Beer, Taxes, and the Economic Crisis in Ireland
I recently completed a research trip to Ireland for the book I'm working on, The Political Economy of Investment Incentives. One oddity of the trip was that my favorite beers, Belgian Trappist ales, were more expensive in Dublin than St. Louis, even though Dublin is 3900 miles closer to Belgium and has no tariff on Belgian products.
The reason, of course, is taxes. Aside from the Scandinavian countries and Poland, Ireland has the highest value-added tax (VAT) in the European Union, at 21.5%. Of nearby countries, the UK has a VAT of 15%, France 19.6%, Belgium 21%, and Spain 16%. This disparity comes from Ireland's long-entrenched policy of charging a very low corporate income tax rate, currently 12.5%. It has to make up the tax revenue somewhere else, and VAT is part of that.
Ireland's corporate income tax regime is not very popular in the rest of Europe, except for the EU's new Member States, which have followed Ireland's example, with tax rates mainly in the 15-20% range. France is perhaps the most vocal in considering it unfair competition for investment, but these criticisms were muted as long as Ireland was poorer than the EU average. With the boom in Ireland's economy from the mid-1990s, the "political justification" for the low rate ceased to exist, as an official in Luxembourg's Ministry of Finance told me in 2001.
Ireland is suffering from the current economic crisis more than most countries. As Paul Krugman writes ("Erin Go Broke," http://query.nytimes.com/gst/fullpage.html?res=9A03EFDF173CF933A15757C0A96F9C8B63&sec=&spon=&pagewanted=1) Ireland's GDP is expected to fall by more than 10%, and its government finances are so bad, it is not able to borrow the money for a fiscal expansion. The government is cutting expenditures and raising taxes (though not corporate income tax), which will make the depression there even worse. No one I spoke to, across the political spectrum, thought the government had any choice on that. At the same time, Ireland is quite vulnerable to changes in U.S. tax policy, in particular the end of corporations' ability to defer tax on foreign operations until the profits are repatriated, something President Obama still says he will do. (The deferral provision makes it sensible for companies not to bring their profits home, but invest them abroad, costing untold potential jobs in the U.S.)
One scenario Krugman doesn't discuss, but that was mentioned to me several times in Ireland, is that it might seek a bailout from the EU. But between the low corporate tax rate and the country's failure to ratify the EU's Lisbon Treaty, EU policy-makers have little patience for Ireland. The speculation is that the EU might tie aid to an increase in the corporate income tax rate (the Lisbon Treaty has to be approved by referendum in Ireland, so it couldn't be part of a bailout agreement). Government officials tended to discount this, but as Ireland's downward spiral worsens, the government may have no choice but to give in on this major issue.
An aside: one of the factors contributing to Ireland's real estate bubble was that there numerous tax incentives for various kinds of property development, similar in some ways to tax increment financing in the U.S. (One tax break was for parking garages, which figured prominently in an infamous TIF in the St. Louis suburb of Des Peres.) A reporter for Ireland's RTE radio network happened to call an interviewee of mine as the interview was taking place, and I wound up commenting on the similarities in his story on "Morning Ireland" the next day. It seems to me that academics usually get their fifteen minutes of fame in 30-60 second increments. FWIW, you can listen to me here: http://www.rte.ie/news/2009/0326/morningireland_av.html?2514896,null,209
The reason, of course, is taxes. Aside from the Scandinavian countries and Poland, Ireland has the highest value-added tax (VAT) in the European Union, at 21.5%. Of nearby countries, the UK has a VAT of 15%, France 19.6%, Belgium 21%, and Spain 16%. This disparity comes from Ireland's long-entrenched policy of charging a very low corporate income tax rate, currently 12.5%. It has to make up the tax revenue somewhere else, and VAT is part of that.
Ireland's corporate income tax regime is not very popular in the rest of Europe, except for the EU's new Member States, which have followed Ireland's example, with tax rates mainly in the 15-20% range. France is perhaps the most vocal in considering it unfair competition for investment, but these criticisms were muted as long as Ireland was poorer than the EU average. With the boom in Ireland's economy from the mid-1990s, the "political justification" for the low rate ceased to exist, as an official in Luxembourg's Ministry of Finance told me in 2001.
Ireland is suffering from the current economic crisis more than most countries. As Paul Krugman writes ("Erin Go Broke," http://query.nytimes.com/gst/fullpage.html?res=9A03EFDF173CF933A15757C0A96F9C8B63&sec=&spon=&pagewanted=1) Ireland's GDP is expected to fall by more than 10%, and its government finances are so bad, it is not able to borrow the money for a fiscal expansion. The government is cutting expenditures and raising taxes (though not corporate income tax), which will make the depression there even worse. No one I spoke to, across the political spectrum, thought the government had any choice on that. At the same time, Ireland is quite vulnerable to changes in U.S. tax policy, in particular the end of corporations' ability to defer tax on foreign operations until the profits are repatriated, something President Obama still says he will do. (The deferral provision makes it sensible for companies not to bring their profits home, but invest them abroad, costing untold potential jobs in the U.S.)
One scenario Krugman doesn't discuss, but that was mentioned to me several times in Ireland, is that it might seek a bailout from the EU. But between the low corporate tax rate and the country's failure to ratify the EU's Lisbon Treaty, EU policy-makers have little patience for Ireland. The speculation is that the EU might tie aid to an increase in the corporate income tax rate (the Lisbon Treaty has to be approved by referendum in Ireland, so it couldn't be part of a bailout agreement). Government officials tended to discount this, but as Ireland's downward spiral worsens, the government may have no choice but to give in on this major issue.
An aside: one of the factors contributing to Ireland's real estate bubble was that there numerous tax incentives for various kinds of property development, similar in some ways to tax increment financing in the U.S. (One tax break was for parking garages, which figured prominently in an infamous TIF in the St. Louis suburb of Des Peres.) A reporter for Ireland's RTE radio network happened to call an interviewee of mine as the interview was taking place, and I wound up commenting on the similarities in his story on "Morning Ireland" the next day. It seems to me that academics usually get their fifteen minutes of fame in 30-60 second increments. FWIW, you can listen to me here: http://www.rte.ie/news/2009/0326/morningireland_av.html?2514896,null,209
