Sovereign states struggling to adjust fiscal capacity to highly mobile capital in a period of recession have thrust the issue of corporate taxation on to the international political agenda. Ireland is in the eye of this storm and needs to consider its options very carefully. Playing host to wild capital when powerful governments of left and right are determined to tame it can easily backfire by undermining the legitimacy of the Irish low corporate tax regime, which anyway needs more public scrutiny than it gets.
Complex system
High capital mobility is a product of neoliberal globalisation since the 1980s and especially since China opened up to world manufacturing, capital controls were lifted and banking deregulated in the late 1990s. Smart capital was able to exit national fiscal burdens, reterritorialise manufacturing and deterritorialise intellectual property on a worldwide scale. Helped along by tax competition and associated havens, this created a highly complex system with which clunky national administrations struggle to keep pace through legislation and tax agreements.
But that legal complexity should not obscure the essentially simpler story of what is at stake. Throughout the developed world the taxation burden borne by payroll and indirect tax has increased as corporate taxation has declined. In the US, corporate tax contributed 32 per cent of federal taxation and payroll 10 per cent in 1952, whereas today the respective numbers are nine and 40 per cent. Despite this trend, the US corporate tax rate remains high at 35 per cent, one of the main reasons companies such as Apple keep their huge international profit piles offshore, in anticipation of it being reduced; they accept the unusual US policy assumption that tax must be paid there no matter where the economic activity takes place.
The most interesting revelation at this week's Apple Senate hearings in Washington, where Ireland was dubbed a tax haven, was the company's use of US and Irish legislation allowing that some companies are not registered anywhere and hence not liable for any tax. Such escapes from fiscality look set to end as governments come together to close loopholes.
They are seeking to overcome the contradiction between the internationalised private and national public spheres revealed by the economic crisis. At the EU level deeper integration of the financial and economic system to save the euro outruns the social and political integration still concentrated in national states. There is a dysfunction between market forces and electorates which makes the system democratically unaccountable if action is not taken to bridge the gap.
Germany’s recent moves against Swiss banking secrecy are matched by US legislation demanding information on the activities of US companies which will make it easier to tax mobile capital. This is required for reasons of domestic legitimacy all round the world; but increasingly governments accept they must act internationally to ensure the tax burden is shared more equitably. Otherwise they stand accused of accepting the contradiction between capitalism and democracy, in which taxpayers shoulder most of the burden of corporate and banking failure, as capital exits national controls. It is an unsustainable and unacceptable mix.
Oxfam estimates that governments currently let €14.3 trillion sit in 52 tax havens (with 5 per cent of that – €707 billion – in Irish accounts) which if taxed would be enough to tackle world poverty. EU pressure on Austria and Luxembourg mounted this week to share more data, which they agreed to do if third countries did likewise. Co-ordination is increasing through the EU, the G8, the OECD and other international organisations.
Legitimate tax competition sits uneasily astride these deliberations. Irish leaders strenuously deny hosting a tax haven and defend the low corporate tax rate as transparent and lawful. But to be coherent they should move pre-emptively and visibly to close the tax avoidance schemes that are there too. They should also show more willingness to discuss co-ordinating tax policy within the deepening euro system. And why not think of a once-off levy on international companies here to narrow the budget gap?
The Irish policy model has served well to attract extraordinary levels of US and other investment here, but how well will it serve the next generation? It looks too locked in to existing corporate interests, as exemplified by the banking lobby, which determines Irish opposition to the EU financial transaction tax. This is going ahead despite strenuous hostility from banks and offers another route towards international fiscal capacity to match capital’s mobility. The potential returns are very large, even at a limited European level. All this deserves more public discussion here than current taboos allow.
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