I have argued many times (most directly here) that, contrary to the claims of nearly all Irish policymakers, low taxes are not what makes the Irish economy tick. The country experienced 30 years of low taxes with no gain on average European income; it was only after 1987 that other policy changes (education, EU-funded infrastructure, and Social Partnership) led to gains on the EU average. Thanks to a Tax Justice Network blog post, I now have a great illustration to show this in living color.
The graph below plots Irish income per capita as a percentage of the EU average from about 1955 to 2012, with important dates noted as vertical lines. Notice that Ireland doesn't get above 60-65% until after 1990. In addition, the Commission-enforced increase in the corporate income tax rate from 10% to 12.5%, which took effect in the early 2000s, had no impact on the Celtic Tiger's spectacular rise in income per capita relative to the EU average. This means Ireland had higher growth when the tax rate was 12.5% than when it was 0%!
Q.E.D.
Source: Tax Justice Network, link above
Cross-posted at Angry Bear
When Ireland increased the tax rate in 2000, what was happening in other EU countries? Did they increase taxes more than Ireland? If the gap grew larger in those years, could that explain the increase in growth?
ReplyDeleteThe general trend of EU corporate income tax rates has been downward in this century. Both Belgium and Austria cut rates at about the same time Ireland raised them for foreign multinationals.
DeleteThere are indeed lots of reasons why companies source production in Ireland. Of course the US inability to enforce its own transfer pricing rules benefit companies like Apple who park a lot of profits in Apple Operations International.
ReplyDelete" In addition, the Commission-enforced increase in the corporate income tax rate from 10% to 12.5%, which took effect in the early 2000s, had no impact on the Celtic Tiger's spectacular rise in income per capita relative to the EU average. This means Ireland had higher growth when the tax rate was 12.5% than when it was 0%!"
ReplyDeleteUmm, the 10% applied only to manufacturing and financial services. The 12.5% to the whole economy....
This is true, but I'm not sure what your point is. 10% was the rate faced by foreign multinationals from the early 1980s to the early 2000s, and then foreign multinationals (along with the domestic economy, as you say) had a 12.5% rate. Prior to the 10% rate, MNCs faced a 0% rate, and didn't gain on EU average income at all.
DeletePlease clarify.
Facts are the perfect counterfactuals!
ReplyDeleteAnd even better, when you can make a picture of the facts using a blue line and some red lines, they're even easier to understand!
Basically, Ireland is the only natively English-speaking part of the EU proper (by which I mean, they use the Euro and aren't constantly talking about leaving the EU, both of which differentiate them from the UK). So they become the default location for international businesses that use English as a working language that want secure access to the EU market. That's the "secret" of their growth since the late 1980s.
ReplyDelete