Daily Austerity Watch: The United States of Ireland

Let’s close our eyes and pretend we live in a country where taxes so low that companies are beating down the door to set up shop there.   Readers of Daily Austerity Watch may ask whether this is some Tea Party fantasy, but no Ireland is a real place.   Thanks to its insanely short-sited fiscal policies, the country is a basket case.

Ireland’s corporate tax rate is 12.5%, which makes it attractive to scads of American businesses looking to lessen the amount they owe to the IRS.  There is even a tax avoidance strategy called “The Double Irish” for that reason.  Though the U.S.  tax rate is 39% though many large corporations pay far less than that thanks to a plethora of loopholes.  Ireland has the second lowest overall tax rate in Europe at 26.5%, trailing only Luxemburg’s rate of 21%.

For a while, Ireland’s policy worked like charm.

Dubbed the Celtic Tiger, Ireland’s GDP expanded on average by 6% between 1995 and 2007, according to The CIA’s  World Factbook.   Irish people who had moved overseas returned to their homeland because there were plenty of jobs.  The country entered into its first recession in 2008 and GDP fell more than 3%.   A year later, the economy shrank nearly 8% and it declined 1% in 2010.   With unemployment topping 14% for the first time since 1994, emigration from Ireland is soaring.  The economy sank the most in the fourth quarter of 2010, the third year in a row it has shrunk.  Modest growth is expected to return in 2011.

In November, the Irish government agreed to a strict four-year austerity plan in exchange for a $112 billion  bailout from the European Union and the IMF. The government already was struggling financially as revenue fell 19% between 2007 and 2009, according to Finfacts.  Ireland’s budget deficit reached 32% of GDP in 2010  because the government needed to sore up its faltering banking sector.  Indeed, the Bank of Ireland and two smaller banks needed to raise $12.7 billion because of stress tests.  The final tally of what many are calling a debacle could be much higher.

It’s all coming down to taxes.

Dublin is under pressure from its European neighbors to raise its taxes if it wants further aid.  German Finance Minister Wolfgang Schäuble recently said the Irish Tax System was “untenable.”  It’s easy to understand why considering that the 2011 budget deficit will hit nearly 18 billion euros this year.  Debt is expected to top 90% of GDP.

Much like the Republicans in the U.S., officials in Ireland are ruling out tax hikes, arguing that it would drive away foreign investors.   Richard Bruton, the Minister for Enterprise, Jobs and Innovation, was quoted by the Irish media a saying”not only crucial for Ireland”  but it was crucial for Europe, for Ireland to keep its corporate tax rates low.

For Americans,  Ireland holds many lessons.  First is not to ger   blinded by anti-tax zealotry.  Taxes are not necessarily bad. Wasteful government spending is never a good thing.  The Irish government also didn’t think about the long-term consequences of adopting low tax rates.  American governments make the same mistakes when they offer businesses huge tax deals that never come to fruition.

–Jonathan Berr