There’s Gold at the End of Ireland’s Rainbow
Other countries should join the Irish side in the battle of tax competition.
By Thomas G. Donlan
The European Union’s persecution of Apple’s Irish tax dodge presents an enormous opportunity for the U.S.
But it’s not the opportunity imagined by Sen. Charles Schumer, the New York Democrat, who said last week that the EU was just pulling a “cheap money grab…targeting U.S. businesses and the U.S. tax base.”
Schumer’s idea of an economic opportunity is to set up a cheap money grab of his own. He and his allies don’t want Apple to pay more EU taxes because such payments would be deductible from the U.S. taxes that Apple might someday pay.
That would make it the greatest magnet for investment, the greatest producer of private profit, and the greatest protector of business freedom since the United Kingdom gave up free trade in 1932.
The Banshee’s Cry
Even the government’s leprechauns knew there was not such a big pot of gold at the end of the rainbow. Its budget used growth estimates of 5% for 2016 and 4% for 2017.
Such assets are more productive earning paper profits in a low-tax country, but they don’t affect the output of “real” goods and services.
Fortunately for Ireland, its low-tax policy brings in more than €4 billion a year, and more than 100,000 Irish people—none of them leprechauns—are employed by U.S. multinationals. Few such companies would have rooted themselves in Ireland for the peat, or the cream, or the wool.
Apple’s friends also have cited the case as an unwarranted grab for revenue by Brussels. It is that, but the weird thing about the case that it isn’t really a tax case at all; it’s an antitrust case.
It’s not a tax case because even the European Commission acknowledges that Apple exploited established Irish tax laws applicable to all businesses in the republic, with the full knowledge and consent of the local tax authorities, going back to 1991. Ireland wanted to attract American investment, and it used a well-established method.
EU Competition Commissioner Margrethe Vestager, however, has concocted a handy theory that corporations that skillfully arrange their affairs to pay low tax rates are receiving unfair subsidies from their low-tax host countries, such as Ireland. Subsidies are illegal, though common as dirt, in the EU.
Meanwhile, the U.S.—or any other country outside the European Union that wants to play a smart game—now has the opportunity to do away with corporate income taxes once and for all. If the Irish tax laws that the EU says enabled Apple to pay as little as 1% on global profits are going to disappear like Cormac gone to Faery, then some stronger, more aggressively pro-business nation must build new laws.
The first big country to go for abolition will make itself the greatest corporate tax haven in the world.
Abolition would destroy all the complex manipulation of international tax codes that employs hundreds of thousands of tax lawyers and accountants on both sides of every controversy. A country that forces them into useful work—or even into unemployment—will experience a giant leap in productivity.
With low corporate tax rates, a small country on the periphery of Europe turned itself from an impoverished backwater to a prosperous modern nation. Ireland attracted corporate migrants from the U.S. and other non-EU countries who sought access to Europe’s markets without paying EU taxes.
We can judge the success of the low-tax policy by the fact that the Irish government would rather not have the $14.5 billion in forgone revenue that the Eurocrats say it should have collected since 1991.
James Stewart, a professor of finance at Trinity College in Dublin, provided a clear but critical explanation of the government’s disdain for the high-tax policies of other EU countries. “The Irish government is opposed to any global tax harmonization because it will harm its ability to attract foreign investment,” he said. He thinks that’s “bizarre,” which suggests that he ought to find some other line of work, or move to France.
Some Irish politicians, however, wanted to cave in. They said it was like hitting the Lotto and not collecting the winnings.
Others went further. A spokesman for a backward group called People Before Profit said the “entire political establishment has colluded over many years with Apple in an act of economic treason to rob the Irish public of €13 billion ($14.55 billion) or more in desperately needed cash for public housing, the health service, and other vital public services.”
The Irish Times newspaper replied, “The best that can be said of all this is that at least the people doing it know it’s just political grandstanding.”
Apple’s chief executive, Tim Cook, had an even firmer grasp on reality: “The most profound and harmful effect of this ruling will be on investment and job creation in Europe.”
Apple, by contrast, will feel almost nothing in even the worst case. The $14.5 billion tax demand by the EU is a trivial bite on the company’s $231 billion of cash reserves.
The salutary effect of low taxes can be and has been exaggerated, most notably this year by the Irish Central Statistics Office. Using a new accounting framework from the United Nations, Ireland’s official bean counters said the output of Irish beans (gross domestic product, that is) grew by 26% in 2015. The result drew the mocking sobriquet “leprechaun economics” from no less a banshee than columnist Paul Krugman.
The 2015 GDP was boosted by a surge in aircraft owned in Ireland for leasing around the world, and by other corporate assets also transferred into the country for tax reasons—notably such intangible assets as patents, copyrights, trademarks, industrial designs, and trade secrets.
Nobody should ignore the smaller pot of gold that remains after the proper adjustments are made.
Until Ireland found the power in refusing to tax, the country had few resources for export other than its people. It was, as James Joyce said, “the old sow that eats her farrow,” forcing the youth of the country to emigrate, as he himself felt forced to leave.
The benefit might be temporary if the U.S. came to its senses and taxed corporate profits solely by taxing shareholders when they receive dividends and capital gains. But the U.S. never misses an opportunity to miss that opportunity.