John Bruton

Opinions & Ideas

Category: OECD

IRELAND NEEDS A SERIOUSFIVE YEAR BUDGET PLAN

Revised article for “Irish Times”

We will only have an intelligent debate about spending and taxation, in the forthcoming Irish General Election, if we know that spending and revenue estimates for all the following five years, and if the policy choices that underlie them, are accurate and fully explained

The Spring Economic statement by the Irish Government was criticised, mainly because it contained “nothing new”.

This type of criticism showed how little had been learned from the recent economic crisis. A constant search for novelty in annual budgets is what got Ireland got into difficulty in the first place. New” initiatives” in budgets from 2000 to 2007 eviscerated the tax base, and led to unsustainable spending commitments.  In that deluded era , if the annual budget did not contain a  new and costly announcement , the Minister would have been accused of lack “vision”!

Now the same chorus is beginning to be heard again. Memories are indeed short.

In  the debate on the Spring Statement, Minister Brendan Howlin said  the government was “now planning expenditures on a multiyear basis”, and  that Departments are operating under “multi annual expenditure ceilings”.  

Although these ceilings are legally mandated, are they firm enough, or can they be  too easily raised without serious questions being asked?

Certainly, in the 2000 to 2006 period, the second and third year ceilings on spending were fictitious.  It turned out that spending in the second year exceeded the” ceiling” by 6%, and the third year by 12%. Low figures were put on paper, but the decisions needed to stay within the figures were not taken. This was politically understandable, but financially disastrous, as we now know.

Since 2011, three year spending ceilings have been much firmer in most Departments, but not in all. 

In fact, one Department, Health has been responsible for 70% of the breaches in the ceilings (which altogether totalled over 600 million euros ). 

This should not be. Health spending should be predictable.

When allowance is made for the relative youth of the Irish population, Ireland is nearly the highest spender on health in the OECD.  But health outcomes here are only average. We have the second highest number of nurses per 100000 people, and 5th highest number of physicians of 34 countries surveyed by the OECD.

As the population ages, pressures on health budgets will further increase. 

Brendan Howlin has pointed out that the ageing of Irish society will add 200 million euros per year to health costs and that high birth rate will necessitate the appointment of 3500 extra teachers by 2021.

Next year, the natural growth in demand for existing services public spending will on its own increase spending by 300 million euros, without ANY change in policy.

Furthermore, the  Government is obliged  to reduce public expenditure as a percentage of GDP up to 2020 by its Stability Programme published in April.

Under it, GDP is set to grow by 3%, but public spending by only 1%. The difference is needed to allow for reduction of debt, as required by the Fiscal Compact the Irish people approved in a Referendum.

In essence, demographics are pushing spending UP, while tough debt reduction requirements are pushing it DOWN.

Of course, taxation can be increased too, but not by much, without risking a flight of capital and talent to elsewhere in the mobile, globalised, world in which we live.

So expenditure ceilings, for the forthcoming five years for each Department, including Health, will have to be set with rigorous honesty and courage, and then kept to. There can be no optimistic under estimates, as there sometimes were in the past. 

This natural increase in spending, without policy change, needs to be spelled out for each Department, and separated completely from any increase (or reduction) that is due to a policy change.

The budget system should incentivise local managements, who know their services best, to make the necessary savings and reallocations in time. They know how to do it in the least painful fashion.  That job cannot be done as easily by Merrion Street.

If a Department or service  finds itself on track to exceed its published annual expenditure ceiling,  for the present year or a future year, Dail Eireann should be immediately alerted. There ought to be a special procedure whereby both the Minister, and the Secretary General, explain the deviation.

The same should apply to any tax concession that turns out to cost more than estimated.  The criteria for this should be formalised  in Dail Standing Orders .

The Minister would account for, and quantify any policy changes, unexpected events, or recalculations, that account for an excess, and the Secretary Genera would account for any lapses in expenditure management.

This would ensure that the costing of future spending and tax commitments would  be “evidence based”.  

A family has to plan its finances five years ahead, and take corrective action if things are getting off track. 

Government should do the same.

Note ; As Minister for Finance in 1981, John Bruton published ”A Better Way to Plan the Nations Finances”, which advocated multi annual budgeting by the State.

THE SOURCE OF ECONOMIC SUCCESS IN THE 21ST CENTURY….EACH COUNTRY WILL HAVE TO RELY ON ITS CHILDREN’S SKILLS AND INGENUITY IN AN INCREASINGLY COMPETITIVE WORLD

A lot of attention is being given to the competition Europe and the United States will face from economic growth in Asia over the next 25 years.

A survey conducted by the World Economic Forum shows that Asia is the most optimistic part of the world about its economic future. And optimism is essential to investment!

The OECD has estimated that between now and 2060, GDP per capita will increase eightfold in India, and sixfold in Indonesia and China, whereas it will merely double in OECD countries, which include Europe and North America. This will affect the balance of power in the world. It is interesting to note that two of the top three Asian dynamos are democracies, India and Indonesia. And both of them have substantial Muslim populations.

The source of economic growth can be summed up in two words…innovation and population.

UNBLOCKING EUROPE’S ARTERIES TO RELEASE INNOVATION

If a country has an innovative and well educated population, open to trends in the global market, able to understand them and identify the needs of the world that it can meet, and with an economic and governmental structure that allows speedy allocation of resources to those needs, and  away from less efficient uses, it will have a higher growth rate.

This is why there is so much emphasis on “structural reform “ in OECD,IMF and EC advice to countries. Structural reform is designed to clear the arteries of the economy, and allow blood to flow more quickly to the activities that will yield the best return.

For example, if a country has disproportionately expensive, slow or overly elaborate legal system that will be a blockage in the arteries. If a country has disproportionately high electricity prices because it uses electricity prices to subsidise uneconomic generation for regional policy purposes, that will block arteries. Likewise if it has disproportionately costly or slow broadband communications, avoidable skill shortages, unwillingness to recognise genuine foreign qualifications, work disincentives for particular groups, or a distorted market for credit that does not favour productive activities,  all these things are blockages in a country’s economic arteries.

Such blockages can also apply at supranational level too. It has been estimated that the lack of a single market for digital services in the EU is blocking the arteries of the EU economy to the tune of 260 billion euros, the lack of a true single financial market is doing so to the extent of 60 bill euros,  the lack  of an integrated energy market to the extent of  50 billion euros, and  the lack of a single services market (including non recognition of skills certified in other countries) is blocking the arteries of the European economy to the extent of  235 billion euros.
Interestingly, a European Parliament staff paper shows that one of the slowest countries to implement the structural reforms urged by Heads of EU governments since 2011, is Germany. And one of the fastest, on paper at least, is Greece. These are reforms that Germany’s own Chancellor recommended along with her colleagues. One of the problems is the delays at the level of the Lander.

To put it all another way, and using some economic jargon, Europe has a choice. According to the EU Ageing Report, the EU can stay on its present course, and, as in the last 20 years, have a total factor productivity growth rate of only 0.8% pa. 

Or it can make changes which could lift its total factor productivity growth rate to 1.1% per annum up to 2020 and 1.4% per annum thereafter. A slow, longterm, return perhaps, but a real one all the same.  And in the long run, enough of you will be around for that to matter!

STRUCTURAL REFORMS HAVE DIFFERING POTENTIAL BETWEEN COUNTRIES

Some countries, not Ireland, have been artificially held back by top heavy bureaucracy, that prevents their societies from allocating resources to where they will get the best return.

Societies can fail to allocate resources well, or block good reallocation of resources, by political vetoes, and constitutional limits. 

The reforms necessary  include reforms to the labour market, but to a much greater extend they involve freeing up markets for the sale of goods and services, from electricity, to professional services, to government services, as I have mentioned already.

Of course, freeing up the arteries will not solve the problem, unless there is blood flow of commercial innovations based on good R and D, accompanied by an innovative and flexible culture within Government, within educational institutions and in the general population.

Between now and 2060, according to the OECD,  the countries with the biggest upside potential, for extra  growth  that might come about as a result of the implementation of structural reforms,  are China, Slovakia, Poland, Greece, India, Indonesia, Italy and Russia. 

At the other end of the scale, some countries that already have relatively efficient systems, and are  getting the benefit of reforms made in the past. These countries include the UK, Netherlands, Ireland and the USA. 

It is good that Ireland is in that position and that is an indication that the reforms we made over the last 40 years or more have yielded fruit. And this is despite the fact that Ireland still has, to a degree , many of the  rigidities I mentioned earlier, and has room to improve in those areas.  

On the other hand, other competitor countries, like China, Poland, Slovakia and Greece have even more room to improve, or  more upside potential than we do , and may thus pose a bigger challenge to us,  as soon as or if  they get their act together.

Already comparatively efficient countries, like Ireland, the Netherlands, the US and the UK,  will have to look elsewhere than structural reforms on their  own, if they are make extra gains. They will have to run faster and faster just to hold their current relative position.

STRUCTURAL REFORMS ALONE NOT ENOUGH……THE NUMBER OF YOUNG PEOPLE WILL MAKE A KEY DIFFERENCE

In every society, young people are the innovators. My own sense is that the crucial determinant, of  relative success in the 21st century as between countries, will be the proportion of young people in a country, and the relative mental agility of those young people, in comparison to those in other countries .

Their potential will be influenced by formal education, but not only by education. It will also be influenced by what happens to them as children, before they ever go to school.

Other things being equal, a country with a large elderly and middle aged population and few young people, is unlikely to produces as many innovators as a country with a large youth population. It is also likely to have more political veto points.

To an extent, each society decides the sort of future it wants to have, when it decides how many children it will have. Societies in many European countries, including Germany, Spain, Italy and many East European countries have decided to have few children, and that is a choice they have made, perhaps unconsciously, about the future profile, and potential, of their country. 

For example, partly as a consequence of differences in past birth rates, the OECD calculates that from 2018 to 2030, Ireland’s potential employment growth rate will be 1.2% per annum, and France’s will be 0.2%.

In contrast, Germany over the same period, will experience a potential employment decline of 0.6% a year, and Finland faces a potential employment decline of 0.2% per year. 

These differences partly explain why Germans and Finns see limits to their ability to bail out other countries, like Greece. They know will soon have fewer people at work, supporting an increasing number of retirees, and they will want to hold their money back for that. Unfortunately for it, Greece has a similar problem of an ageing and diminishing workforce, and an increasing elderly population.

Pensions are already 14.5% of Greece’s GDP, 13.8% of France’s GDP and almost 11% of Germanys’, as against just a little over 5% of  GDP in the UK and Ireland. That difference explains a lot, at least as much as the supposed doctrinal differences between German “ordo-liberalism” and  Anglo Saxon Keynesianism!

It is true, as Keynesian economists argue, that coordinated demand stimulus, by countries that can afford it, would help Europe’s economy achieve its jobs potential, without risk of inflation, and that can  come from countries whose fiscal positions are strong, but the judgement as to which European country can do that, has to take some account of differences in the ageing profile of each country.

Incidentally these differences also illustrate the foolishness of anti immigrant sentiment in Germany.  Germany’s 6.6 million immigrants paid in 22 billion euros more in taxes and contributions, than they took out in benefits, and some of that surplus is helping pay the pensions of native born Germans. I expect the same may apply in France.

In fact, the EU Ageing report, to which I referred earlier, estimates that 55 million immigrants will have to come into the EU by 2060, to make up for the decline in our native born workforce because  past decisions on family size. That can change, of course.
Meanwhile, Africa’s population will have increased by 28% by 2060 and Asia’s population will have slightly declined.   

EUROPE’S YOUTH PROBLEM……..A WASTED GENERATION?

In the next fifty years, on unchanged present trends, the overall working-age population of Europe will drop considerably, from last year’s peak of about 300 million to 265 million. This will be a significant blow to nearly every aspect of the Eurozone economy.

At the same time, the old-age dependency ratio–a fraction or percentage expressing the ratio of residents over the age of 65 to those under that age–will rise from 28% (recorded earlier this decade) to a staggering 58% by 2060.

The causes of this challenge are in Europe are manifold: declining fertility, advances in old-age care, the residue of baby-boom demographics. But the impact will be serious.

This is made even worse by the fact that so many of today’s youth in Europe are unemployed. The longer they are unemployed, the less relevant their skills become, and the harder will it be for them ever to get a well paying job. Their life time earning potential is being radically diminished.

The experience of long term unemployment is devastating.  That is a huge medium term problem. I heard a representative of the Gallup polling organisation, who do in depth polls that the experience of long term unemployment was worse, for the person involved, than of opinion and studies of public psychology, say that his organisation’s finding was the death of a spouse.  Imagine what that also does to future earning potential and self confidence!

Mario Draghi has recognised this, as the central European problem of today.

He said in his  speech at Jackson Hole last year

“The stakes for our monetary union are high. Without permanent cross country transfers, (which he did not expect will happen), a high level of employment in all countries is essential to the long term cohesion of the euro”

I would emphasise two words in that sentence….. “all” and “essential”…..

“ ALL” countries in the euro must have a high level of employment. 

And the head of Europe’s Central Bank says this is “ESSENTIAL”  for the euro.

Not the sort of language you would expect from a Central Banker of the subject of employment, which shows that solving Europe’s unemployment problem is essential to the survival of the euro, and thus the avoidance of immense financial instability and wealth destruction, that would flow from a break up of the euro.

Even economists, like Martin Wolf, who opposed the creation of the euro, argue that its break up would be an unmitigated disaster at this stage. The break up of the euro could herald an era, between the countries now in the EU, of  arbitrary savings destruction, of national protectionism, of competitive devaluation,  and  of mutual litigation and recrimination, that would destroy the interdependence that has allowed the European Union itself to be a structure of peace in Europe for 60 years. 

We would not be going back to the 1980’s, but to the 1930’s. 

And Mario Draghi has linked finding a solution to high unemployment is some European countries(like Greece and Spain) to finding a way to avoid that. That is what is at stake.

TODAYS PRESCHOOL CHILDREN WILL HAVE A HEAVY ECONOMIC BURDEN TO BEAR……, 

But, in the longer run, we have another problem. We will soon not have enough young people at all in Europe.

From 2030 on, Europe’s working age population will decline and the number of retired people depending on them will increase. There are four Europeans of working age today for every one retired person. By 2060, there will be only two.

To be precise, Europe’s labour supply will remain stable up to around 2023, and decline thereafter, by about 19 million people, up to 2060.

As a result of these trends, Europe’s relatively small number of pre school and primary school children of today, will, later in their lives, have to support a proportionately much larger retired population, than will their competitors in India, China, and Indonesia.

Europe will be like a horse carrying extra weight in the “global competitiveness horse race” of the mid 21st Century.

In Europe, the OECD projects that, from 2014 to 2030, the increases in public expenditure on health, long term care, and pensions, will range from increases of 6.3 percentage points of GDP in Luxembourg, through 5.6 percentage points in Belgium,  and 4,8 points in Finland to 2.7 points in Ireland, down to  1.4 points of GDP in the UK, to a mere 0.8 points in Italy and 0.7  points in Poland. This is the difference made by pension and entitlement reforms in the latter countries.

If young people are to be able to have  the future earning capacity to bear these extra burdens ,it is essential that as small children today get every developmental educational advantage now, no matter what the present income status of their family.

That is not just a matter of social justice, although it certainly is that, it is a matter of pragmatic self interest for today’s, eventually to be retired, workforce and electorate.

But what sort of educational investment will make a difference?

Increasing the teacher /pupil ratio may help, but the evidence on that in ambiguous. Some countries with high teacher ratios do less well than do others with proportionately fewer teachers.

In fact, it  may be before children go to school at all that the  biggest improvements in intellectual ability can be achieved.

…………SO THEY NEED EXTRA SUPPORT FROM THE EARLIEST AGE

I recently read a report prepared for Vietnam by the World Bank on how that country could improve its educational performance.

The report said bluntly

“Much of the inequality in learning outcomes, between different types of young Vietnamese observed in primary education and beyond, is already established before the age of formal schooling”
This may be caused by physical poverty, including bad or insufficient nutrition, which will stunt a baby’s mental development. Similar poor nutrition will be found in a minority of homes in rich countries too.
But things, like that,  that can be explained by lack of money, are not the only factors affecting a child’s mental development.

The World Bank Report goes on

“The brain development of young children’s highly sensitive to stimulation and interaction. The more parents and care givers interact with a young child, for example through talking, singing or reading, the better are the conditions for brain development”

The report suggests that, in Vietnam, babies from better off families have more of this sort of stimulative inter action with parents and care givers, than do babies in poorer families.

But the general  point about what makes a difference applies at all income levels, and if very small children , as they develop, only see their parents for an hour or so each day, and spend the rest of the time away from them, they may lose out on mental development, no matter how well off they may be materially.

If these World Bank views about intellectual development are true, they deserve an urgent response from parents, crèches, and government at all levels here in Europe.

If we are going to depend on a smaller number of children to support our welfare systems over the next forty years, we must do everything we can now, to enhance their earning capacity, especially by ensuring that they have a happy and stimulating childhood, from the earliest age.

That may be the most important long term economic stimulus of all!
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Speech by John Bruton, President of IFSC Ireland, and former Taoiseach, at the dinner  of the Institute of Chartered Accountants in Ireland in  the Convention Centre, Dublin at  8pm on Thursday 29th January
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BETTER PRODUCTIVITY IS THE KEY TO EUROPEAN PROSPERITY……… PRODUCTIVITY IN THE LEGAL SYSTEM AND IN THE HEALTH SERVICE IS AS IMPORTANT AS THAT IN EXPORT SECTOR

Raising productivity should be Europe’s top goal for the next ten years.

A recent OECD report highlighted low productivity growth as the key challenge facing the European Union.

It pointed out that, since 2000, labour productivity in the EU countries had risen by only 0.6% per year, whereas the average productivity growth, in OECD countries not in the EU, was 1.2% per year…twice as fast. 

Lagging productivity growth is even a bigger problem than the debt aftermath of the banking crisis. Economic growth that derives from increases in property prices and associated consumer spending is inherently temporary, whereas growth derived from productivity increases will last.

If EU countries become more productive, they will generate the revenue to reduce their private and public debts to manageable proportions. But if productivity remains low, debts will accumulate.

Since the crisis, EU countries have focussed on reducing costs, but have neglected investments that might boost long term productivity. 

Germany, for example, has a low level of public investment, even though it can borrow very cheaply to invest. In Ireland, public investment is still at two thirds the level it was in 2007.

Given that most EU countries will have to have big medium term increases in Government spending to pay pensions and provide healthcare to an ageing population, it is necessary for them to curb deficits now.  Already the EU has only 7% of the world’s population, but 48% of the world’s social spending by government.

Life expectancy in the EU is expected to increase from 76 years in 2010 to 84 years by 2060, which means a longer period during which pensions will have to be paid, and healthcare provided.

But cutting deficits, by reducing investments that might generate the revenue to meet those medium term expenses, is unwise.

One concrete step that could be taken to privilege investment over current spending, would be to amend the EU Stability and Growth Pact, to exempt from the deficit calculations co financing by member states of investments being jointly financed with the EU. 

The number of employable age in the EU will peak in 2022 at 217 million. After that, the number will fall. So if tax revenues, and services, are to be maintained, productivity must be continually improved.

The productivity of an economy is determined by the efficiency of the entire economy, not just of the export sector.

If Government services, the professions, the courts, or the transport system are inefficient, that can do just as much damage, as lack of research or unduly high wages in the export sector. 

Ireland, in particular, needs to look at the productivity of its health services, of its training systems, and of its legal system, all of which appear to be performing relatively poorly, and are shielded from external competition.

In Germany, the delays in setting up a new business are big barrier to improved productivity. Full scale EU wide competition in the services sector is a key to solving this problem.

THE IRISH BUDGET FOR 2014…. ARE WE ASKING THE RIGHT QUESTIONS?

OCTOBER 15 BUDGET WILL BE A DRAFT


Under new EU rules ,which entered into force on 30 May this year and which apply to ALL euro area states, whether in a bailout programme or not, each country must publish its draft budget on or before 15 October.
The Irish government will do so on the 15th. 
The European Commission will then examine the draft budget of all euro area states and must give its opinion before 30 November.

If the Commission detects severe non compliance with the Stability and Growth Pact, it will ask the state in that position to submit a revised budget. This possibility will exist for Ireland, whether or not it is a bailout programme.

The Commissions opinions will then be discussed in the Eurogroup of Finance Ministers, in December, where each Minister will be free to express opinions on the others budget.
The final budget of each country must be adopted by 31 December, up to which time, changes, within the overall numbers are possible.

This new process obviates the need for budget secrecy, which is an antique hangover from Victorian times.

THE DIFFICULT LEGACY OF THE 2001 TO 2006 PERIOD, WITH WHICH THIS GOVERNMENT MUST COPE 

The worst legacy from its predecessor, with which the present Government must cope, is not the bank guarantee.

It is the permanent increase in spending levels that it allowed between 2001 and 2008. The then Government agreed these permanent increases in spending  on the strength of revenues from the construction boom, that it had to KNOW were temporary.
For instance, between 2001 and 2006, number employed in the health service grew from 92000 to 112000.The number of items prescribed in the GMS went from 22 million items to 53 million in 2009. Are we any healthier for all that spending?
Number employed  in the Education sector increased by 25%  between 2001 and 2006, but our educational outcomes measured by the OECD’s PISA test went down quite badly.
Numbers employed in the civil service increased by about 25% too, but numbers in the top grade increased by 86%. These people and posts are mostly still there, even though the revenues that allowed for their recruitment have long disappeared.
Social Welfare rates of payment went up by 67% over and above price inflation between  2000 and 2006, and these rates remain in place.

LOOK AT THE NATIONAL BALANCE SHEET, NOT AT ONE YEARS FIGURES

The debate in the Irish media, and between parties, about whether the gap should be  closed this  year by 3.1 billion euros, or by a lesser figure, is beside the point.
Rather than looking at one year’s figures, we should  focus on the national balance sheet.

We should ask ourselves four questions

+ what are our likely revenues over the next twenty years, 

 + what is the value of our saleable assets, and 

+ what are our obligations, both in explicit debt repayments and rescheduling, 

+ but, just as importantly, if policies remain as they are, what will we have to pay over the next 20 years to keep the promises we will have made  in respect of

      incremental increases to pay,      pensions,      health services,      unemployment benefits and      education,


in light of trends in the age structure of our population and the (reducing) numbers of working age?

These may be among the questions Finance Ministers of the euro area countries will be asking about one another’s budgets, when they meet in December, before each of them finalises their budget for 2014.
The Irish Fiscal Council has estimated that, on the basis of present policies, ageing related liabilities of the Irish state are likely to increase by 5.4% a year up to 2060, as against a euro area average increase of 4.1% a year.

It also draws attention to big shortfalls in the Insurance Compensation area, the VHI, and even a possible state obligation for shortfalls in private sector pensions, arising from a recent Waterford Crystal case.

A recent EU Commission report on ageing  suggest that, between 2010 and 2040, on present policies, pension spending by the state will have to rise from  7.5% of GDP to 10% of GDP, and long term care expenditure from  1.1% to 1.9%.
Constantin Gurdgiev in the Sunday Times has claimed that most of the savings in public sector pay, in the Croke Park and Haddington Road Agreements, are liable to end and be reversed when the latter Agreement expires .
The OECD drew attention to the fact that one in five of Irish children are growing up in a home where no one is working. Will those children grow up to be able to support themselves, and pay taxes, or will they be dependent on the state for income support? That is a vital matter for everybody, not just for the families concerned.
In sum, what Ireland needs is a 10 year budget, and a 20 year balance sheet. Then people will see more clearly what has to be done and what needs to be changed in good time.

IS IRELAND A TAX HAVEN?

In  hearings in the United States Senate recently, on the tax paid in the United States by the Apple Corporation, Ireland was described by one Senator as being a “tax haven”. 

This is wrong.

The Irish Minister for Finance , Michael Noonan, has said that The OECD and the international community do not regard Ireland as a tax haven. 
The OECD, a body of which both Ireland and the United states are members, is currently working to curb tax avoidance, including by international corporations. 

The OECD identifies four key indicators of a tax haven:
  • the first is having no taxes or only nominal taxes;
  • the second is a lack of transparency;
  • the third indicator is an unwillingness to exchange information with tax administrations of OECD member countries; and
  • the fourth indicator is absence of a substantial activity requirement. 

None of these criteria apply to Ireland, . 
The United States is a member of the OECD. Indeed it founded it.  This OECD definition is the authoritative definition and, unless or until it is altered by collective agreement it should be respected by United States Senators.

Ireland has a comprehensive taxation system covering income, capital and indirect taxes and has Double Taxation Relief Agreements with 68 other countries.

The January 2011 Global Forum Peer Review Report on Ireland’s legal and regulatory framework for transparency and exchange of information found that Ireland has an effective system for the exchange of information in tax matters and is fully compliant with OECD standards.

The Irish 12.5% corporate tax rate is a general rate for trading income that requires the trade to have real substance and activity. The Irish corporate tax code does not distinguish between small and large enterprises, or between enterprises that service the local economy, and those that have a multinational focus.

UNUSUAL FEATURES OF THE US TAX CODE

Part of the problem, which has given rise to the controversy in the US Senate, is the unusual US policy assumption that tax must be paid by a United States corporation, even when the economic activity that generated those profits took place outside the United States.
 What would happen if every country applied such a policy?

 It is extraterritorial legislation of an unacceptable kind.
The fact that the United States levies a 35% tax rate, if profits generated outside the United States, are eventually brought back into the United States, creates an artificial incentive  to companies to keep their overseas profits overseas.

That is a problem of the United States tax code, not the Irish tax code.
Another problem is the complexity of the US tax code. The US ranks 69th in the world ranking in the matter of ease of paying taxes. Ireland is near the top of that ranking.

Americans spent $168 billion last year complying with the 74000 page, 4 million word, US tax code. Apparently the US tax code is many times longer than the French or German tax code.

Apple’s effective tax rates are small because the trade charges on its intellectual property is large, and that reduces its liability. Royalties on intellectual property are a legitimate business expense. 

BUT WE DO NEED TO IMPROVE TAX COLLECTION

There is a need to improve the capacity of states to collect tax on corporate income. 

In a world where capital is mobile, and people are not, there are opportunities for tax avoidance that reduces revenue.

That ,in turn, reduces the ability of states to maintain the social peace and freedom, from which corporations themselves benefit so much. International corporations should cooperate with this work, in their own interests.

I hope the OECD work on all this yields fruit.

COPYRIGHT JOHN BRUTON & CONTENT

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