Home > Labour Party News, Terrible Tories > Ireland, tax and British Labour’s response

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.

 

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  1. jamiedixon75
    November 22, 2010 at 11:46 pm

    Paul

    As I have posted at Duncan’s website, I do not accept the line that Ireland was asking for this bail-out. If that were true then why the rush to do it this weekend? I assume it was in the belief that a European banking crisis was imminent without it. In that context this bail-out deal became a no-brainer for all sides and the matter of Ireland’s CT rate became irrelevant.

    The UK is, and remains, captive in all of this. The UK’s national interest is in avoiding a European/UK banking crisis. Adjusting Ireland’s CT rate at this time is just tinkering around the edges by comparison.

    Jamie

  2. November 23, 2010 at 8:51 am

    “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.”

    You will be able to push so far and then they will simply close the plant and shift it to Asia – where they speak better English than the Irish do.

    However so what. If Microsoft go, then the people won’t go. Instead they will start up new businesses doing pretty much the same thing but without the political bragging rights associated with a name. Which is more important in reality?

    For my money the best way to run the business side of the economy is to completely ignore the threats and blusters of large businesses and concentrate entirely on the nursery of smaller businesses. The smaller businesses employ more people in aggregate and are much less likely to take their ball home simply because they haven’t had a huge bung this year from the state.

  3. November 23, 2010 at 9:00 am

    “However, in the short term it seems to me that getting the deficit under control is the important issue in Ireland”

    Deficits are caused by lack of spending, not by low tax rates – even in a fiscally constrained state like Ireland. And that lack of spending is due to the failure of the banks to do what they are there to do – move money from people who want to save today and spend tomorrow to people who want to spend today and save tomorrow.

    You can’t tax your way to prosperity any more than you can get their via austerity.

    btw. Laffer is part of the supply-side nonsense that got us in this pickle in the first place.

    • Lethe
      November 23, 2010 at 10:59 am

      So are you saying that raising the tax rate wouldn’t lower the deficit? Also I don’t think the idea is to tax the way to prosperity but to tax the way out of armageddon.

      And how do you get the banks lending again? And what are people supposed to spend with? – given the collapse of house prices and rising unemployment.

      And the Laffer curve isn’t supply-side nonsense (granted the supply-siders were generally talking nonsense) – but the point of diminishing returns is probably miles away from where we are now.

  4. paulinlancs
    November 23, 2010 at 11:13 am

    Jamie @1: I’m not suggesting that a CT rise is the panacea for all Ireland’s problems, and in general I do support the bail out – it is, as oyu say a no-brainer. But it seems odd for the UK to be taking this potential extra hit(and as Duncan notes, Ireland is v likely to default, when FDI companies are getting off Scot-free (to mix my countries).

    Neil @2: I’ll assume what you say about Irish English is a joke…..I agree that there is a point at which Microsoft will decamp, but I suspect we’re nowhere near it yet. That;s why some political bravery, even if it’s bravery enforced by the people making the loan, would be handy.

    Neil @3: In general terms I’d agree with you. Lowering taxes as a way to boost spending is the way to promote growth. However in this particular case, where the untaxed profits are simply heading back to Microsoft head office and not back into the Irish economy, I think there’s a strong argument for retaining the cash via tax so that the deficit comes less from reducing public spending (and therefore reduced capacity) and more from tax.

    On this matter I agree totally – possibly for the first time ever – with Lethe (who I think is also the Barney referenced in my post, though I am getting quite confused).

  5. paulinlancs
    November 23, 2010 at 11:15 am

    Neil @3: Of course I should add that I acknowledge CT is also paid by domestic firms, so I am talking about a v blunt instrument here, but given the FDI dominance of the economy (I’ve not got figures to hand) probably a sharper blunt than might otherwise be the case.

  6. Lethe
    November 23, 2010 at 2:05 pm

    Perhaps the bail-out isn’t such a no brainer…

    http://blogs.ft.com/money-supply/2010/11/23/wheres-the-market-reaction-to-irelands-bail-out/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ft%2Fmoney-supply+(Money+Supply)

    http://blogs.ft.com/money-supply/2010/11/18/ireland-likely-to-accept-loan-as-buffer/

    In short – if the bail-out is so important why haven’t yields fallen? And we should note they did fall when Merkel’s comments about haircuts were partially retracted. Perhaps what is needed is the drawing up of an orderly re-structuring plan? This will at least allow people to price what they and their counterpatries own. Sometimes the fear of something is worse than the thing itself.

  1. November 22, 2010 at 11:19 pm
  2. April 8, 2012 at 2:57 pm
  3. September 16, 2012 at 8:50 pm

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