The Irish Economy

From 2001 to 2013, we held eleven workshops in Ireland for postgraduate and early career researchers. They started as exclusively aimed at Irish-based researchers and eventually morphed into international events. The events were run mostly by PhD students in the Universities, including events hosted by UCD, TCD, Limerick, Maynooth, Cork, and Galway. In Scotland, 8 universities combine on PhD training and host an annual event for PhD students. Such events provide students and researchers an opportunity to discuss their work outside their own institution and meet other researchers and faculty.

To restart this effort, we will host a full-day event in Dublin on January 19th. The event is aimed at PhD students and early career researchers across the Irish universities. A full call for papers with details of submissions will be released soon. The event will take the form of thematic sessions with ideally at least some faculty discussant input at each session, along with keynote talks, and engagement with policy and industry. We welcome submissions from PhD students and early career researchers in institutions on the island of Ireland.

I would welcome suggestions from students, researchers, and faculty about how to make this a feature of the Irish research environment. Some questions include whether it should be a student-run event in future years, links to the Irish Economics Association, venues, format of sessions, whether it should be restricted to national institutions, whether there should be job-market aspects etc., I hope revamping these sessions will also create an opportunity to discuss collaboration on advanced training in Economics across the country.

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 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 to be subjected to local sales taxes in France (say). (Yes, I know that in the EU we have VAT rather than “sales taxes”…) 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) Amazon.fr sells something in France that would 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. 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.
3. 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. But that common 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.
4. 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.

Readers might be interested in this article.

http://www.tandfonline.com/doi/full/10.1080/08853908.2017.1356250?scroll=top&needAccess=true

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.

Of all the vacuous platitudes regularly trotted out by Brexiteers, one of the most irritating is the mantra that “no deal is better than a bad deal”. What, exactly, would such a bad deal look like? We are never informed, making the claim “not even wrong”.

In contrast, it is pretty easy to define what a bad deal would look like, from an Irish perspective. First, and most obviously, and most importantly, it would be a deal that restored a visible border in Ireland, whether involving border guards of one sort or another, or physical border infrastructure, or both. This would undermine one of the fundamental premises of the Good Friday Agreement: that given the freedom to choose your citizenship, and without a meaningful border, it should no longer matter, very much, on which side of that border you live. The restoration of a border would therefore threaten the security of this island. A deal that allowed this would be a pretty dreadful one, by any reasonable standard.

Second, a bad deal would expose Irish agribusiness to competition from cheap overseas suppliers in the UK market. Such Anglospheric competition would severely reduce Irish exports to Britain, irrespective of whether Irish exporters faced WTO tariffs or not.

It’s pretty easy, therefore, to define what a bad deal for Ireland would look like in principle. Unfortunately, if the UK follows through on its threat to leave the EU’s Single Market, and refuses to become a member of a new EU27-UK customs union replicating the current EU28 customs union, then any deal that the EU will strike with the UK will necessarily be a bad one, thus defined. Most importantly, there will have to be a border on this island. And, since the UK will then do a variety of trade deals with the US and other countries, on the basis of an exceptionally weak bargaining position, it is highly likely that Ireland agribusiness will lose valuable markets there, even if they don’t face WTO tariffs.

So, in the Irish case, we have a meaningful definition of a bad deal, and we can therefore meaningfully pose the question of whether a bad deal would be better than no deal.

No deal would also mean a border in Ireland, and the loss of export markets consequent on the imposition of WTO tariffs. And it would involve additional economic costs, over and beyond those implied by a bad deal, of which more later. But I don’t think that you can automatically conclude that no deal would be worse for Ireland than a bad deal, mostly for political reasons.

As things stand, we have convinced our EU partners that a border in Ireland is unacceptable. The language from Barnier, Verhofstadt, Macron, and many others on the issue is exactly what we have been looking for. By signing on to a bad deal, we would be conceding the principle that a border is, in fact, acceptable. We would be saying to the EU26: “yes, we have been trying hard to convince you that a border is simply unthinkable and must never be allowed to happen, but actually, we didn’t really mean it. If push comes to shove, we’ll accept a border if that is the price that has to be paid for a deal with the UK.” If we were to take such an attitude, we could hardly expect our European partners to take the opposite one!

Once the point of principle regarding the border has been conceded, it becomes likely that the border will prove to be a permanent fixture on the island. The Brexiteers will be happy: they will be able to import as much chlorinated chicken as they want from wherever they want, and the Irish border issue will no longer be on the table to complicate matters for them. There will be no reason for the UK to ever get rid of the border, and we will have lost all leverage on the issue.

By contrast, if there is no deal, because of insufficient progress on the border issue, the point of principle will not have been conceded. Yes, there will still be a border, but there will be a border anyway under a bad deal. And the UK will know that, if it ever wants a trade deal with the largest market in the world, and its nearest neighbour, it will have to erase that border.

And I think that it is almost inevitable that the UK will, eventually, decide that it needs to have such a trade deal.** In which case the border will only have been reintroduced temporarily.

No deal will involve more economic costs for Ireland than a bad deal, and as I said in a previous post, I would like to see those additional costs quantified, taking into account the negative impact upon Ireland of the trade deals that Liam Fox is likely to sign. And it is therefore intellectually respectable to claim that a bad deal is better than no deal. But it is also intellectually respectable to argue that for Ireland, no deal is in fact better than a bad deal.

To an extent, it comes down to what our preferences are. If they are lexicographic, with the absence of a border dominating other Irish interests, then no deal is surely better than a bad deal. If, on the other hand, we are willing to accept a higher risk of the resumption of violence, in order to mitigate economic costs elsewhere on the island, then a bad deal might well be better than no deal. I think that these are issues that we need to debate, honestly, as a society.

My own view is that when things can go badly wrong, they often do, and that we should never take peace and stability for granted. I also think that the primary duty of a state is to provide security. And like everyone my age, I remember the Troubles. And so I tend to the view that we should not concede on the fundamental point of principle that has been forcefully articulated by our government and diplomatic service: a border in Ireland is simply unacceptable.

And what that means in practice, I think, is that in the months ahead — through December and if necessary beyond — we should hold our nerve, stick to our principles, and continue to insist that we need a solution to the Irish border question before the UK withdrawal talks proceed to the second stage.

** It may take time.