Tuesday, November 23, 2010

Did Low Corporate Taxes Kill Ireland? (Or Did Feminism!)

It is obvious to me that the Irish-British model is the way of the future, and the only question is when Germany and France will face reality: either they become Ireland or they become museums:

-Thomas Friedman, in 2005

Here is a staggering fact: right now, as I write this, every single citizen of the Republic of Ireland owes foreign creditors over $535,000.00.

How did this happen in a nation that free marketers from the CATO instutute to Thomas Friedman were just recently holding up as a model of 21st century economic development, and whose laissez faire policies were held in stark and favorable contrast with the Social Democratic welfare states of Germany and France?

Hery Farrell at Crookerd Timber thinks he knows: the genesis of the Irish economic catastrophe lies in the country's corporate tax rate. More speficially, Farrell finds fault in Ireland's low corporate tax rates:

The simplified political economy story goes as follows. Ireland had low nominal and even lower effective corporate tax rates. It also had low personal taxes, both because of the belief that this would foster entrepreneurship etc, and because the government used to periodically sweeten bargains between business and labor by promising tax cuts (which of course favored the rich more than the poor), inter alia buying off unions who might otherwise have started getting feisty about organizing the unorganized bits of the new Irish economy.
The result was that even with booming economic growth, the government faced a fiscal hole. This hole was filled by taxes on property transactions which, as the property market got ever more bubbly, became an ever more important source of government revenue. This provided the government with an extremely strong incentive not to deflate the bubble, reinforcing the already considerable incentives towards inaction resulting from cronyism between politicians and property tycoons, ideological notions about not interfering with ‘free’ markets etc.

Ireland followed the free marketers mantra to the letter: low taxes, lower taxes, even lower taxes, especially corporate taxes! But a government simply cannot function without some sort of revenue stream, so to make up for the revenue lost to lowered corporate taxes, the Irish government taxed property sales instead. And this new revenue stream proved so critical to the state that the Irish government was loath to turn down the tap when it became apparent that its tax base was over-reliant on a huge property bubble. There's no free lunch, as the Irish people have discovered much to their chagrin.

This may not be the whole story, but if even a libertarian like Megan McCardle thinks corporate taxes sunk too low in Ireland and produced an unmanageable investment surge, then its bound t be a very important piece of the puzzle.

Meanwhile, Ross Douthat offers another explanation:

To the utopians of capitalism, the Irish experience should be a reminder that the biggest booms can produce the biggest busts, and that debt and ruin always shadow prosperity and growth. To the utopians of secularism, the Irish experience should be a reminder that the waning of a powerful religious tradition can breed decadence as well as liberation. (“Ireland found riches a good substitute for its traditional culture,” Christopher Caldwell noted, but now “we may be about to discover what happens when a traditionally poor country returns to poverty without its culture.”)
That's right: Ireland's economic collapse owes as much to the ravages of unfettered capitalism as to a society that had pushed aside the simple, timeless truths of traditional religion and found itself adrift in a materialistic sea bereft of the guidance once offered by its moral compass. And how did Ireland lose its moral compass? By accepting birth control and allowing women to work outside the home:

Progressives and secularists suggested that Ireland was thriving because it had finally escaped the Catholic Church’s repressive grip, which kept horizons narrow and families large, and limited female economic opportunity.

There are times when Douthat comes accross as a rare island of nuanced subtletly in a sea of spittle covered, right-wing bloviating. There are other times, ilke this one, for instance, when you'd much rather put yourself in the path of Bill O'Reilly's spittle for an hour than read another sentence of Douthat's disingenuous, patronizing, moralizing, garbage.

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