The true cost of scrapping an ‘almost perfect’ tax

The European Union is investigating Apple to see if it owes countries like Ireland billions in unpaid taxes. As of the second quarter of 2016, Apple has a cash balance of around $231 billion. To put that in its proper context, Ireland’s total national debt is around $226 billion.

Apple can obviously afford whatever the fine is. There’s a lot of money to play for. The pile of multinational cash parked overseas in places like Ireland is in the order of $1.2 trillion, according to credit ratings agency Moody’s.

A first digression: take everything ratings agencies like Moody’s say with a barrel, not a grain, of salt. This is the most recent estimate out there.

Problem with precedent

Back to our scheduled show. Clearly the problem is precedent. If Apple gets whacked with giant fines, other giants such as Microsoft, Cisco and Oracle will get the same treatment. It could be a fiscal bonanza for small countries like Ireland. Our government spends about €56 billion on goods, services, and transfers such as social welfare. Imagine if we got another €10 billion in one year. Every piggy in every trough would consider it Christmas. A special interest holiday. We could call it “Lobby-mas”.

Let’s not start writing our Lobby-mas lists just yet. The US Treasury is strongly opposing the investigation of Apple by the European Union. The Treasury is concerned that the European Union is overstepping its authority in this area. The Treasury claims the European Union is undermining the international tax system. This is code for ‘doing something we don’t like’.

US companies are the main instigators of the problem of double non-taxation. US tax code loopholes – bought and paid for through a Congress rotten with institutionalised corruption – allow this behaviour.

Anyone who wants to spend a weekend shaking with rage at the destruction of the US political system by lobbying should read Robert Kaiser’s So Damn Much Money.

The US is not a neutral actor in international tax. The US Foreign Account Tax Compliance Act, for example, forces other nations to collect data on the activities of US firms, while the US does not reciprocate with data-sharing. There’s a lot of hypocrisy in the US defence of Apple. Here, the US is the author of its own miseries.

Ireland is in the middle of this mess because of the very open nature of its economy and the very compliant nature of its tax system. I highly doubt the structure of the tax system is such a matter of constant debate in other countries. Ireland’s tax system is highly contentious because of the financialised nature of the current international system and our strategic choice to use our tax system to foster export-led growth in the 1950s.

A second digression: this process is the main reason we can no longer trust our Gross Domestic Product numbers.

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We need that €4 billion

Domestically, the tax debate du jour is the abolition of the Universal Social Charge (USC). Deputy Pearse Doherty obtained briefing documents from the Department of Finance showing that the abolition of USC would cost the state €4 billion. We need that €4 billion to run hospitals and pay for house building and pay for social welfare.

USC is an almost perfect tax. It is simple and progressive, meaning the more you earn, the more you pay.

To remove it is by definition regressive, which means richer people benefit more. You can use the income tax (one of the other two taxes on income) to smooth this out, but it’s threshold-based and isn’t perfect.

Long story short: removing USC would help the upper-middle classes a lot more than the poor. It would also deprive the poor of about €4 billion you’d have to find somewhere else.

The only sure fire way to get rid of USC on a sustainable basis is to increase property taxes in a phased way. Unlike income taxes, property taxes are anti-cyclical, meaning you’ll pay them regardless of where we are in the business cycle. Contrast this with stamp duty, for example, which went up and down a lot.

Now, who pays property taxes? Mostly the middle classes. So to recoup the €4 billion or so you’d lose, you’ll transfer the ‘hit’ from one place to another, but, for the most part, the same people will still pay in the end.

The argument that decreasing taxes leads to increases in disposable income and hence more consumption only makes sense when you’re running a nearly balanced budget. But we still aren’t when you account for interest payments on the national debt.

Given that the economy is performing very, very strongly at the moment, it’s not clear we need tax cuts. We need spending increases, and these need to come from the available fiscal space or (gasp!) tax increases. Increasing employer contributions would be a good place to start. Getting rid of the 9 per cent Vat rate on tourism, would again be a very good place to start.

The USC story won’t go away. More than two million people are now in employment in the Republic. Over 56,000 people have jobs that didn’t exist or weren’t filled this time last year. This is undoubtedly good news. The unemployment rate is falling and there are some indications inward migration will exceed outward migration for the first time this decade; 12 of the 14 main sectors of the economy are hiring more, and wages are increasing slowly as well.

A third digression: when searching for new measures of the health of the economy, let’s keep it simple, and keep it real. Look at how many people are working here, and estimate productivity increases by sector. That’s a great place to start.

It’s all connected

In 2016, the Irish economy is deeply embedded in the global economy. Multinationals such as Apple and Microsoft are a large part of this story, and their tax affairs are inextricably bound up with Ireland’s domestic tax strategy and its consequences.

The USC, our recent employment growth, and even the measurement of the economy, are all a part of this story. It’s all connected. Ministers Noonan and Donohoe are aware of these connections. Whether they can manage them in 2017 is another matter altogether.