More evidence low taxes didn’t create the Celtic Tiger
The Tax Justice Network has just inaugurated a new blog, Fools’ Gold. It just came out with an excellent piece on taxes and Irish economic success in the “Celtic Tiger” era, written by Nick Shaxson. As I argued in 2011 and in my book Investment Incentives and the Global Competition for Capital, Ireland had low taxes for decades with nothing to show for it, with no improvement relative to EU-15 GDP per capita in 1958-87.
The Fools’ Gold piece updates the data to 2013. Take a look at its Chart 1, which provides a great visualization of Irish income per capita, tax rates, and developments in the European Union.
Chart 1: Ireland’s GNP per capita, relative to European GNP per capita, 1955-2013.
In addition, the chart shows the significance of EU funds flowing into the country, though it only covers the Common Agricultural Policy (CAP) monies. It does not include the Structural Funds, which Frank Barry (via Shaxson) puts at almost 3% of gross domestic product from 1989 to 1999, or about the same as the CAP. The importance of the European Union, in terms of both trade access and transfers, is hard to understate.
Unfortunately, as Shaxson writes, true believers in the low tax myth, and the architects of its tax haven policies, are still in control of Irish policy. So we have scores of billions of dollars of profits hidden in Ireland and continuing pressure to lower tax rates in the rest of the European Union, and the United States, too, despite the fact that low taxes didn’t cause Irish economic success at all.
Don’t forget to follow Fools’ Gold!
Cross-posted at Middle Class Political Economist.
What caused the Irish temporary economic success was hot money supplied by putting a weak economy (many weak economies) on the currency of strong economies. Weak countries could borrow from strong country banks at strong country, low rates. David McWilliams tells the whole tale entertainingly in his book Follow the Money
A bit more than fair use slices from his newsletter this morning;
Auf Wiedersehen? Never
Over the past year, the euro is 25 per cent down against the dollar – our main trading partner. This is the currency that was supposed to bring stability to Ireland. Losing a quarter of your value in 12 months is hardly stability, now, is it?
In fact, our 15 years’ experience with the euro have been 15 years of massive economic instability. It has been a chaotic period of seven years of unsustainable boom, followed by a year of meltdown and then seven more years of recession, unemployment, emigration and public service cutbacks.
The only reason the economy is growing strongly now is because England and America – our major trading partners – are growing strongly. When you hear politicians talking about the Irish economy, and saying we are the fastest growing economy in Europe, it is meaningless, because we aren’t a European economy at all. We are an Anglo/American economy, with a European exchange somehow grafted onto us.
The euro was the primary cause for the property boom because Irish interest rates remained far too low when the economy was growing far too fast, facilitating all the borrowing. The Irish exchange rate remained far too low too, which meant cheap foreign goods flooded in, pricing local products out of the market and driving the trade balance towards deficit.
The overvalued exchange rate also meant that it was almost impossible for Irish indigenous exporters to compete. Besides the multinationals, there isn’t an exporting base to speak of – 90 per cent of Irish exports are from the multinational sector.
* * *
Amazingly, after nearly 35 years of trying to tie our currency to that of Germany and France (as we first embarked on this lunacy in 1979), we still do the vast majority of our trade with Britain and the US. The idea was that tying our currency would make our economy operate in the continental cycle – it doesn’t. It never has and never will.
When our people lose their jobs, they don’t go looking for work in Germany or France, they go to England and the English-speaking world – as we have always done. By far and away the majority of our inward investment comes from America. This American dominance has increased in recent years – not because of the euro, but because we speak English, have low taxes and have an American culture, which makes it both attractive for American capital and attractive for European talent to immigrate here.
* * *
So who benefits? Clearly those people who are well paid in euro, but could never generate this income and this lifestyle if they had to earn it in the competitive marketplace where they export and compete for their services against the best elsewhere.
* * *
If the Greek crisis caused a break-up, we should be first out the door. But guess what – if the euro did break up, Ireland would be the last to leave, clinging on to Germany begging for respectability.