PGL’s insightful post about corporate taxation and Ireland’s economic growth reminded me of something I read recently from the CBO. In November they published a very interesting report entitled “Corporate Income Tax Rates: International Comparisons.”
A few weeks ago I noted the surprising fact that Ireland actually taxes capital income at a much higher rate than the US does. Well, the above-mentioned CBO report contained another tidbit that was surprising to me: while Ireland has a statutory marginal tax rate far lower than that of the US (12.5% in Ireland versus 39.3% in the US), the difference in effective tax rates is much smaller. The reason is that the US has very liberal depreciation schedules, which significantly reduces the taxes that US corporations must pay. The result is that the effective tax rate that US corporations pay on the income from their investments in machinery and equipment is actually only around 22%, versus about 10% for Ireland. That’s certainly a substantial difference, but far smaller than it seemed at first glance.
Even more surprising, however, was table 2-1 from the CBO report that showed that, somewhat counterintuitively, Ireland actually collects a much larger slice of national income in corporate income taxes than the US does, despite their tax rate being lower. The US collects only about 1.8% of GDP in corporate income taxes, while Ireland collects about 3.7% of GDP in corporate income taxes. This extremely large share of national income being paid as taxes by corporations in Ireland is astonishing, particularly given Ireland’s very low statutory tax rate.
Much of the explanation for this, I’m sure, is exactly the phenomenon that PGL described wherein US (and other) multinational corporations effectively transfer some of their profits to Ireland to take advantage of its lower corporate income tax rate. The Irish government thus effectively collects tax money from multinational corporations on income that was actually earned by those corporations in other countries, and which would otherwise generate tax revenues for other governments.
So Ireland enjoys a decided benefit from its low corporate income tax rates. But note that this benefit is a very different one from the typical supply-side argument in favor of low taxes, which is that low taxes promote growth by promoting capital investment and thus generating economic growth. There certainly was a lot of capital investment in Ireland during the 1990s. But much of the gains to Ireland from its low tax rates were simply due to profit transference from the US to Ireland by US multinational corporations. As I’ve argued before, the link between economic growth and tax rates has yet to be established.