The financial debacle in which Ireland finds itself — pleading for a bailout from the EU — has brought on a lot of complaints from statists that Ireland’s troubles stem from its low tax rates. In this letter, however, Don Boudreaux shows that the Emerald Isle’s troubles are due to the government spending too much, not taxing too little.

Editor, The New York Times
620 Eighth Avenue
New York, NY 10018

To the Editor:

Re the Irish government’s financial woes: leprechauns are springing out from
behind every pot’o’coal blaming these problems largely on Ireland’s low
corporate tax rate. A quick check of the data provides much-needed perspective.

The modern, tax-rate-cutting liberalization of the Irish economy is commonly dated to have begun in earnest in 1987. In that year, Irish government receipts were about 10 billion euros and expenditures were about 12 billion euros. Over the next 20 years, government receipts and expenditures both rose, largely in lock-step with each other, to about 55 billion euros. Steady and significant increases in the government’s expenditures tracked closely the steady and significant increases in receipts. But since 2007, although government receipts have since fallen to about 42 billion euros, government spending continued to rise. That spending was more than 70 billion euros in 2009. (These expenditures are falling back a bit, to about 66 billion euros in 2010.)

As a percentage of Ireland’s (fast-growing) GDP, government expenditures fell steadily from 1987 until 2007 – but then rocketed upward from about 36 percent of GDP in 2006 to about 58 percent in 2009. (These expenditures will be about 54 percent of Irish GDP in 2010.)*

Only time will reveal the full reasons for the Irish government’s fiscal
problems. One thing, however, is certain: given that the government became
insolvent only after it began devouring well over half of Ireland’s GDP, blaming the state’s insolvency on the low tax rates that fueled two decades of solid economic growth and government-revenue growth misses the mark entirely.

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University