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Ireland hangs on to its low corporate tax rate as if it's a life line

And it is. Ireland has resisted European pressure to raise its 12.5 percent corporate tax rate as part of a debt bailout deal. The rate is what fed this now weakened 'Celtic tiger' in the first place. The US could learn from this.

By / November 24, 2010

Irish Prime Minister Brian Cowen addresses a press conference in Dublin on Nov. 24. The Irish government presented a four-year austerity plan, a key step toward securing an international bailout.

Xiong Sihao/Xinhua/Newscom

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Contrary to appearances, the "Celtic tiger" still has some fight left in it. There's a lesson in that for the United States, which I'll get to in a minute.

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In forcing debt-burdened Ireland to take a nationally humiliating bailout deal, several European countries thought they could also twist its paw on corporate income taxes. They wanted Ireland to increase its famously low corporate tax of 12.5 percent.

Germany, France, and others argued that if Ireland raised its corporate tax, it would collect more revenue to pay off debt. But the bigger reason was probably this: These countries see Ireland's low, low rate as predatory, attracting companies to its shores that continental Europe would like for itself.

On this issue, however, Ireland has not relented. In a proposed austerity budget released Nov. 24, the government stuck by 12.5 percent. The rate "is now part of our national 'brand,' " the government said in its plan.

I emailed former Irish Prime Minister John Bruton about this. The low tax policy, he replied, goes back to 1956 and has been the basis of the country's foreign-investment model ever since.

"If we are to restore our finances and pay our debts, we must continue to get foreign investment, and the corporate tax policy is key to that," he wrote. "In fact, Ireland collects more corporate tax as a proportion of GDP than the [European Union] average."

He should know. Mr. Bruton was prime minister when Ireland became the economic Celtic Tiger that fed on plentiful foreign investment. What weakened it was what weakened the US – easy credit feeding a housing bubble that then burst and flattened the banks.

Even in desperate times such as this, Ireland's corporate tax is the one tax that is outperforming the government's expectations, bringing in hundreds of millions more euros to the treasury so far this year than projected.

So what's the lesson for America? Pretty simple: lower the high corporate tax rate.

The chairmen of President Obama's bipartisan debt commission suggest exactly this. In a draft report this month, Democrat Erskine Bowles and Republican Alan Simpson want to lower the US corporate tax rate from 35 to 26 percent. The proposed rate would bring the US in line with the average in the developed countries of the Organization for Economic Cooperation and Development (OECD).

"I want America to be the best place to start and grow a business," Mr. Bowles said at a recent Monitor breakfast with reporters.

According to a 2008 report by OECD economists, the corporate income tax is the most harmful for long-term economic growth, while consumption and property taxes are the least harmful. The explanation is mobility. Companies and capital can pick up and go if taxes are too high. Consumers and property stay put, though Internet shopping changes that dynamic somewhat.

In the last decade, the trend within the OECD countries has been to cut the corporate tax rate by, on average, more than 7 percentage points. The US has not followed, choosing instead some targeted tax breaks. One argument for keeping the rate higher is that the US has a great advantage over everywhere else – it's the largest consumer market in the world. If you're here, you're where your customers are.

Lots of things besides taxes determine where a business is going to set up shop: proximity to customers (see above – and, by the way, being an island nation helps justify Ireland's extra low rate, because customers are not so close); regulation; an educated and skilled workforce; infrastructure, and probably some others that I've forgotten from my business-school days.

You can debate whether the US regulates too heavily or not, but there's no arguing that it has slipped in infrastructure and education compared to other OECD countries. That makes its comparatively high corporate tax rate even less justifiable.

Take it from the Irish, or take it from two smart guys like Bowles and Simpson. The US needs to reduce its corporate tax rate.

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