Why EU Should Not Force Ireland to Raise Its Corporation Tax

The EU Summit in Brussels Friday night could not agree on a reduction in the interest rate to the EU portion of the loan Ireland received to help it overcome the financial difficulties it found itself in after its attempts, since 2008, to prevent some of its banks from collapsing.

Dublin, Ireland
Tim Thompson | Stone | Getty Images
Dublin, Ireland

The reason given for this refusal was that Ireland has refused to agree to change its policy on corporation tax.

There are a number of points to be made about this:

Under the EU Treaties, Corporation tax policy is a matter for member states of the EU to decide for themselves. Renewed assurances were given on that when a second referendum was held in Ireland to approve the Lisbon Treaty, after it had been (mistakenly in my view) rejected in a first referendum.

The corporate tax policy of Ireland has nothing whatsoever to do with the reasons Ireland has its present financial difficulties. Although Ireland’s corporate tax rate is only 12.5 percent, Ireland actually collects a lot of tax from its corporations—more than twice as much proportionately to its GDP as Germany collects from its corporations. Corporation tax revenues are more buoyant than other taxes.

These high corporation tax receipts help Ireland to pay back its debts. If Chancellor Merkel had her way, and Ireland was forced to increase its corporation tax rates, a number of international companies currently in Ireland would leave Ireland and the EU. Actual tax receipts would fall, and Ireland’s capacity to repay its debts would diminish. This would be totally counterproductive.

Ireland has had its low corporate tax policy as a means to attract overseas investment, mostly from outside Europe, since 1956, which is before the EU itself even came into being!

For more than half a century, this policy has become intrinsic to Ireland’s economic development model.

Forcing Ireland to change its economic development model just because Ireland has become suddenly vulnerable to an inadequately supervised EU-wide banking crisis is an exercise in power politics of a kind that is opposed to the founding ideals of the EU. _______________________
The author is John Bruton, Former Prime Minister, Ireland.