Europe Needs to Harmonize to Ireland

Europe Needs to Harmonize to Ireland

Daniel Lacalle 17/07/2018 7

Whenever we talk about tax cuts and growth-oriented tax programs in Europe, many tell us that “it is not possible” and that the European Union does not allow it.

However, it is false. Attractive, growth-oriented tax systems are not only possible in the European Union, but those countries that implement them have higher economic growth rates, less unemployment, and a first-class welfare state.

To deceive us, we are forced to ignore Ireland, The Netherlands or Luxembourg as well as most of the technology and job creation leaders.

Lower taxes and greater liberalization than in the rest of the Eurozone means higher growth, better wealth and greater social welfare. The economic miracle of Ireland is not statism. Its secret is to put budgetary stability, investment attraction, private initiative and maximize disposable income of citizens as the pillars of its economic policy.

Ireland has a corporate tax of 12.5% and a rate of 6.25% on income from patents and intellectual property, a key factor to attract technology companies. Its minimum salary is almost double that of Spain, Portugal and other Eurozone countries, the average pension is higher as well and its health and education systems are of the highest quality, with nine universities among the best in the world according to the Best Global Universities Ranking 2018.

Ireland’s debt to GDP is 73%, unemployment is 5.1% (youth unemployment at 11.4%), public deficit is just 0.7% of GDP.

Only a few years ago, Ireland was close to the edge financially, and its 10-year bond yield rose to 14%. Ireland was considered one of the highest risk of default countries with Spain, Portugal, Greece or Italy. Since then, low taxes, budget control and reforms oriented at attracting capital have made Ireland become the fastest-growing European economy, with an unemployment rate that is less than half that of Spain, for example.

Deficits have been slashed, debt is under control, the economy is expected to grow 5.1% in 2018, and the economy is expected to reach full employment in 2019.

The European Union does not need to harmonize fiscal systems, but if it did, it should do so implementing the systems that promote growth and jobs, not the ones that promote stagnation.

confiscatory tax system and a hypertrophied public sector have only created debt and stagnation in the Eurozone countries that have implemented them. France is a key example.

The last time France had a balanced budget was in 1980, and since 1974 it has never generated a surplus. Public debt reached 97% of GDP and the economy has been stagnating for two decades. Unemployment stands at 9.2% (with 20.4% youth unemployment ) and in 2017 it still had a current account deficit of 6.5 billion euros while the Eurozone has a surplus.  In a country where public spending exceeds 57% of GDP, where public administration spending has grown by more than 13% since 2008 and 22% of the active population works for the State, local governments and public entities, talking of austerity is a bad joke. In addition, France has spent tens of billions on ‘stimulus plans’ since 2009 . Specifically, 47 billion euro in 2009, 1.24 billion to the automotive industry and two ‘growth plans’ under the Hollande mandate: 37.6 billion euro (‘investments’) and 16.5 billion (‘technology’).

When we talk about taxation in the Eurozone, we usually talk about tax revenues vs GDP, and not the tax wedge, which is what each one of us pays in taxes on our total income. If we look at the tax wedge, the Eurozone .

According to the PriceWaterhouseCoopers Paying Taxes study of 2018, European companies suffer a tax wedge of 40%That fiscal wedge is almost 40% lower in countries like Luxembourg, Ireland or Denmark and 12% lower in the Netherlands.

Total Tax & Contribution Rate (%) in EU & EFTA


If we look at families, it is very similar. Most Eurozone countries have a tax wedge on families with one salary and two children that is twice the average of Ireland, Switzerland or Luxembourg and 20% higher than the Dutch.

But what about social protection and welfare? Ireland, the Netherlands or Luxembourg have some of the best and most efficient welfare systems.

Interventionists always talk of the Nordic countries as nations with very high taxes and yet their tax wedge is lower for companies and families than the average of the Eurozone.

Countries with higher taxes do not have better welfare or social protection, but do have higher unemployment rates, weaker growth and higher debt. High taxation discourages economic activity, investment and consumption and, on top, tax revenues weaken.

Macron is calling for a harmonization of the tax systems in Europe. I agree. Let us harmonize to the Ireland level. But no, what Macron implies when he uses the word “harmonizing” is “increasing taxes”. The recipe for unemployment and stagnation.

Governments willingly ignore the beneficial effect of growth-oriented taxation because their objective is not growth, investment or employment, but control.

Europe’s tax model cannot be to impose what does not work. We need to lower taxes to grow and create more employment. High taxes do not guarantee the welfare state, they make it unsustainable.

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  • Dean Robertson

    Ireland could become one of the leading economies in Europe.

  • Sean Frankenfield

    I agree with your analysis but Ireland is helping big business dodge billions of euro each year in tax.

  • Patrick Bell

    The huge investment by foreign companies mainly from America brings enormous knock-on benefits to the Irish economy.

  • Chris Wallace

    The dramatic turnaround in Ireland’s financial health and its increased prosperity is widely recognized to correlate to its drastic reduction in corporate tax rates.

  • David Curtis

    But Ireland still owes more money to the EU......

  • Robert Perier

    Many people ignore the fact that Ireland is not contiguous to the European continent and that its low corporate tax rate is designed to compensate for this competitive disadvantage.

  • Karim Fayaz

    If Ireland increases corporate tax, multinational firms will look at moving their European operations to mainland Europe and Macron can claim he's created more jobs. In the meantime, thousands of Irish will be put out of work.

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Daniel Lacalle

Global Economy Expert

Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of EconomicsFunds Society Forum in Miami, World Economic ForumForecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBCWorld Economic ForumEpoch TimesMises InstituteHedgeyeZero HedgeFocus Economics, Seeking Alpha, El EspañolThe Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).

   

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