Ireland’s Tax Dream Turns Into A Nightmare

For a country seeking a bailout of at least $137 billion,  Ireland is in no place to be dictating terms.  But that’s exactly what Dublin is trying to do to save its controversial corporate tax rate.

According to Ireland’s Independent newspaper, 11  Irish members of the European Parliament pleaded with EU economics chief Olli Rehn to leave Ireland’s 12.5 % corporation tax rate untouched for at least the next three years.  Rehn reportedly favors a higher tax.  Many of Ireland’s EU neighbors are politely — for now — telling Dublin that beggars can’t be choosers.

“Ireland has attracted a lot of companies with extremely low tax rates,” Austrian Finance Minister Josef Proell said in an e-mailed statement to Bloomberg News. “I see room to maneuver on this.”

The Italian Finance Minister Giulio Tremonti is quoted as saying that the current rates may have to be phased out. French finance minister Christine Legarde argues that Ireland will have to raise taxes.  The only people who are adamantly opposed to raising the levy on corporations are the Irish politicians who have gone hat in hand to the EU and the IMF for help. Ireland’s austerity plan announced today was notable because it did not include any increase of the corporation tax.

In fact, the Irish Finance Minister Brian Lenihan denied — with a straight face — that his country was getting any pressure from other EU nations to raise the tax though the issue has been discussed.  “I think everyone realizes that the Irish economy has to grow to get out of these difficulties and the only way we will grow is by attracting inward investment,”  the Irish Times quotes Lenihan as telling a broadcast interview.  He added that Ireland’s right to set its own tax rates is established under the EU’s Lisbon Treaty.

First of all,  Lenihan obviously is trying to be diplomatic.  Other European nations have complained about Ireland’s tax policies for years.  The reasons why is that they worked.  Scores of Fortune 500 companies including Citigroup Inc.  (NYSE: C),  Microsoft Corp.  (NASDAQ: MSFT) and Boston Scientific Inc.  (NYSE: BSX) have located operations on the Emerald Isle.   Not only does Ireland have tax advantages but its population is well-educated and speaks English.  The problem with this deal is that the foreign companies are not paying their fair share.

Evidence of this is clear in the numbers.  The country’s budget deficit may rise to 24% of GDP in 2010 or about 40 billion euros.   Under the government’s four-year austerity plan announced today, that figure would drop to 9.1% in 2011 thanks to 5 billion euros in tax and revenue hikes.  Without raising the corporate tax — perhaps even doubling it — these forecasts are not worth the paper they are written on.  Besides how many countries will want come to  Ireland if increasing numbers of the country’s best and brightest want to immigrate to find work?

Friends First chief economist Jim Power argued that the tax rate may be able to be saved but that the EU’s policies may “harmonize” rates.

“If multinationals regard the 12.5% rate as such a key part of ‘Brand Ireland’, it shows that we must do something about our general competitiveness,” Reuters quotes him as saying.

Ireland’s once mighty Celtic Tiger economy can now barely meow.

–Jonathan Berr