The meeting between US Treasury Secretary Janet Yellen and Finance Minister Paschal Donohoe in London last weekend – and the related deliberations of G7 finance ministers – could prove to be one of the most important meetings that an Irish minister has ever attended.
Their findings – envisioning a minimum global corporate tax rate of over 12.5% ââin Ireland – represent the biggest challenge for one of the pillars of national economic policy of the past 50 years. It will affect everyone.
Donohoe’s trip to London was reminiscent of then-finance minister Brian Lenihan’s trip to Brussels in the fall of 2010, where it was made clear to him that Ireland would have to resort to a bailout. in order to avoid the risk to the euro that would result from an Irish banking collapse. We all know what happened next.
Last week, retired diplomat Rory Montgomery, then Ambassador to the EU, recalled on Miriam O’Callaghan’s Sunday morning radio show of the burden on her close friend, then suffering from a cancer and facing insurmountable difficulties in Brussels. “Hell at the gates,” Lenihan called him. (He’s been dead 10 years this week.)
The change in the tax rate represents the biggest challenge for a pillar of national economic policy in the last 50 years
The meeting between Yellen and Donohoe – who was there in his capacity as head of the group of European finance ministers – and the weekend talks were a demonstration of the realities of power politics at a global level. The big countries – the United States, Germany, France, the United Kingdom, etc.
From the outside, it seems Donohoe had no doubts about where the train was going, its speed, and whether it was leaving the station, no matter who was – or was not – on board.
There are, of course, a few more steps before anything is concluded. But the Biden administration’s demands for speed will keep the pressure on. The United States may have shrunk from its glitz of global hegemony two decades ago, but it’s still the most powerful country in the world, still the leader of the West, and when America wants it, America gets it. The momentum is palpable.
This means Ireland will soon have to face some pretty tough decisions. Does she oppose the global consensus? Does he resist a common EU position? Is it applying the rate in a differential manner, reserving the new higher minimum rate for large multinationals, when that would rather defeat its objective, which is to woo multinationals? At the end of the day, it’s hard, I think, to see Ireland on its own.
I think this will have three immediate effects.
First, the revenues affected will be substantial (at least â¬ 2 billion per year, according to the estimates of the Ministry of Finance) and this will have immediate implications for the government. Sooner or later, this coalition will have to face the fact that faces all administrations: that no government can afford to do whatever it wants. Or even all the things he should be doing.
No one – or very few people, anyway – are seriously arguing that the government is wrong for borrowing so heavily during the period when the economy was deeply frozen by the pandemic. But now that the pandemic is receding, it will soon be time to embrace the other side of Keynesianism – the bit that says when your economy grows, government spending to support it should retreat, not continue to grow.
I fear, however, that we are a nation of one-sided Keynesians. There currently appears to be little or no appetite to control spending in government – instead, ministers and their stakeholders are pushing for ever-expanding budgets, with the gleeful assumption that the unlimited resources of governments. Last 12 months will continue to flow. Spoiler alert: they won’t. This reality will have to be faced, and it will be all the harder if the corporate tax tree is cut down, or at least severely pruned.
Beacon for investors
Second, it will make the country less attractive for foreign investment. Ireland’s 12.5 per cent rate – and the fierce political commitment, unchanged from government to government, to maintain it – has acted as a beacon for foreign investors. It is recognized around the world not only as a low tax rate, but as a symbol of openness to foreign investment, a government and society receptive and accommodating to multinationals.
If the rest of the world asks us to tax the richest companies in the world a little more, will Sinn FÃ©in and the left parties refuse?
It’s not just the rate, of course; it is also the receptiveness of government and tax authorities here to the various patterns of profit shifting, intra-company transactions, complex tax and business structures that have enabled multinationals to avoid trillions of euros and pounds. and tax dollars and that has largely led to the current push against them. This will also be increasingly under pressure.
Finally, the push for the minimum tax will put the remarkable political consensus in favor of 12.5 percent here under perhaps unbearable pressure. Currently, each party is committed to it, and corporate taxation is therefore not a point of political contention. It is unlikely that this will continue.
If the rest of the world asks us to tax the richest companies in the world a little more, will Sinn FÃ©in and the left parties refuse? Sinn FÃ©in’s current position is squarely in favor of 12.5%. But will the party take a position on the right of Janet Yellen, the Financial Times and Boris Johnson? I guess the political consensus on a low corporate tax will be shattered. This will end the 12.5% ââstatus as a sort of national shibboleth, change future economic debates and, over time, the established Irish economic model. Whatever your opinion on reducing corporate taxes, it is a big step.