Obama’s Tax Plan May Sink Ireland

Good intentions and unintended consequences often go hand in hand. As President Obama’s plans for revamping the country’s corporate tax regime unfolds we’re likely to see that combination played out again and again.

Exhibit one comes from the Telegraph.co.uk which points out that the new plan could devastate Ireland.

Whatever the eventual impact on companies, the news can hardly be interpreted in a good light for Ireland. The country has based a large chunk of its economic success in the years preceding the financial crisis on its ability to lure over major multinational companies to set up footholds there and take advantage of the low 12.5pc business tax rates. Many of those large companies are American – among them such modern behemoths as Microsoft and Google, both of which have their European headquarters there.

Some 48pc of Irish economic output is reliant on foreign companies, which employ 150,000 people throughout the country, according to Ireland’s inward investment promotion agency, IDA. The vast majority of these companies are American. Were they to jump sticks, taking with them not just employment and corporate taxes but the associated trickle-down of cash throughout the region, it would be “disastrous” for the economy, according to Ben May of Capital Economics.

Given the current state of the Irish economy it’s not surprising that they take the proposals very seriously. To be fair, however, we haven’t even seen the details and it’s doubtful that if enacted in a form similar to expectations they would become effective immediately. It’s much more likely they’ll be implemented over a period of time to avoid serious systemic shocks.

To some extent, Ireland set itself up for this sort of thing. They leveraged their economy to a low tax regime that attracted foreign corporate investment. Prudence would have suggested that they hedge this leverage by diversifying the economy during the good times since it was obviously susceptible to a shock like this. They didn’t — governments rarely do  — and now the price may have to be paid.

All of this is illustrative of what a difficult job and far reaching tax reform can be.

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