Will Tax Greed Force Up Irish Taxes?

Europe is known for its high taxes, but there is one exception: corporate income taxes. Compared to American corporate income taxes – federal and state – the EU has relatively mild tax rates. While punitive personal income taxes, very high payroll taxes, confiscatory value-added taxes and other taxes contribute to holding Europe back economically, the comparative advantage of moderately reasonable corporate income taxes has helped, on the margin, to prevent the economic crisis from getting even deeper.

Now there is a push in the EU to squander this one little competitive advantage that they have on the global economic arena. The EU Observer reports:

Ireland will scrap a controversial tax instrument which allows companies to legally shift huge profits from Ireland to countries with low taxes, the country’s budget minister has announced. Speaking in the Irish parliament on Tuesday (14 October), Michael Noonan told deputies that the scheme, known as “double Irish” would be closed to new entrants in 2015 and gradually phased out between now and 2020. He added that in the future all companies registered in Ireland would have to pay tax there. The double Irish enables companies to make royalty payments to separate Irish-registered subsidiaries whose parent company is based in another country, allowing them to avoid paying corporate tax. Taken together with Ireland’s corporation tax rate of 12.5 percent, far lower than the EU average, it has prompted plenty of criticism from other EU countries in recent years.

One reason why Ireland was able to elevate itself from the bottom of the economic ranks in the 1980s to one of the wealthiest nations in the world in the early 2000s was that it promoted entrepreneurship, business investments and free markets. A package of reforms, including a drastic cut in the corporate income tax and rules such as the one mentioned here, attracted many multi-national corporations who decided to use Ireland as their springboard toward the European market.

Now Ireland is under pressure from the European Union, and the reason is deeper than just the “double Irish”. The EU Observer again:

The European Commission is currently investigating whether the tax deal between software giant Apple and the Irish government breaks the bloc’s rules on state aid, as well as similar cases in the Netherlands and Luxembourg.

Reuters elaborates:

The European Union has accused Ireland of swerving international tax rules by letting Apple shelter profits worth tens of billions of dollars from revenue collectors in return for maintaining jobs. European Competition Commissioner Joaquin Almunia told the Dublin government in a letter published on Tuesday that tax deals agreed in 1991 and 2007 amounted to state aid and may have broken EU laws. … The Commission said the tax rulings were “reverse engineered” to ensure that Apple had a minimal Irish bill, adding that minutes from meetings involving Irish officials showed that the Irish tax authority did not even attempt to apply international tax rules in its deals with Apple. Instead, the company’s tax treatment had been “motivated by employment considerations”, the Commission said, citing the minutes of meetings between Apple representatives and Irish tax officials.

I am not a legal expert, but I know enough about how taxes work to be certain about one thing: tax laws are very complicated and almost always written to benefit either the lawyers – who get more jobs by interpreting the laws for us plebeians – or to generate as much short-term government revenue as possible in a static economy. This fact alone is a reason for a conflict between the EU and the Irish government: one of them is obviously not happy with how the laws are interpreted.

However, there is another aspect on this. The commonly shared wisdom among government expansionists is that all private income belongs to government by default, and that government does the private sector a favor by not raising tax rates to 100 percent. This is why a tax cut is viewed as a “gift” to taxpayers and a “cost” to government. Therefore, when Ireland allows businesses to make money at a lower tax rate than the rest of the EU, other European government see this as Ireland is giving corporations government money – a corporate subsidy. But not only that: they see that gift as being not just from the Irish government, but from all European governments. The reason is simple: by having a low corporate tax rate Ireland puts competitive pressure on other EU governments who then have to lower, or at least refrain from raising, their corporate tax rates. By being forced to hold back taxation, Ireland’s competitors think that they are being forced to give up their own money.

As weird as it sounds, this is the reasoning underlying the debate over Ireland’s tax policy and its corporate tax rates.