What We Can Learn From Ireland’s Remarkable Economic Growth
Economists and financial commentators scoffed this month when Ireland officials announced that the country’s gross domestic product had increased by 26% in 2015. They rightly pointed out that the arrival of numerous new multinational companies, which conduct the vast majority of their business abroad, had juiced this number.
What was largely overlooked, however, was that Ireland’s gross national product, the income produced in the country itself, had also grown by 19%. Growth in personal consumption, exports and imports also grew at impressive rates.
Meanwhile the rest of Europe is experiencing virtually zero growth. And the U.S.’s average growth of 2% since the end of the Great Recession is 50% lower than the historical average.
Polls show that economic growth is still the most important issue facing Americans. That may be because economic growth is a meta-issue: Increasing it has the power to fix many of the other problems facing the country, including poverty, stagnating incomes and a ballooning national debt.
So how is Ireland achieving this growth? Largely by enticing economic activity in its country with a 12.5% corporate tax rate, which is about one third of the U.S.’s 35% federal rate. (Both Ireland and the U.S. have lower effective tax rates as a result of various tax credits and subsidies.)
As a result of Ireland’s low tax rate, businesses there can devote more of their resources to developing new products, expanding into new markets, creating new jobs and paying their employees and shareholders more money.
This freedom has enticed numerous American corporations, including auto parts supplier Johnson Controls, drug manufacturer Baxalta and medical device developer Medtronic, to relocate to Ireland through corporate inversions in recent years. Countless other American companies, largely in the pharmaceutical and tech industries, are also expanding their operations there.
To try to prevent additional businesses from relocating to Ireland and other low-tax jurisdictions, the U.S. Treasury imposed another set of regulations on corporate inversions earlier this year. Though they seem to be achieving their goal of preventing further inversions, they have not been able to stop other symptoms of a high corporate tax rate, such as foreign takeovers, overseas expansion and stranded offshore profits.
In order to truly increase business investment and economic growth at home, the U.S. should copy Ireland’s corporate tax system. This means dramatically lowering its overall tax rate, as well as moving to a territorial tax system that only taxes companies on what they earn domestically. (Currently, the U.S. is the only Western country that requires its companies to pay tax twice: once in the country where the profits are earned and then again to the U.S. government.)
Critics argue that such tax reform would blow a hole in the budget, reducing government services and increasing the deficit. But Ireland’s experience suggests otherwise. Despite the big differential in tax rates, Ireland actually generated slightly more money as a fraction of the size of its economy from corporate tax than the U.S. in 2015 — 2.5% vs. 2.4%. This data lends yet more credence to the theory that cutting tax rates can increase tax revenues because of associated gains in economic output.
In short, Ireland gets far more economic bang out of its corporate tax buck than the U.S., which hoovers up a much larger portion of business activity in taxes.
To end its economic malaise, the U.S. should take its cue from the one Western country that is actually growing and reform its corporate tax rate. It’s the surest way to boost economic growth, short of finding a pot of gold at the end of the rainbow.
Anderson is the former CEO of Best Buy and a member of the Job Creators Network.