Ireland, tax and British Labour’s response
Some basic numbers.
According to the Irish Examiner (May 2010):
MICROSOFT Ireland Operations Ltd made pre-tax profits of €809.4 million last year and paid €88.99m in corporation tax to the Exchequer.
That’s a rate of 11%, as against the 12.5% standard Corporation Tax rate, one of the lowest in the European Union. The 1.5% difference comes from the “various reliefs the company availed [itself] of”.
So if Microsoft had paid Corporation Tax at, let’s say, the European average of around 25%, they’d contribute an additional €113.36 million
That was last year. This year, if Microsoft Ireland’s profit growth followed its parent company trend of a 51% Quarter 3 profit rise, we might expect that notional tax contribution to grow, let us say in round figures, to €150 million.
That wouldn’t be too shabby as a contribution to the projected Irish deficit for this year (including bank bailout) of €28 billion. About 0.5% of the whole.
And Microsoft is just one firm, chosen because it’s been very keen to tell the Irish government it must not raise corporation tax under any circumstances, and because it has taken a similarly robust line in the UK on how sovereign states should run their affairs.
There’s also Hewlett-Packard (HP), Bank of America Merrill Lynch and Intel telling us the same: keep our taxes low or we’re off.
And that’s still just the tip of the corporation tax iceberg. Ronan Lyons has estimated that rasing Corporation Tax just 1.5% to 14% would net the government a total of €1.5bn.
A rise to the European corporation tax average of 25% would therefore bring in €12.5bn, suddenly making the deficit mean almost manageable even with the bank bailout, and soothing the fevered brows of those poor bond market boys so worried about losing out on their investments.
Now, before you all jump down my throat, I know there’s a Laffer curve, and I know this is a fairly extreme example, with fairly approximare numbers, just to make the point.
In fact, Duncan calls for a more gradual approach, starting with Ronan’s 14% and then moving towards 20%, still at the lower end of the European scale.
But the point is worth making, because in today’s barrage of news and views about the Ireland bailout, the refusal by the Irish government even to countenace raising its very low Corporation Tax has gone largely uncommented, and as far as I’m aware totally unnoted by anyone senior in the Labour party (well, excepting Duncan, who should be senior in the Labour party).
This is stupid, because it lets slip the opportunity to put any real distance between Labour and the Tories on this, and allows the Tories to take the high moral ground over its ‘neighbourly’ act, and to ignore the fact that this is little more than a helping hand to its rightwing cronies at the expense of the Irish working class about to be beset by massive cuts and – with Osborne’s explicit blessing – lowered wages.
Labour should be seizing the opportunity, perhaps alongside its Irish Labour colleagues, to set the record straight on what low tax economies are all about: multinationals using largely fictitious threats of capital flight to drive down taxes and increase their profits, in a way which creates ‘a race to the bottom’ internationally, and massive inequalities domestically.
Regular readers will of course know that I’ve covered this key, self-interested capitalist myth before. For new readers, this is what I said:
Professor Colin Hay says in his must-read Why We Hate Politics:
Predictions of the hemorrhaging of invested capital from generous welfare states are almost certainly misplaced. A combinations of exit threats and concerns arising from the hyper-globalisation thesis about the likelihood of exit may well have had an independent effect on the trajectory of fiscal and labour market reform…….. Not only have the most generous welfare states consistently proved the most attractive locations for inward investors, but volumes of foreign direct investment (expressed as a share of GDP) are in fact positively correlated with levels of corporate taxation, union density, labour costs, and the degree of regulation of the labour market (2007: 131-132).
More broadly, in terms not just of ‘labour market flexbility’ …there is evidence that governments which take social welfare seriously benefit from investment.
Hay relies particularly on the superb research set out in Duane Swank’s Global Capital. Political Institutions and Policy Change in Developed Welfare States (2002), in which the myth of the ‘flight of capital’ is debunked with evidence that [the Right]would have us not know].
Probably the best summary comes on the back cover of the book, which is worth quoting in full:
This book argues that the dramatic post-1970 rise in international capital mobility has not, as many claim, systematically contributed to the retrenchment of developed welfare states. Nor has globalisation directly reduced the revenue-raising capacities of governments and undercut the political institutions that support the welfare state. Rather institutional features of the polity and the welfare state determine the extent to which the economic and political pressures associated with globalisation produce welfare state retrenchment.
In systems characterised by inclusive electoral institutions, social corporatist interest representation and policy making, centralised political authority and universal and social insurance-based program structures, pro-welfare state interests are generally favoured.
In nations characterised by majoritarian electoral institutions, pluralist interest representation and policy making, decentralisation of policy-making authority, and liberal program structure, the economic and political pressures attendant on globalisation are translated into rollbacks of social protection.
Consequently globalisation has had the least impact on the large welfare states of Northern Europe, and the most effect on the already small welfare states of Anglo nations.
In short, the Right has been busy trying to sell us a lie when it talks about the mobility of capital, the need to keep taxes down, and the ‘common sense’ of labour market flexibility.
And as the OECD itself neatly summarises in this short book, what we end up with is in neoliberal orthodoxy is a ‘race to the bottom’ on tax rates, as exemplified in the rock bottom corporate tax rates in many East European countries, and and labour regulation).
And the myth that low taxes and low worker protection are needed to make wealth happen – a myth not even believed by MultiNational Corporations when their bluff is called – becomes a self-fulfilling prophecy, where workers suffer most.
This, with knobs on, is true of the Ireland today, in the mess it’s in.
The principal reasons that US firms invested in Ireland in the first place are that a) it’s English speaking; b) it was a lovely place to live with great ‘craic'; c) it has a well skilled workforce courtesy of a strong welfare state.
The idea that it will simply pick up its plants and go if Corporation Tax is raised, especially in the measured way Duncan recommends, is simply rubbish.* Had there been any truth in its, Microsoft would have been off to Bulgaria, with it’s 10% Corporation Tax, years ago.
Yes, the low tax regime may have played a part in the original investment decision by Microsoft et al., but these firms are now deeply embedded in Ireland, and the costs of removal of such hi-tech firms, quite aside from any ‘softer’ reasons (the boss’s kids go to school in Dublin etc.) are likely to be substantial enough to keep them there, whatever the threats issued.
It’s time to call Microsoft’s bluff.
The Irish government won’t do it – that much is clear – but British Labour should now be shouting from the rooftops its objection to a bilateral loan which, effectively, is the UK taxpayer paying Microsoft’s bosses and shareholders extra profits.
Certainly the UK should offer Ireland a loan, but only on condition that it gets real about tax.
* This is not to say that there are not other reasons to keep Corporation Tax low, and Barney summarised these very well in a comment to an earlier post on this matter. However, in the short term it seems to me that getting the deficit under control is the important issue in Ireland, and takes precedence over the longer term investment issues Barney sets out.