue to pay for it. They have also decided to pay slightly higher consumption taxes. That mix allows them to offer corporations a better deal. That is a perfectly legitimate choice for them to make.
Even U2 singer Bono, hardly a rabid free marketer, can see that. “Tax competitiveness has brought our country the only prosperity we’ve known,” he said this week, referring to the EU’s campaign against Ireland. “That’s how we got these companies here. . . We don’t have natural resources. We have to be able to attract people.”
It doesn’t make any sense to accuse the Irish of illegal state aid either. When you give a person or a company a tax break, you are not subsidising them. You are simply allowing them to keep more of their own money. You can only describe it as “aid” if you think all corporate earnings belong to the state, which might allow shareholders to keep some of it. In reality, the EU is trying to clamp down on choice and diversity.
Maybe the Commissioners believe that if the Irish weren’t able to offer lower taxes to multinationals, those factories and offices might go to France or Germany of Belgium instead. In fact, the offices would go to Switzerland or Singapore and the factories to China. Ultimately, that will make everyone in Europe poorer.
They wouldn’t clamp down on the French making so much wine on the grounds that it was hurting everyone else. Nor would they clamp down on the Germans for being better than anyone else at making cars, and tell them they should give everyone else a chance. So they shouldn’t clamp down on the Irish for being good at lowering taxes – because that genuinely is unfair.
