Looking towards Ireland to forecast Trump’s tax plan

Looking towards Ireland to forecast Trump’s tax plan

In a GRI Guest Post, European political economy expert Winthrop Rodgers explores what Ireland may foreshadow for U.S. Republican Presidential Candidate Donald Trump’s tax plan.

During the First Presidential Debate on September 26th, the most policy-focused moments of Republican nominee Donald Trump’s debate performance were when discussing economic issues. Among other proposals, he included a pledge to lower the Federal corporate tax rate, in an effort to bring corporations back from operating overseas.

He also highlighted this policy at an August 8th speech at the Detroit Economic Club. The response from economists is largely underwhelming. Nevertheless, looking to the wider world, this approach is not without precedent and deserves some analysis.

The Trump Plan and Ireland

Mr. Trump’s idea is reminiscent of the Irish program of economic development centered on a low corporate tax rate. Starting in the 1980s, the Republic of Ireland was looking for ways to differentiate itself from its European competitors and improve its stagnant economy. Leveraging its well-educated, English-speaking workforce, and a positive world image, it promoted itself as a way for foreign companies to access the European Common Market. To sweeten the deal, it locked in a commitment to a corporate tax rate of 12.5%.

The result was the vaunted ‘Celtic Tiger’ economy, which grew at an average rate of 9.75% between 1995 and 2000 before slowing to a more than respectable average pace of 5.5% from 2001 to 2008. According to the American Chamber of Commerce in Ireland, approximately 700 US firms have opened offices in Ireland, creating 130,000 jobs and adding $277 billion to the Irish economy since the mid-1990s. The city of Dublin grew dramatically, becoming the European hub for Silicon Valley.

Because of easy access to credit, the real estate market took off, particularly in the growing commuter belt around the capital. Finally, the relative success of the Peace Process in Northern Ireland opened up fertile areas for trade and investment that had been neglected during the Troubles.

By those metrics, Mr. Trump’s proposal seems like a good idea. The logic is that if companies are able to keep more of their revenue, they will reinvest that money in their business, create jobs, raise wages, and spur development. Indeed, many other places have seen Ireland’s success and attempted to emulate it, especially in Eastern Europe, which has many economic similarities to pre-Tiger Ireland.

Additionally, Northern Irish politicians perennially demand that London lower its tax rate so that it can compete across the border. In Anglo-American economic circles, this model tends to be popular with conservatives and neoliberal, free-market advocates. As such, it is unsurprising the Republican nominee would propose low corporate taxes as part of a broader reform initiative.

Issues with the Trump Plan

The model, however, does raise some issues. First, in order to compensate for lost revenue from direct taxes, indirect taxes must rise. This regressive taxation tends to have the greatest adverse effect on the working class, who have to spend a larger percentage of their income paying sales tax, tolls, and fees than the wealthy. For this reason, the political cost of implementing a plan where indirect taxes fully offset lost revenue from direct taxes would be extremely high and unlikely to be approved by Congress.

Without this offset, revenue would inevitably be lost. In fact, under Mr. Trump’s plan, the conservative Tax Foundation estimates a shortfall of $1.9 trillion. This leaves the government less able to fund social programs or respond to a slowing economy in times of crisis.

Second, it puts more money in the pockets of the very wealthy, as they are typically the group that benefits the most from high corporate revenues in the form of bonuses, stock options, incentives, and salaries. This exacerbates income inequality, which has become an increasingly loaded political issue since the Great Recession.

When the economy is growing quickly, corporate and government balance sheets are in the black, and consumers are flush with cash and credit, tensions ease and inequality can be papered over. But in times of crisis and the gap between the wealthy and wage-workers grows, social and political clashes occur and unrest rises.

The Irish example shows this to be true. As previously indicated, the Irish economy grew at a high rate for many years. However, once the bottom dropped out of the banking sector and real estate and credit markets, the bubble more exploded than popped. The Irish government couldn’t pay its bills and had to undergo a politically humiliating and painful austerity program overseen by the International Monetary Fund, the European Central Bank, and European Union — collectively known as the “Troika.” Furthermore, according to the think-tank Tasc, Ireland currently the highest rate of income inequality in the OECD.

As a result, the past few years has seen an uptick in street protests, the organization of new civil society groups opposed to government policies such as water charges, and an acceleration of progressive cultural change as seen with the legalization of same-sex marriage. Many Irish today, while wistful for the success of the Celtic Tiger, are wary of the negative consequences that it unleashed and the institutions underpinning that era.

Shaping the right tax plan for the United States

Therefore, it is probably better to strike a balance between extremes rates of corporate tax. The United State ought to instead seek to avoid a regressive tax system, combat income inequality, and craft stable, predictable economic policies that can weather economic crisis.

This last point is important because of the unique position of the US in the world economy: it is the largest economy; the dollar is the global reserve currency; it is a massive trading partner, financial hub, and technological innovator. The world cannot afford a fundamentally unstable US economy and extremely low corporate tax rates would weaken that foundation.

Beyond the practical objections that economists have raised about Mr. Trump’s policy proposal, the figures that he cites are misleading. While he did not give specifics in the debate, he did during his speech at the Detroit Economic Club. He said: “The United States also has the highest business tax rate among the major industrialized nations of the world, at 35 percent” and pledged to slash this to 15% for all businesses. However, the 35% figure that he cites is not what corporations actually pay; it is the nominal rate. According to the Congressional Research Service, with all of the tax breaks companies receive, the US corporate tax rate is 27.1%, which is slightly below the OECD average and, therefore, competitive with similar economies before factoring all of the other economic advantages that the US possesses. Indeed, the 27.1% figure is an average; many companies and small businesses receive additional tax relief beyond that level. Therefore, Mr. Trump is concocting a problem where none exists — or at the very least exaggerating it.

Doubtless, Ireland is better off than it was before the ‘Celtic Tiger.’ But its central organizing principle is not applicable to the US economy, nor will it benefit Mr. Trump’s most ardent supporters in the working class. Instead it will benefit the already wealthy and do little for the rest. Additionally, it will exacerbate already evident political, economic, and cultural cleavages. It’s rare in economics that Ireland can be a lighthouse. However, it is in this circumstance. If policymakers want to avoid needless harm to the US economy, they should avoid this particular shoal.

Winthrop Rodgers is a Freelance Writer and Researcher based in Washington, DC. He is currently writing on European political economy and the Kurdish role in the fight against ISIS. He holds a MA from Queen’s University Belfast and a BA from Bates College.

Categories: Economics, International

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Guest Post

This article was published as part of the GRI Guest Post Series. GRI guest posts come from leading experts in business, government, and academia. The series strives to bring a diverse range of perspectives on the critical issues of our time. The views expressed in this article are solely that of the author and do not necessarily represent the views or opinions of GRI.