I’m a big fan of Ireland’s low corporate tax rate for three reasons.
First, it shows that good tax policy generates positive economic outcomes as per-capita GDP in Ireland has grown by record amounts.
Second, it shows that lower tax rates can in some cases lead to more revenue. Sort of a turbo-charged version of the Laffer Curve.
Third, it shows that tax competition is beneficial. The low tax rate has pressured other nations to lower their tax rates to keep pace.
But, just as I’ve warned that a flat tax, by itself, is not enough to ensure prosperity, I also don’t think Ireland’s corporate tax policy is a magic potion for permanent growth.
One major problem for Ireland is that the government is spending far too much money. Here’s a chart, based on IMF data, showing the total budgetary burden of government over the past 45 years.
There are three things to note in this chart.
A spending freeze in the last 1980s which is analyzed here.
Otherwise, an ever-expending burden of government.
Smart readers, incidentally, will ask about other factors such as inflation, population, and GDP.
On paper, Ireland’s spending problem disappears when you look at spending as a share of economic output.
But, as I observed back in 2011, GDP is very high because multinational companies have a big incentive to recognize their profits in Ireland. A more realistic assessment is obtained when you look at gross national income (GNI) rather than gross domestic product (GDP).
Ireland is still a success story using GNI, to be sure, but its spending burden, which looks good when measured against GDP, is troubling when compared to GNI.
Perhaps the simplest and clearest way of showing the problem is to compare the growth of government spending to changes in population plus inflation.
As you can see from this chart, the spending burden has grown more than twice as fast as the combined shift in population plus inflation.
The bottom line is that Irish politicians have been throwing a big party with all the tax revenues being generated by the low corporate tax rate.
They already got burned by that approach during the bailout era.
And it could happen again. Here are some excerpts from a column in the U.K.-based Telegraph by Tim Wallace.
Donald Trump…is not the only world leader enjoying the largesse of America’s tech companies: Ireland’s government is awash with cash thanks to the taxes paid by US businesses based in the country. …Now, Ireland’s economic miracle is under threat. Trump has taken notice of the American riches raining down on the Celtic island – and he wants to repatriate them. …Tax receipts have swollen, with the corporate levy raking in almost €24bn (£20bn) in 2023 – more than double the €10.4bn raised five years ago and more than five times 2013’s haul of €4.3bn. …Tech taxes have allowed for ballooning government spending, which has risen by an average of 6.5pc a year over the past decade… Howard Lutnick, the president’s pick as commerce secretary, said in October that American businesses should pay more to the US Treasury instead of filling the coffers of foreign nations. …The stakes are high. If Trump does force US companies to shift more of their profits back to America, the effects could be devastating for Ireland.
For what it’s worth, Trump probably could grab a big chunk of that revenue, perhaps by changing U.S. policy on “transfer pricing.”
I don’t think he should do that, but set that aside. The moral of the story for today’s column is that Irish politicians have made a big mistake by using their windfall revenues to bloat the government’s budget (a problem that will ring a bell for residents of other jurisdictions).
Given the country’s vulnerability, they should immediately enact a spending cap.
P.S. Ireland also should fix other problems in their tax system.
Dan Mitchell is co-founder of the Center for Freedom and Prosperity and Chairman of the Board. He is an expert in international tax competition and supply-side tax policy.
