by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Ireland was for many years the poorest country in Western Europe, but never the stupidest. Trouble was, its bright people moved abroad as fast as they grew up. Now many stay at home, and some of them write tax laws to lure bright people from other countries to set up business units in Ireland. A recent count found more than 1,000 foreign companies operating in Ireland. They employ about 161,000 people, more than half of them in computer services and related work.
This Irish success does not make those smart Irish lawyers and lawmakers popular in the U.S., which wants to tax income that American companies earn in foreign countries. U.S. tax authorities and congressmen, many of them with an Irish heritage, view foreign income like a $2 trillion leprechaun’s pot of gold at the end of the rainbow.
The tax collectors and the spenders of tax receipts consider tax avoidance through foreign countries to be unpatriotic, bordering on piracy—though it’s as legal as Irish whiskey. That rich-country club, the Organization for Economic Cooperation and Development, has been working on a project to reduce the threat of “base erosion and profit shifting.”
OECD experts adopted a sensible theory that taxation should reflect “economic substance,” meaning that companies shouldn’t play games involving the assignment of costs to high-tax countries and profits to low-tax countries. Unfortunately, the experts also think that every country should have roughly the same tax rates. Otherwise there will be “harmful tax competition” and a big incentive to play those accounting games.
We learned long ago that when someone in government or the business community denounces “harmful competition,” consumers should hold on to their wallets. In this case, the harm falls entirely on the high-tax governments and their client citizens, while it deprives consumers of lower prices and shareholders of higher profits.
We wouldn’t mind if all European countries moved their tax rates to the levels of Ireland and Luxembourg, but that’s not the competition the OECD has in mind.