“Liberty is not the power of doing what we like, but the right of being able to do what we ought.”
- The EU has requested that Apple Inc. pay €13.5 billion to the Irish Treasury, citing back taxes unpaid during the past 10 years as the reason behind it.
- Understandably, Apple is going to appeal the EU’s request, arguing not having broken any law and regulation in Ireland. Apple opened its first Irish office in Cork, Ireland in 1992, based on the very attractive incentives for new investments, including lower corporate tax rates than the rest of the developed world. It didn’t take much time for Apple to headquarter all of its European operations in Ireland. If Apple does not appeal the multi-mentioned ruling, it would mean a gigantic setback for the company and the destruction of a 25 year-old business structure.
- Naturally, the Irish government does not have the slightest interest in accepting any back-dated corporate tax for the reasons argued by the EU. The 12.5% Irish corporate tax rate, one of the lowest in the world, has attracted a myriad of global corporations during the past 25 years. If Ireland were to proceed in accordance to the ruling, a fundamental pillar of the uber-successful Irish economic model would collapse, on top of the severe reputational damage infringed in that instance.
- Ireland joined the EU on January 1st, 1973. By the end of the 80s Ireland had launched an economic liberalism program inspired in Singapore, aimed at pulling-out the country from the dire economic situation it had (one of the poorest nations on Europe, at that time). One of the major features of the economic program launched was the very low corporate tax rate, looking to entice foreign investors. This liberal economic program has been so successful that, according to figures from The World Factbook, in 2015, Ireland’s per capita purchasing power ($55,500) almost equaled that of the US’s ($55,800).
The following table presents per capita income of 15 select nations, in order to have a better basis for comparison. It is important to consider that by the end of the 1980s, Ireland’s per capita income was lower than Portugal’s, then and now one of the poorest nations within the EU, along with Greece.
Understandably, the Irish government has no intention, whatsoever, to accept any payment from Apple, nor from any other large global corporation established in its soil in order to take advantage of the very attractive Irish business atmosphere which, among other incentives, has a 12.5% corporate tax rate, one of the lowest in the world. Otherwise, one of the most fundamental pillars of the Irish uber successful would collapse, with a huge reputational damage inflicted.
Evidently, the Irish government’s strategy to fast-track its population out of its laggardness and poverty was very successful, to such an extent that nowadays, Ireland is not only one of the richest countries in Europe, but also one of the richest in the world. This is truly important. There is no way to overestimate this factor.
IS PANDORA’S BOX ABOUT TO BE OPENED?
Although the aforementioned facts are very concrete, the possible number of interpretations isn’t. Beyond legal considerations (how the internal agreements and the assumed commitments are written, in order to see if Ireland didn’t comply with the EU’s laws and regulations) the essence of this matter is of a more economic, moral and governance nature than a tax matter.
The tax aspect of this matter is just an excuse, a smoke curtain, which focalizes and uncovers something much bigger and momentous: the current limitations of free markets.
As previously exposed, in essence Ireland has followed Singapore’s steps. A couple of originally very poor nations that constructed spectacular competitive advantages for themselves with a very wise strategy:
- Profound deregulation of the economy,
- Fully enforced and respected property rights,
- Very clear and consistent laws and regulations,
- Corruption repudiation,
- Very low corporate tax rates,
- True openness towards foreign investments,
- Great ease to open/close a company,
- In summary, all the attributes that the Heritage Foundation Index of Economic Freedom, and/or the Global Competitiveness Index of the World Economic Forum emphasize as the fundamental aspects of an efficient and virtuous government administration.
The EU as well as the rest of nations on Earth fear the possibility of an authentic war of lowering taxes among nations, since once in progress, it would mean the end of the liberty of congresses to manage government budgets. In particular it would mean something not far from the end of congresses’ discretionality in assigning who gets what, as we know it today; instead, congresses would be hand-tied in this foremost aspect of governance of nations. Ironically, from a purely external phenomenon, a most critical and coveted aspect of internal politics would be severely (and most virtuously) affected.
A global competition where many nations were both actively and aggressively fighting to lower their taxes, thereby attracting more foreign investments, notwithstanding the great net benefits for global society. In the short term it would create a sizeable disequilibrium in the public finances of many nations, which would force them to begin a profound re-engineering of costs and processes.
Moreover, even countries not actively seeking to lower their tax bases would be forced to do it since, otherwise, the loss of companies headquartered in those nations fleeing to more hospitable tax environments would do it.
As it can be seen, the implications of a strict adherence to the policy and practice of free competition among nations seeking to outdo the rest with low taxes are impressively large, with humongously favorable benefits.
The great virtue behind mankind moving towards a truly free tax competition among nations is that, thanks to double-entry (the fundamental principle behind accounting, as a professional discipline), the lower the tax base, the lower the capacity to finance public expenditures, which would force nations under strain to be austere, efficient, and effective in the use of public budgets, thereby withdrawing congress’s huge discretionality in deciding where and how much to spend.
Free markets would achieve the authentic discipline and fiscal austerity that citizens all over the world have been looking for during centuries. More on this topic in next week’s Part 2.