13 January 2008

Taxation in Ireland, or Arguing Supply-Side Economics

I'm about to do something which I absolutely never do, which is to speak absolutely authoritatively about something I know virtually nothing about. Namely, in this instance, economics, specifically, tax policy.

Last night, I was chatting with a libertarian friend of mine who was trying to defend supply-side economics, specifically referencing "Ireland, which instituted a flat tax and a 0% corporate tax rate, and their economy boomed." I told him I needed a reference for that, and he said he'd get me one. If and when I get it, I'll be happy to link it here and discuss it, but for now let me just comment on the general thesis.

I won't comment on the current state of the Irish economy, as I couldn't begin to do an independent analysis of the econometrics of said country, but I can google as well as anyone, and while Wikipedia has its flaws (and should obviously be taken as only a first-approximation kind of reference), reading the pages for Taxation in the Republic of Ireland and Corporate Taxes in the Republic or Ireland give some interesting details.

From the first:
The system of taxation in the Republic of Ireland is broadly similar to the system of taxation in the United Kingdom. On an individual basis most people are taxed through the Pay As You Earn (PAYE) system, based on their ability to pay - the system is quite progressive with little or no tax on low earners and a high rate applied to top earners. For businesses, tax rates are among the lowest in the world with many firms enjoying corporation tax rates of between 10% and 12.5%. A large amount of central government tax revenue is derived from value added tax (VAT), excise duties and other taxes on consumption. The Irish tax system is primarily in place to pay for current expenditure programs, such universal free education (including third level), free healthcare, old age pensions and unemployment benefit, and public capital expenditure, such as the National Development Plan.

That's the very first paragraph of the Wikipedia page. The individual incomes taxes are highly progressive, even more so than the US, and pay not only for full education through college but for a universal health care package. Ireland also has a value-added tax in the place of a sales tax, from which a large percentage of their government revenue derives.

What Ireland does have is a relatively low (although not nonexistent) corporate tax rate. But:

Other significant contributors to the national budget in 2004 were corporation tax and excise duties, which contributed roughly €5bn each. This is somewhat surprising as Ireland has the third lowest rate of corporation tax in the world; with a top rate of just 12.5%. Many multinationals are engaged in tax optimisation utilising Ireland's favourable tax rate by reporting the bulk of their profits in Ireland or using transfer pricing to artificially lower profits in high tax countries and report the profits in Ireland.

In short, revenues remain high despite low tax rates for corporations because out-of-country corporations essentially set up mail drops in Ireland and consider large profits (which may or may not ever actually reach the shores of Ireland) to be "generated" from that country for taxation purposes. It's a paper scam, essentially unfairly taking taxation revenue from other countries and artificially giving it to Ireland. If other surrounding countries tried to reap the benefits of a lower corporate tax rate, Ireland's revenues would drop as "their" paper profits went to other low-tax countries.

I fail to see how this is a victory for supply-side economics. If the US attempted a similar move, it would be highly unlikely to have anywhere near the same effect, as the US is already home to many corporations that claim profit here. In any case, such paper-shuffling really only enriches the corporation doing the shuffling, as transferring the cash back to the home office is usually possible.

As an aside, I wonder if that might be a way to get universal health care in the US, by more closely emulating the Irish model. Large corporations have a much lower effective tax rate in the US due to lobbyist-acquired exemptions and armies of accountants taking advantage of them -- if we removed the exemptions but lowered the official corporate tax rate to the unofficial one, but tied it legislatively to universal health care (not health insurance!), it might be possible to maintain a somewhat revenue-neutral tax revision while making a large stride towards greater equality in opportunities for poor Americans. Something to consider, anyway...

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