rocket finance

Can Ireland inspire a US economic recovery?

A couple of weeks ago, Randall from Credit Withdrawal and I engaged each other on the subject of taxes. I generally oppose tax increases and I happen to support tax cuts for the rich . . . even though I am far from rich. . .but that is another issue. In the course of our conversation, I used the example of the Irish economy and I would like to expand on that comment a little more today.

For most of modern history, the country of Ireland was an economic backwater. Many Americans associate words like “Irish immigrant” and “potato famine” with the Irish economy. For years Ireland’s greatest export was its own people who were leaving in droves. Over the last 10 to 15 years, Ireland has executed a complete economic revival and has begun to be a huge player in the EU, despite having a relatively low population.

There are many factors for Ireland’s turnaround. I believe that the most comprehensive explanation is found in this Heritage Foundation article. Here are some excerpts:

Continued increases in public spend­ing, tax increases, and deficit financing through borrowing soured the investment climate and failed to raise employment while increasing the drag on the under performing economy.

Between 1980 and 1986, total government expenditure grew from 54 percent to 62 percent of GNP, and public debt increased from 87 percent to 120 percent of GNP while annual budget deficits exceeded 10 percent of GNP. Over one-third of all tax revenue (over 90 percent of income tax reve­nue) was being used to service this debt. Mean­while, the economic dependency ratio rose to 2.3 persons per person employed in 1985, and unem­ployment stood at 15 percent.

The beginning of the solution: Spending cuts.

Smaller government became part of the road to success. There was surprise with the first moves to cut spending severely across a range of programs and abolish a number of government agencies. These steps were strongly criticized initially, espe­cially when they seemed to affect (state-provided) health and social services, but the depth of the bud­getary crisis allowed the momentum to be sus­tained.

Globalism and education played a role and a business-friendly climate increased employment – despite an increase in the population.

The population increased by almost 15 percent from 1996 to 2005 in a striking reversal of previous trends. In one year alone (July 2004–June 2005), employment increased by 5 percent. Ireland is now seen as the land of opportunity by many workers from the 10 newest EU member states. Its unemployment rate of 4.4 percent is less than half the EU average. Public budgets are in balance, and foreign investment was equivalent to 17 percent of GDP in 2003.

Ireland achieved this success through a combination of sensible policies and pragmatism. At the heart of these policies was a belief in economic openness to global markets, low tax rates, and invest­ment in education. While eco­nomic success over the past 15 years can be ascribed to a range of domestic and international fac­tors, it was not a fluke. Ireland has long had, and intends to sustain, low tax rates to attract investment.

Ireland reduced corporate taxes, thereby encouraging businesses to incorporate in Ireland. Ireland’s corporate taxes are the lowest in Europe.

Today, Ireland is known for having the lowest standard corporate tax rate in Europe. For 50 years, Ireland has benefited from low taxation, both in absolute levels of tax and particularly in the rates applied to business profits. OECD statistics show that Ireland now has by far the lowest tax burden relative to GDP of all Western European countries and is below the OECD average. (See Chart 6.) This burden reflects in large part the rapid growth of the tax base that the low tax rates have made possible.

Here is the kicker: Government revenue from corporations increased!

The effect of low rates is evident in the relatively high proportion of all tax revenue that is received from corporate profits. Corporate income taxes account for 13 percent of all tax revenue in Ireland as compared to 6 percent in the U.S., 8 percent in the U.K., 7 percent in France, 3 percent in Ger­many, and 9 percent in the OECD as a whole.

The advantages of low taxes were not as clearly understood in relation to personal taxation until the 1990s. In the 1980s, governments seeking more rev­enue to achieve fiscal balance pushed personal tax rates higher. The results were perverse: Higher rates caused more evasion and avoidance of tax and drove some activity offshore or into the black economy, thus reducing tax revenue even further.

I believe that the Irish economic recovery holds the keys to rejuvenate the American financial picture. I just don’t think that our politicians have the courage to ignore the masses, begging for handouts and embrace sound financial policy.

I also recommend the following articles for more information on this subject:

Ireland’s Economic Miracle

Celtic Tiger’s roaring success offers real economic change

How the Celtic Tiger did it