Kevin O’Rourke, quoted “in extenso”:http://www.irisheconomy.ie/index.php/2011/01/13/divide-and-conquer/
A friend of mine has just sent me this “link”:http://www.reuters.com/article/idUSPISDCE7QE20110113, in which Sarkozy is saying that it is unreasonable for us to maintain our low corporate tax rates while seeking financial aid from Europe:
bq. “I deeply respect the independence of our Irish friends and we have done everything to help them. But they cannot continue to ask us to come and help them while keeping a tax on company profits that is half (what other countries have),” he said.
For a more inflammatory version of the same argument, by an influential French economist, click “here”:http://www.liberation.fr/economie/01012306493-le-scandale-du-sauvetage-des-banques-irlandaises. And I was struck on my last trip to France by how ordinary people there are making the link between the Irish bailout and our ‘dumping fiscal’.
There are lots of obvious counters to all this, but I think the more important point is that such responses are inevitable, given the European response to the crisis to date. As two recent articles point out (“here”:http://www.eurointelligence.com/index.php?id=581&tx_ttnews[tt_news]=3002&tx_ttnews[backPid]=901&cHash=c374cd2038 and “here”:http://www.independent.ie/opinion/columnists/david-mcwilliams/david-mcwilliams-citizens-must-fight-rise-of-european-bankocracy-2492637.html), the real cleavage in Europe is between European taxpayers and bank creditors (with the ECB being a third interested party, as another body which could help to fill the holes which have emerged in the European banking system). But since the powers that be are ruling out bondholder haircuts and quantitative easing, the only cleavage we are left with in practice is the one between core and periphery taxpayers.
Of course ordinary French and German taxpayers are going to be angry at lending their money to an insolvent state with lower tax rates than their own. Why wouldn’t they be? Of course ordinary Irish taxpayers are going to be angry at having to pay for high interest loans designed to bail out foreign banks. Why wouldn’t they be?
And while ordinary Europeans get angry with each other, with unpredictable political consequences, capital walks away scot free.
It’s worth expanding the argument that I suspect Kevin is hinting at with his mention of ‘unpredictable political consequences.’ We have seen a lot of analysis from economists which points (correctly) to the inherent contradictions of the Eurozone’s shambolic crisis management strategy. Much less attention has been paid to the _political fallout_ which is considerable. The bailout strategies seem almost purpose-designed to corrode popular legitimacy both in the states giving and receiving funds. If the prospect of a politically viable European Union isn’t quite dead yet, it’s haemorrhaging on the operating table, and the surgeon clearly has no clue what to do. We will be running a seminar on Germany and the EU next week – I have a short piece in it which talks to this at greater length.
{ 51 comments }
Zamfir 01.13.11 at 3:15 pm
A lot of people see themselves as the capitalists here, though their pension funds. They are not entirely delusional there either.
chris 01.13.11 at 3:38 pm
If the prospect of a politically viable European Union isn’t quite dead yet, it’s haemorrhaging on the operating table, and the surgeon clearly has no clue what to do.
Political union hasn’t even been born yet — that’s the problem. Capital has been exploiting the political fragmentation of the EU to create a race to the bottom, which Ireland “won”.
The whole mess proves the folly of attempting economic union without political and fiscal union, and common acceptance of the legitimacy of that union.
Which you could have learned anyway by looking at the US — state line arbitrage causes many of the same problems, until the feds rein it in and impose some uniformity, but the majority of the US accepts that it’s legitimate for taxes paid in one state to go to support the needs of another, even though we may grumble about it sometimes.
hix 01.13.11 at 3:51 pm
Heaven help, Sarkozy is specifically asking for capital not to walk away tax free.
J
mpowell 01.13.11 at 4:08 pm
There is a kind of bait-and-switch here. What Kevin is talking about is definitely a real phenomenon, but the example he chooses is pretty terrible because Sarkozy is talking about corporate tax rates, not personal ones.
Kevin O'Rourke 01.13.11 at 4:15 pm
Ordinary French people are upset about Ireland’s corporate tax rates, believe me! They see them as draining jobs and revenue away from the core.
hix 01.13.11 at 4:25 pm
They are right…..
fly in the web 01.13.11 at 4:29 pm
The failure of the EU leadership model appears again.
The failure to act positively when Russia went down the tubes…allowing the return of the rule of the KGB.
The failure to accept the membership of Turkey while simultaneously requiring changes to the Turkish constitution which allowed the rise of Islamist parties to power.
Now the failure to ensure that a common currency was supported by fiscal integration.
Myles SG 01.13.11 at 5:12 pm
A lot of people see themselves as the capitalists here, though their pension funds. They are not entirely delusional there either.
And houses, if the Anglo-American formulation is followed.
Omega Centauri 01.13.11 at 5:12 pm
I think its legitimate to be concerned about another state arbitraging tax rates (or regulations) in order to “steal” jobs from other states. That clearly can lead to a race to the bottom. There is also the issue that from the standpoint of someone paying taxes to the EU, that his funds are (partially) going to bailout the Irish government, because it taxes its corps too little to help itself. The fact that Ireland foolishly guaranteed debts it needed have merely complicates matters.
Shay Begorrah 01.13.11 at 6:10 pm
@Omega Centauri
‘I think its legitimate to be concerned about another state arbitraging tax rates (or regulations) in order to “steal†jobs from other states.’
Would lower personal taxation fit into that definition? How about municipal charges or grants? Do you think that its a legitimate objective to make your country more attractive to foreign investment by lowering business costs in any circumstances?
Ireland’s CT rate is too low but Europe wide, and indeed world wide, multiple national corporations have been busy playing tax loop hole arbitrage and hide the lucre for the last twenty years, all under the cover of free trade and share holder value. When the EU implements measures to slow capital flight and eradicate tax avoidance then we can start talking about harmonizing tax rates.
Sadly there is about as much chance of international attempts to discipline MNCs as there is of a Tobin tax.
mpowell 01.13.11 at 6:45 pm
But since the powers that be are ruling out bondholder haircuts and quantitative easing, the only cleavage we are left with in practice is the one between core and periphery taxpayers.
This is the statement I objected to. Discrepancies here could certainly be a problem, but is it the same problem as corporate tax rate discrepancies? I though taxpayers here referred to citizens, to be honest.
chris 01.13.11 at 7:27 pm
Do you think that its a legitimate objective to make your country more attractive to foreign investment by lowering business costs in any circumstances?
That’s an interesting question… it seems like by formulating it you have essentially admitted (a) that the game is beggar-thy-neighbour and (b) that it is negative-sum: the country that the corporation moves away from must lose more than your own country gains precisely because their tax rates/minimum wage/worker safety requirements/etc. are higher than yours.
When you combine those with the categorical imperative (if every country does that, then you’re all in a race to the bottom, which workers and noncorporate taxpayers are bound to lose) it is rather tempting to conclude that such competition can’t be legitimate, unless the cost you are attempting to eliminate is itself illegitimate. (Eliminating the need for foreigners to bribe your civil service to get anything done, for example.)
Balanced against that is the possibility that the total supply of global capital is insufficient to invest in all worthy projects and it is in some sense your duty to your own people to get them more than their fair share. But in practice there’s no way to do that because other countries will reciprocate.
If you assume that other countries can imitate your strategy if it appears to be succeeding, then it’s obvious that you shouldn’t race to the bottom — you’ll end up at the bottom with no comparative advantage to show for it. On the other hand, if you assume that other countries *won’t* imitate your strategy if it appears to be *failing*, then not racing to the bottom will just leave you in the dust as other countries do it anyway and capital avoids you.
Ultimately, compelling internationally mobile capital to accept a given set of workers’ rights (such as a minimum wage, or pay for overtime hours, or safe workplaces, or the right to organize and bargain collectively) seems to be a collective action problem among states that can only be solved either by international agreements on workers’ rights or by high-rights states enforcing tariffs on low-rights states that deprive the latter of their comparative cost advantage at least in the former’s markets.
I think the same is true of taxes — every country needs an infrastructure and if the corporations aren’t paying for it, the citizens are (either through higher taxes or through neglect of the parts of the infrastructure that don’t directly benefit foreign investors).
dsquared 01.13.11 at 7:31 pm
boy did this post fail to deliver on the implicit promise in the title.
Henry 01.13.11 at 7:40 pm
If it’s any consolation I noticed this just after posting, and thought for a few moments about changing the title …
P O'Neill 01.13.11 at 7:42 pm
Add to #7’s list, the years-long Euromed love-in and now Tunis engulfed in riots.
novakant 01.13.11 at 8:02 pm
Well, it does feel bit like bailing out Monaco.
marcel 01.13.11 at 8:08 pm
I had the same filthy thought several hours back that dsquared has managed to express so much better than I would have, if I had just hit enter. Please, pictures next time.
Bill Jones 01.13.11 at 8:15 pm
A Google search on the post title amply delivers on the implicit promise…
novakant 01.13.11 at 8:55 pm
Speaking of Google, this might be of interest:
http://www.msnbc.msn.com/id/39784907/ns/business-bloomberg_businessweek/
Zamfir 01.13.11 at 9:30 pm
If it’s any consolation I noticed this just after posting, and thought for a few moments about changing the title …
How about changing the contents to match the title?
b9n10nt 01.13.11 at 9:30 pm
@13:
I find a race to the bottom rather more intriguing than European cleavage, myself.
dsquared 01.13.11 at 10:18 pm
I hope it was only a few moments ;-) We have clearly learned the lessons of the ratings disaster that went with titles like “Was Habermas a Closet Foucauldian?”.
James Conran 01.13.11 at 10:23 pm
The Piketty piece (in French) linked to by Kevin O’Rourke is pretty stern stuff – the Irish corporation tax is nothing less than “theft” from European partners!
What is the progressive case for corporation tax in the first place? So long as income taxes are high enough to fund public services/redistribution and progressive enough to satisfy some standard of fairness why should we care about corporation tax? The economic case for relying on personal rather than income tax is obvious – labor is less mobile than corporations. Morally, since corporations are not, in fact, people, retained earnings don’t affect the income distribution do they? So is there a policy (as opposed to politics) reason for taxing corporate profits as opposed to the incomes of the executives and shareholders who benefit from them?
James Conran 01.13.11 at 10:25 pm
Third sentence, second para should read: “The economic case for relying on personal rather than corporate income tax is obvious – labor is less mobile than corporations.”
mpowell 01.13.11 at 10:56 pm
James Conran:
In a perfect world, that’s not a bad argument you have there. But if you eliminated corporate taxes today, where do you think the resulting increase in corporate profits would flow? I don’t think it would be to the salaries of line level workers, but maybe that’s just me.
James Conran 01.13.11 at 11:09 pm
Absolutely mpowell, one would certainly not want to unilaterally abolish corporate taxes, but the reasons are to do with politics rather than policy per se.
Stuart 01.13.11 at 11:10 pm
I thought taxing business profits was based on at least two things: it allows you to tax more or less invisibly to most voters, so that makes it politically attractive, and it limits the tax loophole for smaller companies (i.e. leaving retained profits in a company you own which you could then live on once you retire, or otherwise find ways of getting it out with lower tax rates than via income tax.
engels 01.14.11 at 12:52 am
I was expecting a clip from Eurotrash at the very least. Your course evaluations are definitely going DOWN…
david g 01.14.11 at 2:01 am
The Irish Republic must leave the euro. As long as it doesn’t, Irish taxpayers and homeowners will pay through their teeth and lose money, all in favor of the banks and the Eurocrats. The Republic was never fiscally in synch with much of mainland Europe in its fiscal cycles or interest rates. Keeping the euro is a recipe for further impoverishment. Get out!
marcel 01.14.11 at 3:05 am
Bill Jones – Wow, especially if you turn off safe search!
EngelsBut his coarse evaluations are going up, up, up!
Daniel 01.14.11 at 3:46 am
The Irish should certainly leave the euro. They can make a deal with Barzini and still keep their casino.
Martin Bento 01.14.11 at 4:07 am
James, if the US started taxing rich people at the levels prevailing in the 50’s, they would just leave. One3 could not stop them without turning the country inot a prison (a place you cannot leave is a prison). Corporations could be denied market access. Ultimately, they are more thoroughly controllable by law, because corporations are creatures made of law. At the highest levels, labor is more mobile than corporate presence (more relvant than capital per se).
novakant 01.14.11 at 4:07 am
one would certainly not want to unilaterally abolish corporate taxes,
Yeah, but that’s in fact what more or less happens already – from my link above:
The Irish government taxes corporate profits at 12.5 percent, but Google mostly escapes that tax because its earnings don’t stay in the Dublin office, which reported a pretax profit of less than 1 percent of revenues in 2008. Irish law makes it difficult for Google to send the money directly to Bermuda without incurring a large tax hit, so the payment makes a brief detour through the Netherlands, since Ireland doesn’t tax certain payments to companies in other European Union states. Once the money is in the Netherlands, Google can take advantage of generous Dutch tax laws. Its subsidiary there, Google Netherlands Holdings, is just a shell (it has no employees) and passes on about 99.8 percent of what it collects to Bermuda. (The subsidiary managed in Bermuda is technically an Irish company, hence the “Double Irish” nickname.)
Also, while corporations are indeed not persons, they sure like to take advantage of the legal fiction of corporate personhood.
hix 01.14.11 at 6:22 am
Ah, thats what its called “tax arbitrage”. Lets call it what it is, enabling big corporations to evade taxes and take a cut in the form of a small tax paid in Ireland and some well paid alibi jobs to pretend the production is done in Ireland.
Tim Worstall 01.14.11 at 9:54 am
But there is a case in favour of such corporate tax arbitrage.
“I thought taxing business profits was based on at least two things: it allows you to tax more or less invisibly to most voters, so that makes it politically attractive,”
Very much so. But different taxes have different deadweight costs (that is, economic activity which does not happen as a result of the existence of said tax). As the OECD* tells us, these run from least to higher deadweight costs: taxes on immovable property, upon consumption, income and then capital and corporate taxes.
So corporate taxes have a high cost in wealth not created for revenue collected: but they are very attractive indeed for political reasons. Competition between different jurisdictions will (OK, could, might) drive down the rate of this bad tax which can be levied and thus shift revenue collection to less damaging forms of tax.
And if we accept the recently here explained point that the economic incidence of corporation tax is largely upon the workers anyway, in the form of lower wages, we end up with that rarity, a free lunch. Moving from corporate to property, consumption or income taxation provides us with the same necessary revenue but greater growth.
Competition in corporate tax rates is thus a good thing.
*http://freethinkingeconomist.com/2010/03/25/while-i-do-hate-the-argument-from-authority/
Zamfir 01.14.11 at 10:49 am
But Tim, corporate taxes are not magically the only tax countries can compete on. They can compete on many forms of tax evasion. And the result of that competition is nearly always to reduce the tax burden on rich investors, since they are in the best position to channel their money through the ways of least resistance.
And don’t really buy the argument that we should abolish corporate taxes because the tax incidence doesn’t fall on investors anyway. It doesn’t fall on investors because of that competition int he first place. If all countries had coordinated corporate taxes, the open-economy leak wouldn’t exist.
A further point: the tax incidence arguments only apply to actual businesses in competitive markets. They do not apply to less competitive markets, and especially not to shell companies that mostly serve as vehicles to hold wealth. For those cases, corporate taxes could affect investors strongly, since such companies generate profits that are not merely market-based compensation for invested capital.
It’s just that in the modern world, people can base such companies in tax-friendly countries. But that’s an argument against tax havens, not one in favour of turning the whole world into a tax haven.
James Conran 01.14.11 at 12:41 pm
“if the US started taxing rich people at the levels prevailing in the 50’s, they would just leave”
Maybe at a certain point this would become a problem but there’s a hell of a way to go from the current US tax levels (top marginal rate < 40%) to the Eisenhower era (top rate = 90%). And obviously most developed countries have higher taxes on the rich than the US so the exit options are somewhat limited.
Also, the alternative revenue source to corporate taxes is not just taxes on "the rich" – it's higher taxes across the income range (including via consumption taxes). The evidence is that countries with more equality/redistribution tend to fund it with relatively non-progressive tax systems (but systems that raise a lot of revenue to be spent in relatively egalitarian ways (relative to the counterfactual market distribution of these revenues that is).
Tim Worstall 01.14.11 at 1:06 pm
“if the US started taxing rich people at the levels prevailing in the 50’s, they would just leave”
Well, no, not really, Because you pay US taxes as a US citizen wherever in the world you live (there are some allowances for not being resident but in reagrds to “rich” people, millions of $ a year, these are trivial).
In order to not pay US taxes you have to stop being a US citizen: and at that point the IRS starts to ask for all the taxes you would have paid or the next decade anyway. Certainly they’ll try and get any capital gains taxes out of unrealised capital gains etc etc.
Chris Bertram 01.14.11 at 1:24 pm
_Because you pay US taxes as a US citizen wherever in the world you live_
Well that’s US law, but many US expats do not in fact pay US taxes, haven’t done for years, and don’t intend to. If and when then return to live in the US, some of them end up having to make a deal.
soullite 01.14.11 at 2:25 pm
The idea that reach people born and raised in the US would just leave if you raised taxes is absurd. Human psychology doesn’t work like that. It is extremely difficult to live in a culture you aren’t socialized to be a part of, and most of those few that did leave would come back.
Humans aren’t computers. There is a lot more to ‘where do I want to live’ than ‘how much money will it cost me’. You get large numbers of people leaving a country if they think they will get killed, if they are on the verge of starvation, or if their livelihoods have been destroyed. There has never in the entire history of humanity been an exodus based on taxes. You get a few around the margins, and that is pretty much it.
Zamfir 01.14.11 at 2:54 pm
I am sure someone has written book how Exodus was really about the 2nd-amendment-loving Jews escaping from the taxes of -the communists in Washington- the pharaoh nanny state.
marcel 01.14.11 at 3:13 pm
Zamfir: This is so off topic. It was really about Jews leaving the high-tax state of Egypt for that libertarian paradise, Canaan: there are several Canaan’s in the United States, and my guess is that they thought they were coming to New Hampshire.
hix 01.14.11 at 3:50 pm
In Europe, most big capitalist have tax haven options that are lingual, cultural and geographic very close to the environment they grew up in. The French have Monaco, the Irish Uk, Germans even have 4 tax havens to pick from. The Greek got Cyprus. If they feal like going home, they can always stay in another house for half the year.
chris 01.14.11 at 3:52 pm
You get large numbers of people leaving a country if they think they will get killed, if they are on the verge of starvation, or if their livelihoods have been destroyed.
I think you can also add slavery to that list, and possibly mass imprisonment. But the general point remains valid: the level of tyranny you need to produce a large number of emigrants is something like the Spanish Inquisition, Nazi Germany, or the pre-Civil War South (for their respective disfavored groups), not the tax policies of the Eisenhower Administration. French aristocrats fled the Revolution because of the guillotine, not because their property was in danger of confiscation (although it was).
The income tax just doesn’t have what it takes to make it into the big leagues as an instrument of oppression.
The relatively few people trying to escape East Germany were noteworthy because East Germany was willing to not only put up a giant wall, but also kill them to stop them; but it wasn’t so many as to imperil the East German economy (if it hadn’t already been weakened by the mismanagement and corruption of its own government at the time).
Tim Worstall 01.14.11 at 5:09 pm
“The French have Monaco”
Well, no, not quite. In fact, the only people who pay income tax in Monaco are the French: not even the Monegasques do.
De Gaulle got a bit angry with them back in 1962 and forced this change in the system.
zamfir 01.14.11 at 5:17 pm
Tim, isn’t the point that wealthy French become Monegasques, without having to change their life much?
roac 01.14.11 at 5:26 pm
If chris at 44 is suggesting that the motivation behind the Berlin Wall was not economic, that’s wrong. Wikipedia says (omitting footnotes):
Alex 01.14.11 at 6:08 pm
with East German party leader Walter Ulbricht later claiming that West Germany owed him $17 billion in compensation, including reparations
and people talk about “humourless” Stalinists…
Tim Worstall 01.14.11 at 9:42 pm
“Tim, isn’t the point that wealthy French become Monegasques, without having to change their life much?”
Nooo, rather that wealthy French could not do so: while the weathy of all other nations could. I know, I know, a very minor point, but Monaco is a tax haven for everyone except the French.
Salient 01.14.11 at 10:00 pm
There has never in the entire history of humanity been an exodus based on taxes.
True, though with peculiar emphasis on exodus so as to exclude the American Revolution, but then that’s probably completely fair.
Thomas Jørgensen 01.16.11 at 10:12 pm
There have been any number of revolts over taxation. The US one is mostly noteworthy for not immediately ending in tears. Still not relevant tough as the odds of your typical bankster or hedgefund manager taking up arms against the government are pretty.. remote.
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