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There’s more to economics than tinkering with tax

The obsession with Ireland’s corporation tax rate is a distraction from the serious business of creating new wealth.

Jason Walsh

Topics World

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Since the International Monetary Fund (IMF) and the European Central Bank (ECB) hit Dublin last month, there has been endless wailing about how Ireland’s corporation tax must not be touched by our new masters, as it is the key to the country’s jobs strategy.

It sounds sensible. After all, why would anyone come to Ireland if our tax rates were on a par with better-developed countries such as France or the UK?

Of course, if you stop to think about that for a moment, it rather loses its shine as a defining point of Irish economic policy. Ireland has ceased to be a cheap labour economy (though plenty of politicians and business leaders plan to reverse that development as soon as they get their hands on the levers of power), but if all the country has going for it is lower tax than countries like Britain… well, that’s quite pathetic, isn’t it?

Ireland’s corporation tax rate of 12.5 per cent is the third lowest in Europe, after Bulgaria and Cyprus, both of which levy 10 per cent. The EU has never been particularly happy with Ireland’s low business taxes, seeing them as going against the spirit of the union. Indeed, late last month a group of Euro MPs demanded a doubling of the rate as part of the so-called ‘bailout’ being forced on the Irish public. The motion tabled in Strasbourg called for an EU-wide corporate tax rate ‘considering that European taxpayers and citizens have to take a major risk in order to stabilise a financial system which has been profiting from the exceptionally low Irish corporation tax rate of 12.5 per cent’.

The fact that the word taxpayers came before citizens does rather give the game away: politicians on all sides of this argument have completely run out of ideas and so fiddling with taxation can be passed off as radical. In truth, the Irish obsession with corporation tax indicates a country that has no industrial policy whatsoever, and the EU’s hatred of it is an expression of a similar malaise: deindustrialisation.

Supporters point to the presence of Microsoft, Google, Facebook and Apple on Irish shores, saying they would not be here were it not for the tax regime. Arguably this is correct, but it doesn’t tell the whole story. True, the presence of US-based corporations in Ireland should be welcomed. After all, they do create jobs. However, those jobs tend to be quite shallow in nature.

As US financial journalist Doug Henwood noted on his radio show, Behind the News: ‘There is little research and development done in Ireland, or procurement of goods and services, meaning that there are no spillover effects from the multinationals’ investment.’

In simpler terms, Microsoft’s office in south county Dublin is welcome, but if it opened a major software development centre that would be even more welcome.

Moreover, there is some evidence that Ireland’s obsession with creating a low corporate tax economy has hurt its industrial development. At one point, Apple had significant manufacturing – or at least assembly – facilities in Ireland. Today, the bulk of Apple’s manufacturing and assembly is done in Asia, and the ‘post-industrial’ likes of Google and Facebook are infinitely worse.

Or perhaps it’s even simpler than that: Irish policymakers and business leaders prefer to harvest low-hanging fruit, selling Ireland simply as a place for multinationals to enjoy arbitrage opportunities and an Industrial Development Agency-subsidised English-speaking literate workforce so that Ireland’s self-serving crony capitalists can beg the measly crumbs of profits created by foreign firms domestically and abroad.

As Ireland became increasingly viewed as a location for accounting and tax operations, few bothered to suggest using Ireland as a location for research and development or manufacturing.

Ireland’s low corporation tax regime is an article of faith, both for mainstream voices who say it must under no circumstances be raised, and for the Irish left who say it is nothing but corporate welfare.

The sad reality is that both are right: Ireland’s low corporate tax rate is a form of state aid for private enterprise and, in the absence of anyone proposing a serious alternative, Ireland has no choice but to present itself as a cheap option for multinationals seeking a European location to funnel money through.

Any solution to Ireland’s economic problems should not discount foreign direct investment and multinational job creation. But what is also needed is a strategic industrial policy to define and shape positive spillover effects. A low tax-rate ought not to be a crutch to ameliorate the absence of a long-term industrial strategy. However, until Irish politicians are willing to invest in real, productive activity, being a kind of ropey not-quite-tax-haven (without the other traditional benefits such as sunshine or skiing) is all Ireland will ever manage.

This hasn’t gone entirely unnoticed, but the wrong conclusions are being drawn. Writing in the Guardian, Polly Toynbee struck a particularly hateful tone, saying Ireland was not part of the ‘civilised world’ and was engaged in ‘tax piracy’. She is correct that businesses are acting in their own selfish interests (quelle horreur!). But the anti-capitalist former SDP member is apparently incapable of seeing that Ireland is not just a location for tax avoidance; it is also a country with a citizenry who are about to be put through the wringer by EU diktat.

This cod-leftish Little Englander stance does nothing to address the fact that virtually all western European nations, with the exception of Germany which is still the world’s largest exporter by value, have run away from promoting industrial development, preferring instead to monkey around with taxation and other financial mechanisms in order to create jobs. Britain is the worst offender.

Ireland’s dogmatic defence of the low corporation tax-rate is an excuse not to meddle with or upset our fragile dependence on creaming off foreign profits. Opposition to the 12.5 per cent rate is primarily motivated by a desire to demand that corporations pay their fair share towards the new austerity. While this may sound fair, in fact it ignores the structural weakness of the domestic economy, instead basing antipathy to low corporate tax on an article of faith that this is immoral corporate tax-avoidance.

The corollary of this moral posturing is that we concede the political arguments against cuts and for economic prosperity, but are content to make sure that the poor, the wealthy and foreign corporations all share an equitable burden of the austerity. For anyone with a bit more ambition for the future, this is a barrier to tackling the difficult task of restructuring the economy to focus on creating value so that we no longer continue to siphon off value created elsewhere in the murky world of financial and tax arbitrage.

Jason Walsh is a journalist based in Dublin.

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Topics World

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