Tuesday, November 23, 2010

Europe and Ireland: The Charge of the Tax Brigade

Here is Tyler Cowen (“Second Thoughts on Ireland”, Marginal Revolution, November 22):

“ 1.The Irish had some excellent economic policies, but they needed to regulate their banks more. They were simply too optimistic and too sloppy.
2. Irish troubles could have been contained, at some point over the last two years, had Ireland not been on the euro. They would have devalued, defaulted, and had a rapid bounce back up, within the next three years.”

And here is Randall Henning in a paper titled “European Pressure to Increase the Irish Coporate Tax Is Deeply Misguided”:

"The ironies and contradictions surrounding the demand by some European governments that Ireland raise the corporate tax rate as part of a program to address its present financial predicament are breathtaking. They threaten the political underpinnings of the euro area …

First, Ireland encountered the Financial crisis relatively early and came relatively clean. Rather than falsify its statistics and hide the problem, it acknowledged the magnitude of the crisis in its banking system and secured acknowledgement in return from the international community. …

Ireland is being asked to accept a program not because its government needs financing now but because other governments in Europe fear the contagion effects. … tax matters have not been devolved to the European Union; they fundamentally remain the province of member states. There are many governments in Europe that … hope to harmonize rates across the membership. But member states have not agreed to a common discipline on corporate taxes and Ireland ratified the Lisbon Treaty on the understanding that its relatively low rate … would not be constrained. To compound the irony, the OECD reports … that Ireland collects substantially more corporate tax revenue as a percentage of GDP (2.7 percent) than Germany (1.9 percent) and about the same as France (2.9). …

Raising Ireland’s corporate tax rate would not address the problems of the Itish banking system directly … (and) there are many sources of revenue beyond the corporate tax rate that can address this problem without the same damage to competitiveness. …

The French and German governments’ attempt to secure an increase in the Irish corporate tax rate as part of the financial package … appears opportunistic in the extreme.”

My comment.

To sum up: the Euro has been used as a permanent tariff protecting German industries from “southern” competition, due to a disequilibrium entry rate and ulterior real appreciation in the South. And now, its deep, fundamental crisis is used by France and Germany as an excuse and opportunity to eradicate tax competition from Ireland.

Who would dare say that the European monetary unification has been a “liberal” (pro market) policy when observing these deeply distorting, beggar-my-neighbor policies?

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