The Irish tax conundrum

US firms warn Irish over tax move
The Irish government has been given a stark warning from some of the biggest American companies in Ireland on the risk of a mass exodus if the country\’s low corporation tax rate is raised.

You can certainly see why some of the other EU states are pissed at them: a low corporation tax rate has indeed meant that companies have moved or set up there in preference to other places.

But then that\’s good as it\’s meant that those other places face pressure to make sure their own corporate tax rates are competitive: and we know very well that corporation taxes are, along with capital taxes, the most expensive ways of raising revenue.

For all taxes have deadweight costs (economic activity that doesn\’t happen because of the existence of the tax) and from lowest to highest such costs it runs property taxes, consumption taxes, income then capital and corporation.

However, we also know that corporation taxes are politically easy to impose: it\’s not just \”the bastard rich bastards should be paying\”, it\’s also that no one sees the incidence of the tax. Which we know is mostly, in open economies, upon labour. So there\’s very little internal pressure to keep corporate taxes low, even though economically it\’s a very sensible idea indeed. Thus that external pressure, from competition, is a good thing.

However, it\’s also true that Ireland does need more revenue (given their appalling and absurd decision to guarantee all bank liabilities). But this crash hasn\’t been caused, in any manner at all, by either corporations or the rate at which they are taxed. Rather, it\’s been caused by low interest rates (thanks euro!) leading to a property boom (thanks euro membership!) and then the crash of said boom.

And we\’re seeing, now the tide\’s going out, who in Warren Buffett\’s words, has been swimming without trunks on.

And it isn\’t the corporate sector: it\’s the property and banking sector. So charging the cost of the mess to the corporate sector doesn\’t really make all that much sense.

Charging it, in some manner, to the property sector would indeed help though. For, amazingly, Ireland seems not to have any equivalent of council tax. There is no regular charge upon the ownership of property. There are transaction taxes on the exchange of it (which paid for an awful lot of the State during the boom) but nothing for the ownership of it.

And, arguably, there should be. Partly because such property taxes have those low deadweight costs and partly because it will temper any future boom (and as long as Eire stays in the euro, there will be another boom. For interest rates will still be set for Germany/France, not for a small peripheral economy).

In fact, given the crisis, they\’ve probably got the opportunity to bring in a proper, full scale, Land Value Tax.

Except, well, there\’s a political problem here. An historical one. Given the way that for centuries (yes, us bastard English) the Irish weren\’t able to own land in their own country (well, OK, not quite a ban, but certainly it was made a lot harder for a native son to own the soil than it was the Anglo Irish), the subsequent riots, insurrections and reforms, it really might not be politically possible to charge people for simply owning land.

Something of a problem: but raising the corporation taxs doesn\’t do anything at all to address any of the extant problems.

4 thoughts on “The Irish tax conundrum”

  1. I’ve had a silly idea. Instead of the UK bunging Ireland £7bn, they should buy all Ireland’s empty estates. Then fill them with all the unemployed currently living in council houses. Ireland wins as it gets money into its system. The UK wins as it’s unemployment rate plummets. And the UK wins again when property prices eventually recover and it can sell all the Irish properties. 🙂

  2. Well said, SBML. And also “given their appalling and absurd decision to guarantee all bank liabilities”; yes, that is quite a puzzle. Bribery? Stupidity? Panic?

  3. “EU states are pissed at them”
    I think you mean “pissed off with them” ( or perhaps ” it ” – Ireland being singular.)

  4. Tim Worstall makes some excellent points but could I correct the statement ‘it really might not be politically possible to charge people for simply owning land.’ Land Value Tax is not a tax on land. It is a levy on the annual rental value of land that arises from the location of each site.

    The current system of taxing wages and production to improve infrastructure with new roads, sewers, streetlights, etc, increases the location value of land. This provides the landowners to get a higher price and make houses more expensive, and allows them to increase the rent for private and business tenants. So the community pays twice – taxes and higher rents. What makes LVT so attractive is that if is not a ‘deadweight tax on production’ but an incentive to use land to its full potential. Furthermore it returns to the community the value that the community creates in land value – a perfectly fair way of raising public revenue without taking anything from anybody that they have created or produced themselves. The objective is to reduce and eventually abolish other taxes.

    Ireland has a wonderful opportunity to adopt LVT and by lowering the cost of land ensure their economy was able to attract more business and employment to is shores.

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