Debt Crisis Casts Spotlight On Ireland's Low Taxes

Dublin's new convention center. i i

hide captionDublin's new convention center, with its tilted architecture, is situated among low-rise office buildings that have sprung up alongside faded brick factories and warehouses.

Jim Zarroli/NPR
Dublin's new convention center.

Dublin's new convention center, with its tilted architecture, is situated among low-rise office buildings that have sprung up alongside faded brick factories and warehouses.

Jim Zarroli/NPR

U.S. presidential candidate John McCain made big headlines in Ireland in 2008 when he advanced a bold new idea to make the American economy grow: Do what Dublin did.

Ireland had cut business taxes sharply over the years, giving it a big advantage over other industrialized countries, McCain said in a debate with then-Sen. Barack Obama at the University of Mississippi.

"Right now, [U.S.] business pays the second-highest business taxes in the world — 35 percent," McCain said. "Ireland pays 11 percent."

McCain's numbers were off a little (corporate taxes in Ireland are 12.5 percent). But there's no debating that Ireland has long pursued a policy of low business and personal taxes, which has helped it lure the kinds of blue-chip foreign companies that bring plenty of white-collar jobs.

"The low corporate tax rate is a very, very important part of the package of attractions that Ireland has to offer the multinationals, and we have found it has attracted a good deal of new foreign direct investment to Ireland," says Barry O'Leary, head of the Investment Development Agency of Ireland.

The New Ireland

The results can be seen all over Dublin: In the picturesque Grand Canal area, where boats bob serenely in the water, gleaming low-rise office buildings have sprung up alongside faded brick factories and warehouses. Facebook, State Street Bank, Google and Citigroup have offices nearby. Pfizer and Dell are not far away.

Wage taxes, too, have long been much lower than in other European countries, says Fintan O'Toole, a columnist for The Irish Times and the author of Ship of Fools: How Stupidity and Corruption Sank the Celtic Tiger.

"If you were working in Ireland, well, very large numbers of people were kept out of the tax net altogether," O'Toole says. Many middle-class people paid no taxes either, he says.

A ship is moored in front of the Citigroup building in Dublin's  Grand Canal area. i i

hide captionA ship is moored in front of the Citigroup building in Dublin's Grand Canal area.

Jim Zarroli/NPR
A ship is moored in front of the Citigroup building in Dublin's  Grand Canal area.

A ship is moored in front of the Citigroup building in Dublin's Grand Canal area.

Jim Zarroli/NPR

But the economic collapse of the past few years — unemployment has gone from 4.5 percent to more than 13 percent — has exposed the downside of Ireland's low-tax policies, and forced it to backtrack somewhat, he says.

A Property Bust

The government has depended heavily on consumption taxes, which are down sharply, as well as taxes on real estate transactions. Because of government policies that encouraged property development and a flood of foreign investment, the country experienced an infamous construction boom. As a result, money poured into government coffers, which it used to pay for infrastructure projects like school modernization and higher wages for public employees.

"The unsustained property taxes that the government was taking was giving the government the false sense that this money is there to be spent, and we can actually take this money and there will be no end to it," says Mark Fielding of the Irish Small and Medium Enterprises Association, a lobbying group for business.

With the bust in the housing market, starting in 2007, property tax revenues slowed sharply, and Dublin began to amass a massive budget deficit. At the same time, the government decided to help prop up some of its bad banks, staggering under the weight of failed real estate deals.

The government needed to borrow to cover its deficit. But after the collapse of Lehman Brothers in September 2008, the credit markets dried up, and heavily indebted countries like Ireland found it nearly impossible to borrow the money they needed.

To cover its deficit, Ireland was forced to make sharp cuts in wages and programs — and to raise wage taxes by about 4 percent. The increases have been unpopular, but Fielding says the country had no choice.

"Our tax base was way too small for the economy, and too many people weren't paying taxes," Fielding says. "And again, you'll have the social do-gooders say, 'Well, you can't afford to be taxing these people.' But the facts of the matter are that without a tax base, the economy just can't run."

"What the government has not done is raise corporate taxes, O'Leary says.

More About Ireland's Economy

"We're pretty clear on the benefits it brings for Ireland," he says. "And we don't want to damage those benefits at all by increasing the tax rate. So it is not on the horizon at all."

Zombie Hotels

Neither has the government altered its pro-development policies, though in this battered real estate market, few people are choosing to take advantage of them.

Today, as many as 150,000 empty houses dot the landscape, in a country of about 4 million people, says O'Toole. There are also several hundred "zombie hotels," erected because tax law favored their construction, he says.

This construction boom wasn't caused by tax policy (like the United States, Ireland attracted huge amounts of foreign investment dollars, leading to a credit boom). But government policies made the problem worse, O'Toole says.

It's a situation he calls "surreal."

"When people used to come to Ireland from abroad in the 1960s and 1970s, one of the sad things you'd see on the landscape was all these empty houses, and they were the sort of physical manifestation of famine in the 19th century, of mass emigration, of the kind of depopulation of whole parts of the countryside," O'Toole says.

"So it's pretty sad to create that out of disasters like famine and emigration," he continues. "It's really insane to create it out of a boom. So out of prosperity we managed to create all these empty houses, which have the same ghostly presence on the landscape as the houses from the 19th century had."

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