In Praise of Irish Corporate Taxes
John McCain expended a lot of time on the trail slamming America’s corporate income tax and lauding Ireland as a superior model. And guess what? McCain was right — Ireland is a better model. Unfortunately, McCain’s actual plan wasn’t to make our corporate income tax more like Ireland’s. Instead, he wanted to leave the loophole-ridden mess as it stands and then cut rates. But check out Ben Furnas’ chart:
As you can clearly see, Ireland raises more not less income from their corporate taxes. That’s because their lower rate is levied on a broader tax base, with many fewer loopholes. What’s more, reform of that sort not only can raise revenue, it boosts economic growth because the private sector allocates its resources the most efficient way possible and then just pays taxes on it, rather than expending lots of time and energy on trying to squeeze into the loopholes. I’m all for fiscal stimulus, but now would also be a nice time to undertake structural reforms of this sort that could boost growth while improving the long-term budget situation.
48 Responses to “In Praise of Irish Corporate Taxes”
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November 14th, 2008 at 10:38 am
always after me lucky loopholes!
November 14th, 2008 at 10:47 am
I find this a little disingenuous even if I agree with your basic argument. For one Ireland is able to raise more corporate tax revenue as a percentage of GDP because it behaves as a de facto tax haven. By making its taxes competitive it is able to siphon off tax revenue from other economies without a proportionate increase in GDP. It is sort of like using Monaco’s high ratio of income tax revenue to GDP as justification for a ridiculously low income tax rate.
November 14th, 2008 at 11:06 am
Aye, we’re a sort of offshore pirate state leaching revenues from the rest of Europe. Kind of like Delaware without toll roads.
Oh, and our economy is well and truly scragged by the credit crunch, far worse than the US’s.
November 14th, 2008 at 11:11 am
I downloaded and then enlarged the image on my computer. Best as I can tell the U.S. (Ireland) gets corporate tax revenues equal to 2.7% (3.5%) of GDP. Never has Matt made so much of so little. The post just seems to a pretext for some more McCain snark. Somebody quick, tell Matt the election is over McCain lost.
November 14th, 2008 at 11:18 am
I disagree, this is an excellent post. The U.S. is becoming increasingly less competitive and less attractive for business as a result of our regulatory framework and our enormous corporate tax. Matt’s conclusions are the basis for a reasonable compromise…Drop the corporate tax rate and shore up the loopholes. I’d add to it dropping SOX and a few other stupid regulations that have predictably failed us over the past year, but I’d imagine that might be a bridge to far for my progressive friends.
November 14th, 2008 at 11:23 am
Ireland is a parasite on the rest of the EU. It is as much of a model for taxes as Delaware is for credit card regulation in the US.
November 14th, 2008 at 11:31 am
Easy there why oh why…
Why is it Ireland’s fault that Germany and France want to overtax and overburden their businesses? If they want some of that business, they can change their own stupid laws. Ireland’s no parasite…It just understands how the game is played.
Ireland spent enough time in the cellar of Europe to wise up and improve its future. Apparently France and Germany haven’t woken up to globalization yet.
November 14th, 2008 at 11:32 am
It is insanity to believe that a government of, by, and for lawyers will ever make any law simplier.
Lawyers make their livings making things complicated and then not answering questions. Look for the tax code to become more complicated as the Democratic controlled government works hard to inject more social engineering into the process.
November 14th, 2008 at 11:41 am
It’s also important to note that personal taxes are also relatively high in Ireland. No conservative will go for that one.
November 14th, 2008 at 11:44 am
Ed Smithe, the argument is that Ireland is acting as a parasite because without the existence of, say, France and Germany, the companies that use Ireland as a tax haven would not have a consumer base to cater to, much the same way that Bermuda’s status as a refuge for reinsurance companies would not be possible were there not an insurance industry that exists in the rest of the well-regulated world.
Delaware is making due with what it has to work with, but there’s a reason why the rest of the US doesn’t change its laws to conform to Delaware’s, and there’s a reason that the rest of the EU doesn’t change to line up with Ireland’s laws: Ireland simply has less to start out with and, thus, less to lose.
November 14th, 2008 at 11:45 am
Though let it be said that I agree with MattY’s overall argument. Corporate taxes have too much room for evasion because everyone wants to hand out targeted cuts, creating a cottage industry in creative corporate accounting. Nevertheless, it is disingenuous to claim that everyone can be a tax haven as Ireland is.
November 14th, 2008 at 11:58 am
I’m pretty sure McCain version 2000 railed against corporate tax loopholes. His arguments against ethanol were part of this line of thinking.
November 14th, 2008 at 11:59 am
If you read yesterday’s NYT piece on Ireland’s woes, you’ll see that it’s rather likely that Ireland will find itself on the other side of the United States in that chart the next time it’s updated.
November 14th, 2008 at 12:00 pm
And by New York Times, I obviously meant the Washington Post: http://www.washingtonpost.com/wp-dyn/content/story/2008/11/13/ST2008111300809.html
November 14th, 2008 at 12:07 pm
I believe Obama has said he’s open to this sort of reform, so maybe he’s not a fire-breathing socialist.
November 14th, 2008 at 12:49 pm
The U.S. is becoming increasingly less competitive and less attractive for business as a result of our regulatory framework and our enormous corporate tax. Matt’s conclusions are the basis for a reasonable compromise…Drop the corporate tax rate and shore up the loopholes.
One of the main reasons why American businesses are less competitive isn’t the regulatory framework or the “enormous” corporate tax – it’s the fact that American businesses are expected to pick up their employees’ health care costs and then compete against companies where health care is nationalized and not a burden on business. Instead of knee-jerk arguing for reduced regulation or corporate taxes, those who wish to argue for corporate competitiveness would do much better arguing for nationalized health care.
November 14th, 2008 at 12:50 pm
Hello! We did this in the 1980s. The business community freaked out because we had whole cottage industries built up to create nothing but tax losses. These partnership were run to say manage real estate or some windmills or invest in wildcat wells or movies, but the real purpose was to lose money, which could then be offset against gains. It was great for rich people. I used to love how all these general partners of limited partnerships would expound about this or that topic of business and be real serious about “the market” and “social darwinism” and such, when their whole reason to live was to lose money. They didn’t know how to succeed, ie generate operating profits if their lives depended on it. All of this begat the S&L crisis. So we tried it. It worked but then real base of the Republican Party freaked out.
November 14th, 2008 at 12:56 pm
Simplifying the tax code might have the added benefit of increasing the number of public defenders; there’d be fewer tax attorneys, and those lawyers would have to practices something!
November 14th, 2008 at 2:38 pm
We *should* simplify the corporate tax system. However, much like the farm subsidy system, the day after the Omnibus Corporate Tax Rationalization Plan of 2009 passes, someone will introduce a new loophole.
Targeted tax breaks without end, amen.
November 14th, 2008 at 3:03 pm
Could you include larger graphics files when you post something like this? I can barely make out the countries along the bottom.
November 14th, 2008 at 3:09 pm
I seriously doubt that anyone in Washington – of either party – will be the least bit interested in creating a less convoluted tax code. There are too many lawyers who benefit from the current system.
November 14th, 2008 at 3:11 pm
Nevermind the lawyers. It’s the people keeping the lawyers on retainer.
November 14th, 2008 at 4:18 pm
What’s Germany doing on the extreme left? Do they have even more tax loopholes than us, or incredibly low rates, or what?
November 14th, 2008 at 5:26 pm
Ireland also gets tax revenue from US companies that shift money making operations to Ireland.
I know of a few companies that earn hundreds of millions in Ireland that could just have easily earned here.
The biggest advantage of lowering rates in the US to 25%, or thereabouts, is that it becomes less worthwhile to legally avoid paying US corporate taxes.
My job is to shelter corporate income tax. It is easy to do with a 35% rate. It is far tougher to do at a 25% rate. I would have to get a real job if we lowered the tax rate to 25%. Then I could become someone who actually contributes something of value to the world. Now, I just do my best to abuse the 35% tax rate.
November 14th, 2008 at 9:42 pm
Why not use a graduated corporate income tax? That means, higher percentage if the profit margin is high (but with deductible so small businesses can get off the ground up to a point.) It seems to me, that would reward companies that offer good prices and succeed by volume instead of price margin. The best of both worlds for taxation policy?
tyrannogenius
November 14th, 2008 at 9:46 pm
Sorry, you can’t quote corporate tax as a percentage of GDP without also looking at corporate profits as a percentage of GDP.
Because Ireland has attracted additional corporate income thanks to the lower tax rate.
But I guess when it comes to beating up on your political enemies for the benefit of a credulous audience, mere facts and arithmetic cannot be allowed to get in the way.
November 15th, 2008 at 12:47 am
Might lowering the corporate tax rate actually create a disincentive for reinvesting in Corporate America? When the tax rate was higher, corporate behavior to avoid paying more taxes was characterized by dumping more dollars into R&D, maybe acquisitions or mergers, or even expansion of the business, and, yes, wages.
Tax policy should have the effect of encouraging corporate growth and prosperity by reinvesting– and more importantly, perhaps, here in America — so as to minimize the intrusion of government in certain societal needs like health care, retirement planning and the like.
And, BTW, where do corporate profits usually end up nowadays? Golden parachutes and bonus packages, right?
Do I have a grudge against these CEOs that rake in billions for themselves? No. I applaud folks that are able to realize the dream. To the extent that the profit-taking comes at a price to society and where the government has to take up the slack, that’s the problem. Corporate America has been shirking their duty lately, with the help of the politicians, and that’s so obvious today.
Government intrusion is to be avoided. But when capitalism doesn’t provide what is needed to maintain and grow a civilized society, those needs don’t just go away.
Pauline
November 15th, 2008 at 1:32 am
Matt, according to your own numbers the loophole-adjusted US rate is still over twice Ireland’s. So it’s simply not true to say that their loophole free system is the reason they are raising more revenues. The key factor here is Ireland’s much higher corporate earnings as a percentage of GDP.
More:
http://theenlighteneddespot.com/2008/11/the-payin-o-the-taxes/
November 15th, 2008 at 4:05 am
That’s quite sensible.
The corporate income tax as it now exists in America is a quite effective cartelizing device for the biggest of big businesses. Its main competitive effect is to differentiate the privileged from the non-privileged. It gives an emormous competitive advantage to the firms at the heart of the state capitalist system.
First of all, its deductions are skewed toward rewarding the business models that rely heavily on capital-intensive production, high technology, and mergers and acquisitions: the depreciation allowance, the R&D credit, and the interest deduction for corporate debt. So much of the “commanding heights” of the corporate economy (high-tech, capital-intensive manufacturing) pays little or no income tax.
And second, it falls most heavily on the competitive sector of the economy, which–unlike the monopoly capital sector–can’t pass taxes onto customers through administered pricing.
The solution is to eliminate all differential tax exemptions and then lower the overall rate enough to be revenue-neutral.
November 15th, 2008 at 4:15 am
P.S. Pauline May: The problem is, the kind of “investment” the corporate income tax led to was reinvestment in enterprises that were already overbuilt, further exacerbating overaccumulation, and all the pathologies that stem from it: the Sloan/Chandler model of mass production, “push” distribution, planned obsolescence, etc. It led to the Galbraithian model of organizing the whole society around guaranteeing a market for cheap, shoddy crap that nobody wants, with the permanent war economy, the auto-industrial complex, the subsidized high-tech economy, etc., as successive attempts to provide a government-guaranteed outlet for excess output and capital.
Instead of encouraging overbuilt industry that can’t dispose of its full product without government having to find a way to make water flow uphill, why not instead promote investment in small-scale enterprises, using multiple-purpose machinery and frequently switching between short production runs, and serving local markets on a “demand-pull” model of responding to demand rather than trying to manufacture it?
November 15th, 2008 at 11:56 am
good post… but can you really look at a country only by its corporate tax rate? Corporations have employees and they pay personal taxes… here is the full tax situation in Ireland:
Corporate
Regular income: 12.5%
Passive income: 25%
Personal
less than 34,000 Euros 20% (no doubt exemptions kick in at lowest levels so no tax is paid)
balance over 34,001 euros 41%
Capital Gains
20%
VAT on almost everything you buy: 21%
Home property tax: 0% (was being discussed a return to same during the bubble, with the real estate depression unlikely)
home purchase transaction tax 125,000 to 1 million euro valuation : 7%, over 1 million euro is 9%. (under 125,000 no transaction purchase tax)
November 15th, 2008 at 12:22 pm
Opportunity Abounds
I agree with pretty much everybody. Our corporate tax rates are not high, but they are perceived as high.
J. K. Galbraith argued in his re-issue of The Affluent Society that Democrats should reform the tax system because the progressive income tax drives much of the rightwing. He’s right. Corporations and wealthy individuals are motivated by the perceived unfairness to donate and organize on behalf of the right.
Reforming the tax system is a Nixon-in-China deal. It can only be done by Democrats. Democrats have an opportunity to do good for the country by implementing a more rational and more economically beneficial system, and at the same time cut the legs out from under the opposition.
November 15th, 2008 at 2:18 pm
Why weren’t we offered a look at this chart some months ago?
Debbie? Clark?
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