Eire, the Republic of Ireland, is a classic example of how low business taxes can generate prosperity even in the most unpromising of places. Although Irish people around the world are very entrepreneurial, the Republic itself was an economic backwater for most of its history. That changed when tax cuts attracted massive inward investment and turned Ireland into the “Celtic Tiger”.
The fact that Ireland is now in financial trouble does not alter that fact that it proves the effectiveness of a low tax regime. The current crisis arose in spite of Ireland’s success as a venue for inward investment, not because of it.
The low business taxes remain Ireland’s greatest competitive advantage – so it is sad that the Republic is almost certainly going to have to give them up.
The Republic’s mistake was not its low taxes but its failure to exploit their success in attracting inward investment. Instead of using the opportunity to develop its own indigenous enterprise culture, the Republic enlarged its already bloated public sector. Instead of investing in the capacity to generate even greater prosperity, Ireland’s politicians became addicted to higher spending.
So the global banking crisis only exposed that the Tiger was more of a kitten than it appeared. Bailing out Ireland’s banks increased state spending even more, and the government made the problem worse by adopting a strategy of hoping it would go away if they ignored it.
The European Union has now stepped in to bail out the Republic itself – but at a price. It is hardly surprising that the national governments who are providing the actual cash – Ireland’s competitors in Europe as well as “partners” – demand that taxes go up in return. They have long been jealous of the competitive advantage Ireland has enjoyed as a result of low taxes, and so they can hardly be expected to underwrite it.
That is why the Irish have been reluctant to accept the bail out. Without those low taxes, the economic future of Ireland looks grim. A virtuous circle may be replaced by a vicious circle – higher tax rates reduce the tax base and so increase demand for even higher tax rates. Ironically, this may mean that the very people who are insisting that the Republic raise taxes may end up paying even more than they intended to underpin the Irish economy.