Ireland's fiscal future is in a federated Europe of states

It is in Ireland's long term interest to become part of a confederated Europe of states; that is, to receive and contribute, tax and spend, and coordinate its labour market and social polices as though it were a region of Europe not a nation state. By Aidan Regan.

Policy analysts opposed to Ireland’s low tax regime and in particular its low rate of corporate taxation are a minority. They are a minority not on the basis of rational argument, but by virtue of a general group think that has become established in political/policy circles on this issue. Advocates of Ireland’s low tax regime never have to provide evidence, data or arguments to support their case. It is one of those policies where counter-factual fear stories are used to support the argument; there would be a flight of capital out of the country, exports would suffer, jobs would be lost, investment would collapse. This is the level of analysis informing the government’s negotiations with the EU (one supported by the entire media establishment); not rational deliberation on the future of tax and spend policy in a Euro-federated region.

There is a strong argument that increasing Ireland’s corporate tax rate in the current economic depression would be too risky a strategy to pursue. So, I will grant that, in this very volatile environment, where gross fixed capital investment has plunged, the state is insolvent and levels of unemployment are beyond 14%, it is perhaps not such a good idea to increase corporate tax. This is a fair and rational argument for the government to use when negotiating with the EU. However, most of the analysis of why Ireland should not budge on its corporate tax rate is not based on this type of argument. It is based on a beggar thy neighbour logic of “We have national autonomy over our tax base and we shall defend it to the hilt.”

Thus, Irish political and media elites are not just opposed to an increase in corporate tax rates but the very idea of a Euro-federal approach to fiscal policy. This takes expression in their opposition to the ‘Common Consolidated Corporate Tax Base’ (CCTB). There are significant problems with this proposal (it is designed to minimise tax on MNCs generally) but Ireland’s opposition is a general opposition to tax harmonisation. This is not a sustainable position if Europe is to evolve positively into a polity, that is, not just negatively as a free neoliberal market lacking political-democratic institutions (which is the direction it has been going in for some years).

At this stage in Ireland’s political-economic development it is obvious that we cannot go it alone as an independent nation or as a tiny globalised economy on the periphery of Europe. All public policies since the late 1980s have been premised on increasing and facilitating economic openness. Ireland has internalised the global economic paradigm of neoliberalism and all domestic policy choices have facilitated Irish adaptation to this external constraint. Hence, our status as the poster child of the OECD, IMF, and the EU Commission for 15 years. Recognising the global constraints Ireland operates within is not to deny the importance of domestic politics and institutions. Domestic policy decisions still matter. But, generally speaking, no government will adopt policies that restrict FDI or increase corporate tax rates. There is a consenus amongst Irish political parties and administrative elites that the comparative advantage of our low tax regime is all we have left.

Ireland in 2007 was the most globalised economy in the world. This increased our vulnerability to economic shocks. We never established the domestic social protection needed to act as a societal buffer against changes in global capitalism (as other small open economies such as Austria, Sweden, the Netherlands and Finland did during the 1960s and 70s). After Ireland gained independence from the UK, Ireland opted to go it alone for a few years. This nationalism, economic and otherwise, did not work and would never work given the external changes in the global economy. The decision to enter the EU fundamentally altered our political economic history. We have yet to fully realise this. Culturally, given our long history of emigration (and the fact that we speak English) we are closer to the USA, Australia and the UK, but in terms of our existing polity, policies and economy we are embedded in the Euro region.

This tension has yet to be fully analysed. There are simply not enough Irish people to sustain a national approach to future development. We contribute 1% of overall European GDP. We have less than 1.8 million income tax payers (hence, the absolute inability to pay off the private cum public debt of almost €200bn). Ireland’s future is part of an integrated Europe. Some might prefer the integration was with the UK or the USA but that is just fanciful.

Most economists don’t think about these political issues at all and just assume Ireland is a national corporation linked into global MNC production and supply chains. But the reality is that we need to integrate further into Europe and not the US, UK or global MNC production chains if we are to survive as a tiny region on the periphery of Europe.

It is in Ireland’s long-term interest, both economically and politically, to be part of a confederated Europe of states. That is, to receive and contribute, tax and spend, and coordinate its labour market and social polices as though it were a region of Europe not a nation state. This does not mean giving up one’s ‘Irish’ identity. One can be from Sardinia and Italy, Catalonia and Spain, Rhein Westphalia and Germany. This approach simply requires a recognition that the world is evolving into a series of integrated regions, not isolated nation-states or some abstract ‘global cosmopolis’. The problem for Europe, however, is how to evolve beyond a narrow focus on the single market premised on the free movement of capital. One can advocate European integration whilst recognising the farce of Euro-neoliberalism espoused and institutionalised by the EU Commission and ECB.

Thus, one way to approach the current negotiations over the ECB-IMF interest rate on the financial loan provided to Ireland is to argue that a) it is not in the immediate interest of Ireland and Europe to increase corporate taxes in a context of zero growth and a collapse in gross fixed capital investment, but that b) we do accept the need for greater tax harmonisation as a short to medium term objective. The next question is what type of fiscal, labour market and social policy coordination we are talking about. This opens up a debate between the Hayek Euro-Neoliberals (who dominate by virtue of the centre-right dominance across Euro-nation states) and those who advocate a Polayni Euro-Socialism.

Aidan Regan is a PhD candidate in Public Policy at University College Dublin.

Image top: Samuel Ronnqvist.