Corporate Tax Rate Illusions

Last week, John McCain and Newt Gingrich cited Ireland's low corporate tax rate of 11 and 12 percent, respectively, (it's actually 12.5 percent) as evidence that American business were overtaxed.

Well, you don't have to be Warren Buffett or Bono to know that there are some large differences between the U.S. and Irish economies and that what works for the Irish economy is certainly not what would work for the U.S. economy (though I wonder why they didn’t mention Ireland’s universal healthcare system, or free tuition at its universities).

Ireland operates within the European single market the way Delaware does in the United States. Because Ireland is a small, open economy, it has little ability to create economies of scale on its own and therefore needs substantial foreign direct investment and a large market to sell goods to grow. Ireland uniquely positioned itself within the EU to sell high-tech goods like computer software to the rest of the European single market by tempting foreign companies (mostly American) with a low tax rate. It also has several other comparative advantages, including a highly educated workforce, a common language with America and relative labor peace. There’s the reason why companies like Google, Microsoft, eBay and Yahoo all have their European headquarters in Dublin.

However, it wouldn’t do the United States any good to copy Ireland’s corporate tax rate, just as it wouldn’t do any good to have an entire country with the same tax structure as Delaware’s. McCain and Gingrich offered no context for their assertions. I wonder the last time they cited Ireland’s 42 percent personal income tax rate for single taxpayers on income over €28,000?

Yes, there are a few lessons the U.S. could take from the Irish economy, but trying to repeat its economic success by copying its corporate tax rate is like putting on a number 17 Redskins jersey and hoping to play like Jason Campbell. As they would say in Ireland, “Good luck to ya!”




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