Europe, Ireland, and taxes

The recent German election reminded us that we should never get too excited when a European Commission President, or even a French President, makes a speech about the future of Europe. Ultimately, that future will depend on the decisions of 27 democratically elected governments, including our own, and that will probably continue to slow moves towards deeper integration.

Nonetheless, here are some scattered thoughts on the tax issue, since it is in the news these days. The good news is that Ireland doesn’t have to do anything on taxes that it doesn’t want to. On the other hand, it might be prudent for us to have more to say on the issue than “No, no, no”. If we don’t get pro-actively involved in these (and other) debates, we can hardly blame others for setting the political agenda.

I take it that the core Irish interest is maintaining the right to set our own corporate profits tax rate (and other internal taxes, perhaps, such as labour taxes). If so, then as others have said, it surely makes sense to focus on that core interest and not facilitate schemes that help companies pay less than that — and the good news is that we have been moving in this direction in recent years, notably via the OECD, something that is not sufficiently appreciated by the foreign press. But we and the rest of the world clearly need to do a lot more.

But that’s not what I wanted to write about, since others have done so. Here are some further scattered thoughts on taxes, in the hope of sparking debate.

  1. If a US firm sets up an Irish branch and makes something physical which is sold abroad, we wouldn’t object, and nor should we, if that something were hypothetically to be subjected to local sales taxes in France (say). What matters to us, and the firm, is that the profits arising from this sale are taxed in Ireland. Does it not follow that we should be relaxed about, and probably even actively encourage, a situation where if (say) sells something in France that would (hypothetically speaking) normally be subject to French sales tax, that transaction is taxed accordingly? There were moves in that direction in 2015, but if more is needed to ensure a level playing field as between the online giants and local retailers, why would we object? In the US, Amazon customers are now paying state sales taxes in several states. The two key principles ought to be that (1) there be no discrimination between online and high street retailers, and no discrimination against US online companies; and (2) that we keep clear the distinctions between sales or revenue taxes, on the one hand, and profits taxes on the other. If Amazon and the rest paid taxes on their French sales revenues, in France, similar to what was paid by French online and high street retailers, might this not defuse a huge amount of political tension? And would that not be good for Ireland?
  2. Now, that previous paragraph used the US language of sales taxes since I think that the US is a good point of reference in these debates. But in Europe we don’t have sales taxes: we have VAT. The current VAT regime is unfit for purpose: it leads directly to tens of billions of euros worth of fraud every year, perpetrated by organised crime (real criminals, not fancy lawyers and accountants). The sums involved are very large, even relative to the moneys lost to multinational tax avoidance strategies. The Irish government agrees that the VAT regime should be overhauled, and so do other governments, such as the French one. This is a first order important issue for the EU. Might it not make sense to consider whether and how to reform the taxation of cross-border e-commerce, within the context of such a broader reform? I don’t see that why Ireland would object to that, and once again, anything that emerged from such reforms that reduced the impression that the online giants are not paying their fair share would lessen the pressure on Ireland to increase the 12.5% tax rate.
  3. Some Europe-wide taxes would surely be in Ireland’s interest. In particular: I’m not a fan of EMU, but since we’re in it we have an interest in making it work as well as possible. We would have saved many billions of euros during the crash if EMU had been a proper monetary union, involving a proper banking union — so anything that moves EMU in a US-style-monetary-union direction, with a common bank deposit guarantee, and a common fiscal backstop, should be welcomed by us. Especially if our financial sector is going to grow because of Brexit. But bank deposit guarantees and fiscal backstops will require common financing, presumably by the Eurozone taxing the financial sector somehow. That would be good for us, not bad for us.
  4. More speculatively: I and many others more eminent than myself have argued that if you really want a monetary union, some sort of fiscal smoothing mechanism would help it function better. If we hadn’t had to impose quite so much fiscal austerity on the economy at the worst possible point in the economic cycle, that would surely have been a good thing for us. Now, I don’t think that such a fiscal smoothing mechanism is on the cards at all, but if it were, it would require some sort of common tax base that would then finance transfers of some sort to countries in difficulty (by reinsuring their unemployment benefit systems, or whatever). Perhaps a common corporate tax might form one part of that common tax base. (I would be keen on an energy tax, since we need it for environmental reasons anyway, its revenues would be pro-cyclical, and it could finance infrastructural projects related to the energy transition that are badly needed.)  But that common corporate tax wouldn’t mean that state corporate taxes would have to be harmonized, any more than the federal corporate profits tax rate in the US means that state corporate taxes there are harmonized. Indeed, I guess that once a common “federal” tax was in place, political pressure to harmonize state taxes would be difficult to sustain.
  5. As I said before, that last argument is extremely hypothetical, since I don’t think we have any hope of achieving a fiscal union in the Eurozone. (Nor do I think that the Euro is inevitably going to last forever.) But let me make a further point in that regard. There is indeed a logical argument to the effect that monetary union means that you need some sort of Eurozone-wide tax base (but only in the context of a proper US-style fiscal system for smoothing regional shocks). But there is no logical argument that I can think of that says that monetary union requires that state-level taxes be harmonized. This is an important distinction which policy-makers in France, Ireland, and elsewhere should remember.

In conclusion, my suggestion is that by making such logical distinctions, and by being clear about what are our core interests, versus those that are merely peripheral, we may be able to avoid being perceived as the DUP of European fiscal policy.

The Life and Death of Protestant Businesses

I’ve been asked to take this post down for copyright reasons, though the draft is not the version that will eventually be published. It has in fact been changed to reflect a number of the points made here and in other discussions.

The Rotten Apple: Tax Avoidance in Ireland

Readers might be interested in this article.

It’s a descriptive overview of the legal/ethical issues involved in Ireland’s role in faciliating Apple’s corporate tax avoidance strategies.

The conclusion is as follows:

In light of the European Commission’s investigation into state aid, Apple has generated the largest bill in unpaid taxes, as compared to Starbucks, Google, and Amazon, which were also investigated. The Commission has ordered Ireland to recover these taxes plus interest, but Ireland has refused and has appealed the Commission’s order in the EU General Court and, if necessary, will appeal to the European Court of Justice. Apple has also decided to appeal. The issues here are whether tax avoidance is ethical and whether Apple should pay the $14.5 billion plus interest that the Commission is demanding. In both of these issues, the conclusion is no. While Apple’s tax avoidance is legal, it is clearly unethical in its use of tax havens, mainly Ireland, and shell companies like Apple Sales International. Through these schemes, Apple has avoided paying taxes in any country, although it technically should have been taxed in the U.S. However, Apple should not have to pay the $14.5 billion plus interest because the repercussions outweigh the possible benefits, and the Commission should not have sought recovery of past transfer pricing rulings under its new approach. Instead, the U.S. and the EU should work together to close the loopholes, and Apple should be sanctioned by the U.S. because, ultimately, the U.S. is the country that should have received those taxes. This would also help reduce other corporations’ tax avoidance, both in the U.S. and by U.S. companies in Europe.

Upcoming Conference: Macroeconomic Effects of Policy Announcements, 5 and 6 October

The Central Bank of Ireland is organising a workshop on the effects macroeconomic policy announcements have on agents’ expectations and their actions. The main focus is on the Dynamic, Stochastic General Equilibrium (DSGE) macroeconomic models used for policy analysis. The workshop will take place on 5 and 6 October, 2017 in Dublin.

Expectations of households and firms regarding future monetary and fiscal policies have been at the heart of macroeconomic policy debates at least since the 1970s, most notably in the context of how to limit the costs of disinflations. Since the financial crisis and the European sovereign debt crisis, policymakers aiming to stabilise inflation and economic activity had to rely even more on their ability to influence the expectations of the private sector. As short term interest rates hit the zero lower bound, some central banks aimed to influence long term rates by announcing the future path of the policy rate, and also tried to affect long term rates more directly by means of asset purchases. Similarly, the key rationale behind fiscal policy measures taken during the crisis and the accompanying structural reforms was that their favourable effect on the expectations of households and firms would counterbalance direct contractionary effects. This workshop aims to be a forum for recent contributions analysing the current macroeconomic effects of future policy changes or long term plans.

 The programme can be found here:

 Programme – Macroeconomic Effects of Policy Announcements FINAL.


Miriam Hederman O’Brien Prize 2017

The presentation of the 2017 Miriam Hederman O’Brien prize awarded by the Foundation for Fiscal Studies will take place on the Monday 2nd October from 8:00 -9:30am in the Grafton Suite, The Westbury Hotel, Dublin 2.

The aim of the prize is to recognise outstanding original work from new contributors in the area of Irish fiscal policy, to promote the study and discussion of matters relating to fiscal, economic and social policy and to reward those who demonstrate exceptional research promise. The prize forms an important part of the Foundation’s overall objective of promoting more widely the study and discussion of matters relating to fiscal, economic and social policy.

The shortlisted papers are shown here and past winners here.

There will be tea / coffee from 8.00 as well as an opportunity to view stands promoting some of the work and applications nominated for the Award.

The event is free but please register in advance to