Whether they be city states or countries, all jurisdictions that experience growth rates and increases in prosperity that, for a time, dwarf those of their neighbours tend to have deployed an innovation, a resource or a policy that gives them a unique economic advantage.
For France, that policy might have been mass and brutal colonialism in Africa. For Holland it could have been the wholesale plunder, at gunpoint, of the natural bounty of Indonesia and Borneo. For Belgium, early 20th-century wealth came with the gruesome hacking-off of the hands of men, women and children in the Congo in order to force the enslaved African population to produce more rubber.
One of the UK’s wealth-appropriation tricks was to impoverish India: when the British arrived, India’s wealth constituted 31 per cent of global GDP; by the time Britain left it was barely above 2 per cent.
Other jurisdictions have been far less brutal in pursuit of their interests.
Medieval Florence, for example, rediscovered the magical commercial properties of urine. In 12th-century Asia, the Florentines stumbled upon dyeing techniques using the potassium in human urine combined with local lichens to create florid dyes. This innovation propelled the Florentines to become the dye and textile centre of Europe.
But Florence wasn’t the first to appreciate the magical power of pee. The Romans, who washed their teeth with the stuff, due to ammonia’s whitening capacity, were so enamoured by urine that they taxed it. In fact, the tax on urine led to the wonderful Roman expression, attributed to the emperor Vespasian: “pecunia non olet”, meaning “money has no smell”.
In defending his decision to tax the “piss collectors” (yes, a real job in Rome), Vespasian declared that it didn’t matter where the tax came from, as long as it raised money, so taxing urine was fair game.
He was a pragmatist, not an idealist, and pragmaticism is an essential attribute when devising economic policy in a competitive world. Tax is strategy. It is not just a revenue-raising exercise.
Dynamic is a key word here because, when talking about tax, we are not referring to a static specific balance sheet for a specific company pertaining to a specific year. We are talking about a dynamic, complex multigenerational strategy that has contributed enormously in dragging Ireland out of economic backwardness.
Tax strategy is about relative prices and relative abundance of labour and capital. For the first 70 years of independence, Ireland did not have enough capital and as a result it had too much labour. This meant that capital was hoarded, as evidenced by low levels of investment, and labour was exported, as evidenced by high levels of emigration.
Ireland exported people and, at the same time, hoarded capital, measured by ridiculously high levels of interest rates. High interest rates in a fixed-exchange-rate regime with low growth are usually emblematic of capital flight fears, so interest rates are high to keep the capital here.
When interest rates are high, the cost of capital is high, so it’s not used productively. It sits in the deposit accounts of the small amount of already wealthy people, exacerbating colonial levels of inequality. This was Ireland, minus the 500,000 people who emigrated in the 1950s and the continuing emigration in decades to follow.
Another problem with living in an economy with a fragile capital base is that levels of productivity are low because workers without capital are less productive than workers with capital. Low productivity means low wages, and low wages mean not only a diminished standard of living, but also depressingly low expectations about what can be achieved in this country.
The implication of this is that even people who might otherwise have created businesses here chose to do it elsewhere – taking their ideas, dreams and abilities to the UK, US or Canada.
An economy with no capital has to import it, or it collapses. How do you import capital? You make it cheap. How do you make it cheap? You don’t tax it, or you tax it at rates that are much lower than those of your neighbours who, for reasons of internal ideology or the existing size of their corporation tax take, may not be inclined to follow suit.
For the poor country with no capital, not taxing capital has no downside because it never had capital to tax in the first place.
The lower the capital tax rate, the more capital should flow in. This capital, when fused with the existing population, provides job opportunities and a more dynamic economy, which in turn throws off tax revenue in a variety of other areas that previously didn’t flourish: VAT, excise duty, income tax and the like.
A vibrant economy
Vibrant tax is a function of a vibrant economy. This larger tax take can then be spent on social objectives, such as education, health and social welfare. Such elevated public spending would not have been possible without the initial capital catalyst.
Capital tax revenues rise because capital taxes are low, not in spite of low capital taxes. This is because of “network effects” as much as tax policy. When a region, be it Silicon Valley or medieval Florence, becomes a cluster in any industry, it experiences network effects, where other companies and players want to be there simply because others are there too.
Clustering or networking is one of those dynamic, hard-to-pin-down, elements in economics. Networks are ephemeral and constantly changing, but maybe the best way to regard clustering in terms of capital taxation is to look at the approximate numbers in Ireland.
Ireland’s corporation tax take is heading towards €10 billion per year. With a population close to 5 million, that’s €2,000 per year per citizen. Obviously, this comes on top of the incomes, share options, capital transfers and career opportunities for the 300,000 people who work in these companies.
The economist Seamus Coffey estimates that US companies in Ireland every year pay €8 billion in wages, spend another €4 billion on Irish contractors and another €4 billion on capital projects – on top of their corporation tax.
Tax is a legitimate part of a country’s economic arsenal. Indeed, some might argue that independent tax policy is the definition of sovereignty for a country.
This battle is not over between the European Commission and Ireland. The commission has lost the state aid argument but will come after us on the internal market argument next.
Given the significance of foreign investment here, it would be wise for us to eliminate some of the loopholes that infuriate the commission. But moderating and tinkering around at the margin is not the same as abandoning tax arbitrage to boost economic growth.
Taxation is and will remain a legitimate policy tool. Let us not forget this.
How we behave in this crisis will determine how we come out of it. In the 1960s Martin Luther King spoke of the “fierce urgency of now”; what is critical in a crisis is today – tomorrow can look after itself. We can view our traumatised economy in a similar way.
From the point of view of commerce, the most critical point is to keep small businesses afloat and prevent mass bankruptcies, which would prompt defaults and prevent business people from getting back on their feet.read more
When events change, we change our minds. Old rules go out the window and new ideas are embraced. What was once radical becomes mainstream and what was once mainstream becomes redundant. In a crisis, you run out of time. You can’t wait; you must act.
This week, the Department of Finance acted with remarkable speed, implementing what might be called the “Danish model”, soldering the link between employers and employees by subsidising people’s wages to the tune of 70 per cent. The civil servants are to be commended in how quickly they turned this around. It should help enormously. Hopefully, we will see results in a stabilising of the rise in unemployment.read more
What can we do now to prevent this crisis getting worse? What can Irish policy-makers do to prevent company closures, militating against more mass redundancies? How can we buy time? Buying time is a critical way of looking at the crisis because in a crisis you run out of time, not money. It’s essential that actions we take today are designed to ensure that a temporary crisis doesn’t become permanent chaos.
The good news is that this will pass; the better news is we can do something to cushion the blow; the even better news is that it demands only courageous thinking and action. The bad news is that, up to now, there is little evidence of courageous thinking, and that includes the European Central Bank’s €750 billion mega-intervention.read more
We are in a crisis. The health panic will be followed by an economic panic. People will stop going out, stop shopping and dramatically reduce spending. This will have an immediate impact on cashflow. Without cash, businesses will go bust. Without cash, suppliers don’t get paid and they in turn can’t pay their creditors. The knock-on effect will be swift. Tax revenue will seize up. In addition, businesses without cash can’t pay their employees who will have to be laid off. This will exacerbate the slump.
Unfortunately, as cashflow dries up, those with cash will hoard it. Hoarding is the natural reaction to a panic – witness what is happening right now in supermarkets. The same will happen with cash. As more and more cash disappears from balance sheets, more and more cash will be hoarded. In fact, as always happens in a panic, more cash will be hoarded than is actually needed for the rainy day. That’s human nature; we overreact when panic sets in. There will be a run on cash as businesses try to stay open.read more
The loud woman at the bar of the French Roast on New York’s Upper West side is agitatedly telling her brunch partner, and (given her operatic volume), everyone else in the joint, how her business in China has stopped working.
“It’s gonna happen here too,” she admonishes. “We’re gonna have to shut the place down.”read more
The excoriation of Sinn Féin in recent days seems to be directed from the top, with the intention of softening the ground for a Fianna Fáil-Fine Gael coalition. ABS (“Anyone But Shinners”) certainly gives cover to both leaders, allowing them to ask their followers to hold their noses and do the deed with each other, based on having no alternative.
A battle is raging right now for the soul of both Fianna Fáil and Fine Gael. Political parties are a bit like golf clubs: rules and sacraments that matter enormously to members seem silly from the outside. Members of Fianna Fáil and Fine Gael are agonising about purity rather than policy.read more
The Metzer Eck in central Berlin is one of those traditional German bars – lots of beer, sausages and bread designed to fill you up. Nothing fancy, nothing elaborate, everything simple and, like almost everywhere in Germany, affordable. It’s a wonderful place to be the night Leipzig give Spurs a lesson in attacking football.
I’ve been coming to this spot for four decades. In the 1980s it was firmly behind the wall, and still has a bang of the DDR off it. The locals are in great form, discussing football and rent control, and later, after more pints, politics.read more
In keeping with the times, let’s quote Vladimir Lenin. The Communist leader, looking back on the October Revolution and seeing it in the context of what had gone before in Russia – from late 19th-century Tsarist reforms to the 1917 Bolshevik takeover – quipped “there are decades when nothing happens and then there are weeks when decades happen”.
Believers in the Leninist world view of big epochal moments might be tempted to conclude that Irish politics has just witnessed one. By this analysis, the previous status quo has been shattered, and a new paradigm is taking shape, whereby old people vote Fine Gael or Fianna Fáil, and young people vote Sinn Féin.read more
David has been writing for almost 20 years and there are plenty of articles covering some of the most turbulent times in the world economy.
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