DEAR OLLI REHN and colleagues,

Welcome to Ireland. Honestly, we mean that. As you might have noticed, it’s all gone a bit Fawlty Towers here of late. Thanks to the management, things are a right mess and everything they do to fix it only seems to make things worse. So, when we heard the EU Health and Safety inspectors were on their way, we thought this might just be the thing for us!

Unlike our bigger brother across the water, you see, we actually have a lot of time for the EU. We see past the regulations about how curvy a banana needs to be and see instead a Europe that has done an awful lot for Ireland. We’re not really talking about the billions in Regional Development Funds. Clearly they helped, but looking around the world today, it would be naive to think that economic growth is as simple as throwing €1bn a year at something. No, instead we mean the wider economic and political benefits, such as being part of a large and stable common market and more recently a stable interest rate and currency environment. These benefits have helped Ireland become Europe’s answer to Singapore or Hong Kong, a trading and investment hub that helps bridge continents.

Imagine our surprise, then, when we heard you, Mr. Rehn, say not once but twice that “Ireland will not continue as a low tax country, rather it will become a normal tax country”. What could you mean, we thought? A natural place to start looking was every country’s two largest sources of tax revenue by far, sales tax and income tax.

Well, surely you didn’t mean VAT, we said. Ireland’s 21% VAT rate is higher than France’s, Germany’s, the Netherlands’, the UK’s… you get the picture. Indeed, according to the OECD, the Irish government gets significantly more VAT revenues, relative to national income, than most EU countries.

So, if not indirect taxes, we thought, perhaps you meant income taxes? No, that would be silly, we assured ourselves. Latest OECD figures reveal that Ireland’s all-in marginal rates are among the highest in Europe. For someone earning the average industrial wage, 45% of their next euro goes in income tax. Only Hungary can boast a higher tax regime. Certainly, we can do with fixing our income tax credits – which seem particularly generous to lower earners compared to those elsewhere in Europe – but our income tax rates are, if anything probably too high, I’m sure you’d agree.

If you’re with us this far, you might be interested in learning that we’re now about two-thirds the way through the typical EU country’s base of taxation revenues, and if anything Ireland looks like it’s a slightly higher tax country than the “normal EU country”. Not to worry, we’ll battle on. Do you mean customs and excises perhaps? Hmmm, it’s unlikely as customs are now controlled by EU policy while Ireland’s excises on alcohol, tobacco and fuel are certainly not low by international standards.

So, here we are 85% of the way into Ireland’s tax base and it doesn’t look like we’ve a problem. Next up is, however, corporate tax and it seems the European Parliament – at least two prominent members, Markus Ferber and Sven Giegold – have argued that: “If Ireland needs the European Resolution Fund, its corporate tax rate has to be doubled.”

Really? Is corporate tax, which comprises less than 10% of the “normal EU country’s” tax revenues, what all this is about? Are you honestly worried that, by potentially undertaxing companies based here, Ireland is doing itself permanent fiscal harm? Perhaps you might take a look a “Exhibit A” below. Based on OECD figures, it shows the size of government’s corporation tax revenue, relative to the economy as a whole. You’ll see Ireland nestled in the Top Five for governments getting lots and lots of taxation revenues out of companies based here.

Corporate tax revenues, % of GDP, by country

So, have no fear, the one thing Ireland is most certainly not doing is shooting ourselves in the foot with our corporate tax policy. Indeed, relative to size, Ireland brings in almost twice as much in corporate tax revenues than Germany. (Don’t worry, we won’t run off trying to give the Germans tips about how to run their public finances just yet!) The fiscal success of Ireland’s corporate tax policy is clear from this first glance, before even considering the second-round effects on VAT and income tax of having more than 150,000 extra jobs in the country due to foreign investment into Ireland.

Perhaps what threw you was simply the fact that 12.5% looks low. In fact, Ireland’s effective corporate tax rate is about 15.5%, a little bit below Portugal’s, Estonia’s and Luxembourg’s (which are all below 20%) but above those of Hungary, Cyprus and Iceland. But in a sense that’s completely irrelevant. It’s not what you have, it’s what you do with it. And Ireland has used its corporate tax rate – combined with its openness to workers and its gateway location between the US and Europe – not just to the benefit of Ireland’s Exchequer, or indeed the wider Irish economy, but to the benefit of the whole of the EU.

Ireland’s low corporate tax rates, highly skilled labour force and ease of doing business made it in 2009 yet again the world’s most successful country at attracting foreign direct investment jobs per capita. Our investment promoters, IDA Ireland, will no doubt tell you that a huge chunk of the time, Ireland is fighting off competition from places like Singapore and Switzerland, so every time Ireland wins, the EU wins.

Cutting to the chase, we all know Ireland has a huge fiscal problem. That’s why you’re here. To fix it by 2014 or so, Ireland certainly needs to address two areas where it is not a “normal EU country”, namely introduce an annual property tax and reform its income tax credits. Together, these could raise €6bn of the €15bn in savings needed and would leave no part of Ireland’s taxation system unlike those of a “normal EU country”. Ultimately, though, Ireland’s huge non-banking deficit stems from basing permanent spending increases on the back of temporary taxation revenues. Therefore, the bulk of the adjustment will come from bringing government spending back into line, not knee-jerk taxation measures that may win votes in Düsseldorf while making matters even worse in Dublin.

Ten year ago, Prof John O’Hagan, who has more than likely taught more undergraduates about the Irish economy than anyone else, changed the subtitle of his “Economy of Ireland” textbook from “Policy and Performance of a Small European Country” to “Policy and Performance of a European Region“. In Ireland, you see, we have known for a long time that we are not – and can never be – a scaled-down version of a major economy like the USA. Instead, we are North Carolina on a different continent. And, just like North Carolina, we need to be able to ensure our prosperity by attracting and retaining skilled labour and capital to our shores.

So no-one in Europe wins if, for reasons of economic illiteracy, Ireland is forced to double its corporate tax rates. Ireland’s government deficit will worsen: capital is mobile and, without a large domestic market, Ireland will attract less capital here than otherwise. The wider Irish economy will lose out, with fewer jobs for Irish people living here and fewer jobs to attract skilled migrants to here… and the government finances lose out yet again through lost income tax and VAT receipts. And the EU loses, as R&D and business support service jobs that would otherwise go to a region of the EU economy go somewhere else instead.

All we ask, then, is that when telling us what to do next, please make sure you make the right recommendations, not the easy ones.

Yours,

Concerned Irish Citizen.

PS. I like Creedence Clearwater Revival too.

Read more at Ronan Lyons' blog >