Monday 21 April 2008

Lisbon and Tax

[update: while the main post was about tax harmonisation, the comments section has developed into a discussion on the Lisbon Treaty]

What does the Lisbon Treaty say about tax harmonisation? The answer of course is - Nothing. Lisbon will not mean tax harmonisation. (But that won't stop the Euroskeptics from shamefully telling us the lie that Lisbon will mean instant tax levelling and disaster for the Irish economy).

Nevertheless, the issue of tax harmonisation is here to stay. It is here to stay because the huge variation corporate tax rates across the EU is resulting in a massive disparity in Foreign Direct Investment (FDI).

According to the OECD the cumulative FDI Inflows into Europe for the period 1994-2004 look like this:

UK $534m
Germany $375m
France $356m
Spain $184m
Ireland $139m
Italy $100m
Denmark $71m

Ireland getting more than Italy in absolute terms! Unreal. On a per capita level Ireland is getting 5,8 times more FDI than France, 7.5 times more than Germany, and 20 times more than Italy.

A further start figure: according the to US department of State the total US capital stock in Ireland as of 2006 stood at $84billion which is more than double the US investment in India and China put together ($31 Billion).

These stark figures explain a large part of the Celtic Tiger. But they also expose its vulnerability. It is no secret that more and more capital is being diverted to Asia or countries in Eastern Europe such as Estonia which imposes a zero rate of corporate tax on some categories of company.

The figures also explain why some of the bigger European countries are crying foul. The European project was supposed to entail levelling the economic playing field by ironing out distortions in the market across countries. The single market, remember? But Ireland is not the only country seen as an offender. In 2006 Germany accused Austria of fiscal dumping in order to poach companies from Germany. Austria responded that they had to reduce their rates to cope with competition from their neighbours on their Eastern borders.

And so, Germany put the tax debate back on the table.

There is no doubt that it's going to stay on the agenda - although the Germans and French leaders may remain fairly mute about it until after the Irish referendum.

In any case, the referendum will make no difference - Europe, and therefore Ireland, is going to have to face this issue sooner or later. It is true that even under Lisbon each member will retain a veto over taxation, but in practice when the big EU powers apply pressure something has to give. It is unlikely that tax rates will be harmonised, but the way in which tax amounts are calculated could be harmonised to take into account the size of the local market for each firm, or the size of the workforce. This could mean an end to the famous transfer pricing, whereby companies located in a low tax country such as Ireland, simply push their funds around internally to be taxed in the low tax location and not their high tax location. In effect, it would be the same thing - Ireland's tax haven status would disappear.

There are two things to note about this. First, the argument made by the big continental powers is probably right: in terms of how tax is calculated it is ridiculous to pay most of your Eu tax in Ireland simply because you employ 200 people in Sandyford. (Ridiculous if you're German, not if you're one of the employees in Sandyford!)

Second, if the UK backs us we have a fair chance of postponing the inevitable. In the end, the UK will be powerful enough to protect her interests by only agreeing to watered down proposals which will probably be phased in over a long period. It just might be enough to give us enough breathing space to do what we need to do anyway: start unloading some of those eggs into another basket.

10 comments:

BryanFeeney said...

Tax harmonisation only makes sense if every country has the same budget and social structure. However this is clearly not true. It must further be said that whilst the last 15 years of EU economic history would favour liberalisation, and minimal taxation, most proponents of tax-harmonisation in the EU favour the opposite - it is in effect a way for the older countries to try to retain their advantage without going through the difficult reforms that Britain (and to a lesser extent Ireland) went through in the 80s.

Furthermore, one should not simply consider taxation when viewing FDI figures, Italy[1] and France are notoriously difficult countries to do business in, which huge amounts of regulation and bureacracy. This is why England, with a corporate tax rate of 35%, does better than the two of them.

Germany's placing is a little puzzling, but then again, Germany has little need of FDI, and may not have chased it as hard.

Lastly, most of the Eastern European economies make use of aggressively low taxation schemes. Introducing tax harmonisation at this stage would deny them a benefit Ireland has enjoyed.

As regards Lisbon, I'd reject it because it failed to address the issues it was meant to: accountability, lighter government, closer government, economic progress. It just adds more institutions and confusion[2], further removed from the electorate. Ireland joined the EEC, we've no obligation to join such a mangled mess that a post-Lisbon EU would be. After all, despite all the bloviating about increased EU size stalling progress, since the arrival of Eastern Europeans several years ago, decision making in Europe has not ground to a standstill: if anything it's been slightly faster

[1] http://www.economist.co.uk/world/europe/displaystory.cfm?story_id=11067600&CFID=3065150&CFTOKEN=32602434
[2]http://www.economist.co.uk/world/europe/displaystory.cfm?story_id=10852850

BryanFeeney said...

With my regard to expansion not hindering decision making, the reference is http://www.economist.co.uk/world/europe/displaystory.cfm?story_id=8998372#login but it's behind a login wall. The relevant quote is:


-----------------
Overall, the EU has been adopting new rules and regulations some 25% faster since enlargement, says a study published by Sciences Po in Paris. Its authors have tracked thousands of proposals, large and small. “Contrary to much received wisdom,” they conclude, “the data gathered shows that enlargement has not...brought Europe's machinery to a halt.” Looking for blockages, they find that “old” members have opposed proposals twice as often as new ones. The French study, like a report on EU summits from the Swedish Institute of European Policy Studies, concluded that meetings of EU commissioners and national politicians have become less cosy, with more deals stitched up in the corridors, but that is a rather different point.

As for talk of new voting rules, these conjure up images of late night cliffhangers, in which new laws scrape through by a bare majority. But that is not how the EU works. In both the commission and in meetings of national ministers, votes are generally shunned in favour of consensus. Abolishing national vetoes still matters, but for a different reason. When laws can be approved by majority vote, governments enter negotiations in a state of fear, knowing that doubters can easily end up isolated; a knowledge that pushes everybody towards compromise, gives the commission more power and promotes “more Europe”. If countries have a veto, they can sit out the argument and simply say no. When eurocrats call for more streamlined decision-making, what they mean is making life more frightening for laggards. Hans-Gert Pöttering, president of the European Parliament, is admirably frank: “If you have majority voting, you can overrule those who don't want to move ahead.”
-----------------------

Sciences Po is France's premier political sciences University, and hardly a bastion of right-wing thought. The Economist, I'll freely admit, is, but it's still a decent reference for this sort of stuff.

Tomaltach said...

Bryan, thanks for your comments. I'll respond to some of the very interesting points that you raise.

one should not simply consider taxation when viewing FDI figures Italy[1] and France are notoriously difficult countries to do business in, which huge amounts of regulation and bureacracy

Absolutely right. There are many factors involved. And Ireland sells itself, as does the UK, as having a light regulatory touch, little red tape to start up, and, again like the UK, lower social contributions.

The UK corporate tax rate (30%), though not as low as Ireland's, is lower than those in France (33%) an Germany (38%):

http://www.ukinvest.gov.uk/United-Kingdom/4016067/en-GB.html

But along with the lower corporate rate the UK has considerably lower personal and social contributions. Also for finance, London is among the biggest trading centres in the world, so its sheer critical mass is enough to suck in a lot of investment.

Germany has little need of FDI, and may not have chased it as hard. I'm not sure. I think Germany would certainly welcome more FDI. It was German's displeasure at fiscal dumping that kicked off the recent round of debate about consolidating the tax base:
http://www.tax-news.com/asp/story/story_open.asp?storyname=23285

As regards Lisbon, I'd reject it because it failed to address the issues it was meant to: accountability, lighter government, closer government, economic progress.

I wouldn't agree. I think the treaty considerably improves accountability and clarifies and enhances the role of both national parliaments and the European parliament. It was never meant to gaurantee lighter government, and it doesn't actually mean heavier government either. Regarding economic progress, the Treaty was never about making economic progress: no Treaty can gaurantee that. The Treaty is a refinement of the working rules of the main institutions in the hope that those who use those tools will do so wisely to further all of the shared objectives, including economic progress.

It just adds more institutions and confusion. Well no, it certainly doesn't add more institutions. The main institution of the EU remain in place and no further institutions are added. We will still have Council, Commission, Parliament, Central Bank, and Court of Justice. The real change is in the refinement of how they work and the pushing of a number of areas from unanimity to QMV.

The point made by the economist is a fair observation. I think the main point is salient: mostly the big decisions are taken by consensus - which is why it is irrelevant if Ireland's weight in QMV is marginally decreased. Ireland's success in protecting her interests in the Eu will depend on many of the same things as her success in protecting her interests elsewhere: clever diplomacy, informed engagement, building smart alliances, knowing her red lines.

The fact that the EU functioned well since the new members joined is good news. Though I personally think that is likely change as the new members grow into their roles and become more assertive. In that scenario, it makes sense that in non-crtical areas (so leaving out tax or defence) would be decided by a vote.

The other thing is that I think the rotating presidency with 27 members was beginning to show strain. The time taken to liaise with the different governments and to converges towards a consensus for agendas or the negotiating points for major decisions was taking longer than a presidency could handle. So there were hand offs in mid-flight, which seemed to result in a lack of momentum.

I believe that in a world increasingly dominated by major players, and where our main Anglo-Saxon partners are in relative decline, it makes sense to be part of the huge block that is the EU. Therefore it is in our interest that the EU functions well in those areas which we have agreed that it should handle. It is true that we need the EU to be more democratic. Lisbon goes at least a little in the right direction - though not enough. But it is in the nature of negotiations between 27 nation states that no-one ever gets exactly what they want.

Part of the trouble with the EU is that people in general and perhaps moreover, their governments find it a convenient scapegoat for problems which have causes either closer to home or which are completely beyong the control of the EU, such as the credit crisis.

The Lisbon Treaty certainly contains no big idea equivalent to the single market or the single currency - steps which were indeed momentous. It contains a fair attempt at reforming the institutions, it will provide no more than that.

Vince said...

It has one very big idea, that all past bets are off. Anything that has gone before with reference to anything, will be meaningless. Unless expressly stated. But then can be changed.
This tax thing is a red herring as is much of the debate currently. What we are voting for is change, any change seen fit and at any time. This is what is so difficult with Lisbon. There is nothing concrete, nothing fixed. In that it is nearer to the UK constitution, something unwritten until it's written and can then be erased later if need be.

BryanFeeney said...

The original purpose of the constitution, from which the Lisbon Treaty was derived, was intended to make the EU more accessible to its citizens, in part by making it more obviously democratic. This has not happened: commissioners are still appointed; the parliament's role is still quite vague; and the disconnect between voters in Cork (or Corkmen voting in North London) and the decision making is as wide as ever.

The two new institutions are president and foreign minister, both of which have significant overlap (in the U.S. the president was originally meant to deal with foreign affairs only, while congress dealt with domestic issues). Who shall speak for the E.U. on, say China's history of human rights, and to whom should China listen? It's a bit of a fudge to keep at least two counties happy. There is still also the rotating president acting in parallel to this, which is insanity.

As regards the economics, my point was that the issues of the "Lisbon Agenda" have been discarded, and the EU's central states are pushing for closer political integration and less economic integration (e.g. France's panic over Gaz de France, Italy's over Alitalia, general antipathy to "polish plumbers" on the continent etc.).

Leaving aside how little sense this makes, it will also make it less likely that the EU will successfully expand into the Ukraine or Turkey, both of which are important for reasons of geopolitical presence and stability. This is not lost on the members of central Europe: France - a few years ago - demanded and got a special dispensation so its voting rights would still outrank the Poles, even though Poland has the higher population.

Personally, I would rather fix the economics, and complete the aims of the EEC, EC, and Maastricht-based EU, before fiddling and fudging with institutions. If institutions are to be altered, I'd prefer less of them, rather than more of them with more overlap, and I would like a voting system like the US, where states still have significant rights and representation, even where populations are tiny.

The last thing I'll say is that the choice between Anglo-Saxon links and Central European links is a false one. Economically, there are also the models used by the Nordics: highly liberal economies with little job protection but large (though temporary) safety nets. In terms of markets, the place to be selling to is the Far East, concentrating on Europe is short-sighted.

The thing is, the pro-treaty arguments thus far have been based on three things: 1) the embarrassment it would cause if we said no - this is nonsense, in a democracy one should have the right to say no, and the rest of the EU should respect that if it is to be democratic; 2) The need for stream-lined institutions: again, Sciences Po and the Swedish Institute of European Policy Studies both disproved that and 3) a sense of obligation because the EU has been so good to us - which is effectively emotional blackmail after the fact (and anyway, we originally joined the EEC).

None of it has concentrated on how things work now, and how things will work after. All I see is more overlapping bureaucracy, and a reduced (even if only slightly) Irish input in that bureaucracy. Why should anyone vote for it?

Tomaltach said...

Vince, I don't think all bets are off. The Treaty spells out clearly, actually very precisely in section 56 (article 48), how any future changes are made. Any major changes would need to be ratified by all member states. In the case of minor policy changes the treaty gives explicit power not just to heads of state but to national parliaments to vote on the issue.

In fact, in terms of how it spells out - more clearly than ever before - the demarcation between national parliaments and the Eu instittuions, and between the Eu institutions themselves, I can see no parallel with the British Constitution.

Tomaltach said...

The original purpose of the constitution, from which the Lisbon Treaty was derived, was intended to make the EU more accessible to its citizens, in part by making it more obviously democratic. This has not happened: commissioners are still appointed; the parliament's role is still quite vague; and the disconnect between voters in Cork (or Corkmen voting in North London) and the decision making is as wide as ever.

The democratic deficit in the EU has been on the radar for some time. But addressing it was not the key objective of the original constitution. It is true that the constitution, as does the treaty, enhances democracy a little through more explicit involvement of national parliaments and the way in which the new president would be elected. The Comissioners are appointed it is true, but so is our Taoiseach, Finance Miniseter, our Ambassadors, our Judges, and so on. It’s representative democracy. There is a fair argument that perhaps the Comission should be elected. But rejecting the Treaty because it does not do enough for democratisation is no gaurantee that anything better will come soon. Reopening the institutional debate again, after about a decade or tortured wrangling between 27 nation states, is not going to enhance the EU. It is more likely to leave us bereft of the modest proposed changes for another decade.

The two new institutions are president and foreign minister, both of which have significant overlap (in the U.S. the president was originally meant to deal with foreign affairs only, while congress dealt with domestic issues). Who shall speak for the E.U. on, say China's history of human rights, and to whom should China listen? It's a bit of a fudge to keep at least two counties happy. There is still also the rotating president acting in parallel to this, which is insanity.

Yes two new roles. I see nothing wrong with having a head of the council and a specialist in foreign affairs. Our Taoiseach represents us at major international events involving Ireland, and certainly gets involved with any international treaty talks. That doesn’t mean we don’t need a minister for Foreign Affairs. The US president also represents his or her country abroad, though there is a permanent secretary of State who is full time devoted to the foreign affairs brief. So in fact, the Eu model is widely used. But it must be understood that the Eu is pooled sovereignty and enhanced co-operation. There will doubtless be issues where the nation states take their own stance – and nothing in Lisbon will prevent them from doing so.

As regards the economics, my point was that the issues of the "Lisbon Agenda" have been discarded, and the EU's central states are pushing for closer political integration and less economic integration (e.g. France's panic over Gaz de France, Italy's over Alitalia, general antipathy to "polish plumbers" on the continent etc.).

I wouldn’t confuse the Lisbon Agenda which was an action plan with the Lisbon Treaty, which was always about the institutions. The Lisbon Agenda was an aspiration for where the Eu wanted to go (and the implementation of which would have involved more from national governments than the Eu), rather like a program for government which has nothing at all to do with changing the institutions of the government itself.

Leaving aside how little sense this makes, it will also make it less likely that the EU will successfully expand into the Ukraine or Turkey, both of which are important for reasons of geopolitical presence and stability. This is not lost on the members of central Europe: France - a few years ago - demanded and got a special dispensation so its voting rights would still outrank the Poles, even though Poland has the higher population.

It’s important to note that the Lisbon Treaty in no way reverses the rather deep economic integration which has taken place in Europe over last 50 years. It’s true there was a lot of scrapping about weighting in the negotiations for Nice and after. In essence France was against a weight directly proportional to population because it would loose out vis a vis Germany. In the end though, these are poor measures of influence within the Eu. Economic might and diplomatic alliances always counted for more. (Incidentally Poland has a population of about 38m, while France has over 60m.)

Personally, I would rather fix the economics, and complete the aims of the EEC, EC, and Maastricht-based EU, before fiddling and fudging with institutions. If institutions are to be altered, I'd prefer less of them, rather than more of them with more overlap, and I would like a voting system like the US, where states still have significant rights and representation, even where populations are tiny.

You’re right – the economics is essential. But it’s impossible to isolate deep economic integration from politics. That reality has governed the direction of the EU from the beginning. Increasing economic integration and co-operation inevitibly involved more and more political integration.

Regarding the US voting. Ideally if we were to create an entity from scratch things would be different. But the Eu – like the UK itself for example – emerged as evolution not revolution. No big overhaul is now politically possible. We are where we are and we need to inch forward with incremental improvements. I believe that Lisbon is one of them. We cannot pick and chose what we like from the US and what we dislike (such as an appointed executive)

The last thing I'll say is that the choice between Anglo-Saxon links and Central European links is a false one. Economically, there are also the models used by the Nordics: highly liberal economies with little job protection but large (though temporary) safety nets. In terms of markets, the place to be selling to is the Far East, concentrating on Europe is short-sighted.

You’re right there are other models. The beauty of the Eu so far has been that it has enabled co-operation, access to huge market, pooled negotiating power, etc, while in parallel allowing various economic models to continue – the UK/Irish Anglo-Saxon, the Nordic, and the Central European, and perhaps Eastern European models which are settling into a still different pattern. This diversity is as it should be and that is why the debate on taxation is such a big deal. It kills that diversity.

The thing is, the pro-treaty arguments thus far have been based on three things: 1) the embarrassment it would cause if we said no - this is nonsense, in a democracy one should have the right to say no, and the rest of the EU should respect that if it is to be democratic; 2) The need for stream-lined institutions: again, Sciences Po and the Swedish Institute of European Policy Studies both disproved that and 3) a sense of obligation because the EU has been so good to us - which is effectively emotional blackmail after the fact (and anyway, we originally joined the EEC).

Certainly I am no apologist for those elements of the Yes camp which, like many in the No camp, resort to scare mongering and often, plain lies. Nor do I think we have an obligation to the EU. We have an obligation to frank and honest engagement. That is the only path to enhanced democracy and success for Ireland in Europe and beyond.

None of it has concentrated on how things work now, and how things will work after. All I see is more overlapping bureaucracy, and a reduced (even if only slightly) Irish input in that bureaucracy. Why should anyone vote for it?

The reason I will vote for it is that I believe it provides:

- a welcome clarification and simplification of how the institutions work
- an enhanced and clarified role for national parliaments
- a more effective presidency which should facilitate more coherent prosecution of common eu objectives
- an incremental enhancement in democracy which is the best that was politically possible from a compromise between 27 nation states

Tomaltach said...

There was one other point from Bryan's last post which I had intended to address. Bryan writes "I would like a voting system like the US, where states still have significant rights and representation, even where populations are tiny.

I see the angle you are coming from: while seats in the house of representatives is allocated by population, each state is entitled to two senators. Fair enough. But your statement that you'd like states, especially small states, to "have significant" rights is akin to saying that today, or under Lisbon, the smaller EU states do not have "significant rights". But that cannot be true in a system where so much EU business is done by the ministers of the relevant members. In Financial matters for example, the ECOFIN committee meets and each state, no matter how small has a minister present. Furthermore, in many areas, the EU has no competence at all. The EU cannot tell us what kind of Health Service we have, nor what kind of Education system, or the shape of our Legal system, and so on. In a list of other areas, the decisions will be by unanimity. And as acknowledged in the Economist piece that you mention, decision is usually taken by consensus even where voting applies. Under these circumstances it is impossible to stand over the statement that states do not have 'significant rights' such as the US. They have rights to a whole host of things that the US states couldn't dream of. Such as a separate foreign policy, separate armies, different currencies in some cases.

Vince said...

The point I made is that there is very little new in this. Most of the goals/dreams of the earlier treaties are sitting in a prominent position. And there is something for any and all. Which is why none of the political parties have much of a issue with it. And if they have, there is more than enough of their own stuff in it to make them swallow the whole. This with the exception of the insane fringe who would have a problem with themselves were there no one else about. The issue here is what is different, why have a treaty at all. When you strip all of the stuff which sits in the earlier ones, there is little left over.
Change is the thing, and the management of that change. who really gives a flying monkey whether or not there is a president et al, when we know that the person/s will be placed one way or another, and end up as little more than a focus or a point to aim at, same difference anyway.
The major change for us is that control will be handed to Dublin, not to the EU, and that might not fit as well in the future.

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