Tuesday, November 23, 2010

Does Low Irish Corporate Income Tax Hurt The Rest Of Europe

While it now looks as if an increase in the Irish corporate income tax won't be a condition for an EU loan package to Ireland, there are many politicians who thinks it should be a condition. And even many of those that don't think it should be a condition still says that they think Ireland should raise its corporate income tax.

The reason for this is that while they acknowledge that a low Irish corporate income tax has made a lot of companies invest in Ireland instead of other European companies, and also caused companies to attribute profits in their accounting to Ireland solely to take advantage of Ireland's lower tax rate, they argue that the expansion of the tax base that this has brought has come at the expense of other EU countries, meaning that the total tax base hasn't increased and that the main result is simply to benefit companies and their owners at the expense of others and that the secondary result is to benefit Ireland at the expense of other countries.

This line of argument, while perhaps plausible to some at first glance, however overlooks two important things.

First of all, while the competition for the tax base (both in the form of the quantity of real investments and the extent of corporate tax planning) to some extent takes place within the EU, it also takes place relative to non-EU countries. A higher corporate income tax rate in Ireland might drive companies to these countries instead, producing no gains for other EU countries. Indeed, because they are more geographically distant and have more trade barriers, the economic ties are generally weaker in relation to their size. This means that relocation of businesses from Ireland will be bad for the rest of Europe.

And secondly, by holding taxes low in Ireland, not only will Ireland attract companies from other countries, but it will also enable investments that would have otherwise taken place in any country. This means that total global investment and total global output will be increased because of low Irish corporate income taxes.

Thus, EU as a whole benefits from the low Irish corporate income taxes something which means that Ireland's gains doesn't (at least not fully) come at the expense of other EU countries.