The Irish Economy

The Irish Times reported recently that over 4,000 people on job seekers benefit had a penalty cut imposed from January up to July this year. The culture of using penalties or sanctions in benefit contexts needs to be debated a lot more. They have become a normalised feature of the UK benefit system (blogpost I wrote on this here and lengthy and somewhat eclectic reading list here; see David Webster for detailed analyses of how sanctions evolved from 2010 onwards). There is a substantial body of evidence documenting substantially elevated levels of psychological distress and mental health problems among people who are long-term unemployed. There is also substantial controlled correlational evidence that sanctions at the levels imposed in the UK are associated with a range of negative outcomes  (including here, here) though the causal impact is one that still is for debate.

Furthermore, there have been dramatic problems with implementing an albeit far more extensive system of sanctions in the UK (e.g see the Oakley report which points out what look like very large flaws in the system of administering sanctions). One of the most lucid accounts of this is given by Professor Michael Adler here.  Adler examines UK benefit sanctions from the perspective of eight legal principles below, and argues that they fail most of these criteria and should either be remedied or better yet replaced with non-punitive methods.

The law must be accessible and, so far as possible, intelligible, clear and predictable.
Questions of legal right and liability should ordinarily be resolved by application of the law and not of discretion.
The laws of the land should apply equally to all, save to the extent that objective differences justify differentiation.
Ministers and public officials at all levels must exercise the powers conferred on them in good faith, fairly for the purpose for which the powers were conferred, without exceeding the limits of such powers and not unreasonably.
The law must offer adequate protection of fundamental human rights.
Means must be provided for resolving, without prohibitive cost or inordinate delay, bona fide civil disputes which the parties themselves are unable to resolve.
Adjudicative procedures provided by the state should be fair.
The rule of law requires compliance by the state with its obligations in international law as in national law.

The extent to which the type of things being envisioned under Job Path are susceptible to these criticisms is something that should be discussed more. It is also worth thinking about the direction of this policy in Ireland and whether it represents a move toward the more widespread and normalised use of these methods across a wide range of policy areas and whether it will be ramped up to a greater degree in the employment area itself. At the very least, it would be good if the responsible politicians were asked to articulate the reasoning behind and direction of these policies, and the extent to which they are legal and ethical. There are some empirical papers pointing to a potential role for such sanctions in motivating employment uptake in the short-run (key paper here) but it is reasonable to think that this relationship will depend on the state of the economy, the degree of skills mismatch, and other features of the participant pool and quality of implementation. It is also not an argument for ignoring legal and ethical aspects of roll-out.

The European Commission made a decision yesterday that is likely to revolutionise corporate tax law. To understand this, it’s important to step outside the narrow lens (and self interest) of ‘Ireland Inc’ and consider the global political background, from the EU perspective.

Globalization has made it much easier for footloose capital and international firms to move across borders, and avoid paying tax. This means it’s increasingly difficult to apply the principle that tax should be paid in the country where profits are made. It’s estimated that more than half of the foreign profits made by US firms are booked in tax havens.

In response to this, scholars in international political economy have long argued that to manage the worst effects of globalization, whilst retaining the democratic legitimacy of the state (tax and spend capacity), governments should shift governance up a level, beyond the nation-state.

The EU is perhaps the most successful example of this type of supranational governance in the world. It has an executive arm (the EU Commission) with legislative agenda-setting powers, and a supranational Court. In effect, European integration can be conceptualized as a political response to market globalization. But it has no tax and spend capacity.

The core actor driving the process of integration is the Commission. This was most obvious during and after the Eurozone crisis, where member-states, including Ireland, agreed to delegate more economic governance powers to Europe. This included the two-pack; the six-pack; the macroeconomic imbalance scorecard and the European semester. Lest we forget, the Commission was part of the Troika, who actively intervened in fiscal policies of the state, not least in terms of water charges.

All member-states of the EU have actively delegated sovereignty to the Commission to manage a whole raft of policy areas: agriculture, trade, fisheries, competition, the single market, regulation, health and safety. For members of the Eurozone, this pooling of sovereignty is even deeper, and explicitly includes monetary and fiscal policy competences.

Hence, to suggest the Commission has suddenly started intervening and undermining Irish sovereignty is somewhat disingenuous.

Social democratic oriented economies, such as France, Sweden or Denmark, have always tended to view the Commission as an agent of “neoliberalism“. It is perceived as having a narrow commitment to market liberalization, with no capacity to tax and spend. The implication is that the EU cannot build those social institutions that are necessary to compensate for the negative effects of increased market liberalization.

Liberal market oriented economies, such as Ireland and the UK (and parts of the German polity), have tended to view the European Commission as an agent of bureaucratic interference. It is perceived as a political actor that tries to expand it’s executive powers in those policy areas that should remain at the level of the nation-state: employment, social protection, welfare and taxation. The EU is a single market, and should be designed to reduce the transaction costs of trade, nothing more.

These two competing visions of the EU came to a head yesterday.

But for anyone who spends time in Brussels, it’s been a long time coming. In a world of global capital flows, the argument across European capitals has been that, at a minimum, the EU Commission must ensure tax coordination, to ensure that MNCs pay their taxes where profits are made.

Those governments, such as Ireland, that turn a blind eye, and facilitate corporate tax avoidance, have been increasingly viewed with hostility, as they are effectively robbing European citizens of scare taxable resources. This has often been missed in Ireland, as there has not been a public debate on corproate tax avoidance, and therefore it’s not a salient issue.

The EU response to this growing demand in Europe to stop corporate tax avoidance has always been, well, how? It’s a massive collective action problem that requires an assertive Commission, willing to confront rogue member-states, challenge capital interests, and be open to legal challenge. This is exactly what happened yesterday. The Commission concluded that those tax benefits that enable multinationals to avoid tax is a form of illegal state aid, and falls directly under competition law.

The fight is on.

More precisely, the Commission found that Ireland enabled Apple to avoid taxation on almost all of the profits generated by the sale of Apple products in the EU single market. In effect, Ireland facilitated Apple’s ability to build a colossal stock pile of cash that amount to hundreds of billions of dollars. As the Guardian editorial noted today, this is nothing more than “a rainy day fund for the super-rich“. If the Irish government challenge the Commission’s ruling, they are effectively legitimising this, even though they have closed off the tax loophole that made it possible.

All of the focus within Ireland has been whether the government should take the 15 billion. But again this totally misses the point. It’s not Irelands money. It’s tax that should have been paid in Portugal, Greece, Spain, Germany, France and other member-states of the EU, who, like most European countries implementing austerity, are pretty cash strapped.

This is why Ireland has been rightly called out.

In essence, it’s a distributional conflict. Ireland has facilitated one of the richest companies in the world to engage in corporate tax avoidance (money that should have been paid to other governments in the EU). In ordinary language use, this would be called theft.

In responding to the Commission, a clever strategy by the government would have been to accept the ruling; highlight that they have closed off the tax loophole; admit they are in a bit of a legal bind now; and then focus on what really matters in the long run for high-tech FDI: the human capital externalities of thick labour markets, which has been made possible by the process of European integration.

The EU Commission has acted in the general interest of European citizens and business. Hence, it’s decision is being welcomed almost everywhere outside Ireland. The EU Commission has shown that it can act as a supranational counterweight to the untrammelled forces of globalization.

 

€13 billion. Wow! Nothing to do with transfer pricing. All do with the relationship between the parent companies and their Irish branches. The EC position is that as the ‘stateless’ companies have no substance ALL of the profit is allocated to the Irish branches.  We really are at the races now.

The press release is here.

The Apple state-aid journey rumbles on.  The scene was enlivened somewhat last week with the publication of a white paper by the US Treasury criticising the approach of the European Commission.  The paper dishes out a good kicking and provides a useful template for a company or country considering an appeal to an adverse ruling.

We know most of the key points the US are making.  They are concerned that the US taxpayer could end up footing the bill (as Robert Stack repeats here) but if the tax payments are legitimately due elsewhere then this doesn’t amount to much.  But the risks, functions and assets that generated Apple’s profits were in the US so, under the current system, the tax on those customers is due in the US.  Of course, a company may decide to move those assets but that is an issue that the country of departure has oversight of.  For the period under investigation in the Apple case it is clear that the main drivers of its profitability were controlled and located in the US.

The US Treasury paper looks at the substance of the EC position – that some transfer pricing arrangements put in place (for mainly US MNCs) were “wrong”.  For the EC is this is a competence they do not have nor one that they should be seeking. If you are intent on saying that something is “wrong” you must be able to state what is “right” – but in transfer pricing there are ranges not precise outcomes.
Continue reading “Are we there yet? Are we there yet?”