Like many external observers, I am impressed by the speed with which Ireland has bounced back to once again take her place as one of the star performers of the European economy. Major challenges will remain, of course. Ireland is vulnerable to the performance of many other countries with which it trades and is also locked into a currency and economic union which is still struggling to find solid footing following the global crisis. In this environment, Ireland must focus on economic policy to create an environment of growth.
In my experience as an academic and adviser of governments, corporations and investors, this pro-growth policy mix must be built on five key pillars to be successful: sound money, free trade, minimal regulation, low flat-rate taxes and spending restraint. Such a policy mix creates the incentives for citizens to work, produce and invest, in turn stimulating growth.
Looking at Ireland today, three of these five pillars are strong, largely on account of Ireland’s presence in the euro zone: sound money, free trade and spending restraint.
While the recent spending restraint may only be a result of externally imposed conditions, I am hopeful that it will become the norm. The Irish Government can reap rewards if it realises the important role spending restraint plays in offering the ability to put money back into taxpayers’ pockets through the reduced taxation it allows. As my former colleague Milton Friedman always said, government spending is taxation.
In two other areas, regulatory and tax policy, more needs to be done.
Evils of overregulation
Regulation is important, though often underestimated. A considerable part of Ireland’s attraction, which is heavily marketed by the State’s inward investment agencies, is the protection and support offered for intellectual property development. Overregulation, especially as a result of drift from other policy areas, needs to be avoided, especially in areas where competitor countries to Ireland may offer attractive alternatives.
Everyone knows that a successful country requires regulation – we can’t wake up each morning and decide on which side of the road we feel like driving today. The key issue for policymakers is to ensure there is a sound economic basis for any regulation imposed. Inappropriate regulations, often introduced for well-intentioned social policy goals, increase costs and damage productivity and competitiveness. The subject of taxation is likewise never off the policy agenda.
While Ireland’s corporate tax rate is admirably low, personal tax rates remain too high. As well as its political appeal as a policy option, reducing personal taxation makes sense to stimulate growth. In short, I believe that lowering marginal tax rates to increase the after-tax rate of return from work and investment will stimulate growth and lead to better outcomes for all.
At a corporate level, external demands from competitors and others to squeeze more revenue from multinational companies operating in Ireland has been staunchly resisted by the Government up to now. Recent reforms show the Government is sensitive to external criticism and very conscious of the importance of its reputation in this area, as has been acknowledged by senior Ministers. That pressure can be expected to continue.
Integrity, transparency and fairness are also essential components of any tax system. Ireland must continually assure its taxpayers, potential inward investors and competitor countries that its tax code is beyond reproach and universally and consistently applied.
Pragmatism and imagination
In Ireland, however, the Government is sending mixed signals in some areas of tax policy. Ireland displays pragmatism and imagination in developing proposals such as the “knowledge box”, offering hope that creative low-tax measures will encourage investment in patents and intellectual property in Ireland.
It is puzzling, however, that the government does the opposite in other spheres. Some taxes, such as those on tobacco products, continue to rise despite an acknowledgment by officials and Ministers that they are counter-productive. The Government’s own evidence shows that, at current levels, increased excise duties lead to less legal consumption and thus lower revenue.
These results should not be a huge surprise. People adjust their behaviour when the incentives change – that is the simplest expression of economics.
Accordingly, the lower the regulatory and trade barriers, and the lower and flatter the tax rate, the greater the incentive to produce and the greater opportunity for Irish prosperity.
Ireland’s ability to attract high-end investment from American companies across a wide range of sectors is widely known and envied. Many of the world’s leading companies in pharma, bio-engineering, medical devices and IT have significant operations in Ireland. Ireland will have to stay nimble and flexible, with consistent tax policies and sensible regulation, if it is to continue to attract foreign direct investment from global corporations.
Dr Arthur B Laffer is founder and chairman of Laffer Associates. He was a member of US president Ronald Reagan’s economic policy advisory board and advised Margaret Thatcher on fiscal policy during the 1980s.
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