The meeting between US treasury secretary Janet Yellen and Minister for Finance Paschal Donohoe in London last weekend – and the related deliberations of the G7 finance ministers – may turn out to be some of the most consequential encounters an Irish minister ever attended.
Their conclusions – bringing into prospect a global minimum corporation tax rate above Ireland’s 12.5 per cent – present the greatest challenge to one of the pillars of national economic policy for the last 50 years. That will affect everyone.
Donohoe's trip to London reminded people of the journey undertaken by then minister for finance Brian Lenihan to Brussels in the autumn of 2010 where it was made clear to him that Ireland would have to avail of a bailout in order to avoid the risk to the euro that an Irish banking collapse would entail. We all know what happened subsequently.
Last week,retired diplomat Rory Montgomery, then ambassador to the EU, recalled on Miriam O’Callaghan’s Sunday morning radio show the burden on his close friend, then ill with cancer and facing insurmountable odds in Brussels. “Hell at the gates,” Lenihan called it. (He’s 10 years dead this week.)
The tax rate change presents the greatest challenge to a pillar of national economic policy for 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 discussions over the weekend were a demonstration of the realities of power politics at a global level. The big countries – the US, Germany, France, the UK, etc – are fed up of having tech giants avoid tax by channelling profits through places like Ireland, and they are asserting their power to stop it.
It looks from the outside that Donohoe was left in no doubt where the train was going, what speed it was going at and the fact that it was leaving the station no matter who was – or wasn’t – on it.
There are, to be sure, a few steps yet before anything is concluded. But the requirements for speed of the Biden administration will keep the pressure on. The US may be diminished from its pomp as the global hegemon of two decades ago, but it is still the most powerful country in the world, still the leader of the West, and when America wants, America gets. The momentum is palpable.
Revenue hit
That means that Ireland will face some pretty difficult decisions soon. Does it stand against the global consensus? Does it hold out against a common EU position? Does it apply the rate differentially, reserving the new higher minimum rate for big multinationals, though this would rather defeat the point of it, which is to woo multinationals? Ultimately, it is hard, I think, to see Ireland standing alone.
I think this will have three immediate effects.
First, the revenue hit will be substantial (at least €2 billion per annum, the Department of Finance estimates) and this will have immediate implications for the Government. Sooner or later this coalition will have to face up to the fact that confronts all administrations: that no government can afford to do all the things it wants to do. Or even all the things it should do.
Nobody – or very few people anyway – seriously argues that the Government is wrong to have borrowed so heavily during the period the economy was put into deep freeze 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 is trucking along, government spending to support it should withdraw, not continue to expand.
I fear though that we are a nation of one-sided Keynesians. There currently seems to be little or no appetite for controlling spending in the Government – instead, Ministers and their stakeholders push for ever-expanding budgets, with a blithe assumption that the unlimited resources of the last 12 months will continue to gush forth. Spoiler alert: they won’t. That reality will have to be faced, and it will be all the more harsh if the corporation tax money tree is cut down, or at least severely pruned.
Beacon to investors
Second, it will make the country less attractive for inward investment. The Irish 12.5 per cent rate – and the fierce political commitment, unchanged from government to government, to maintain it – acted as a beacon to foreign investors. It is recognised around the world as not just a low tax rate, but as a symbol of openness to inward investment, a government and society that is receptive to and accommodating of multinationals.
If the rest of the world is demanding we tax the richest companies in the world a bit more, are Sinn Féin and the parties of the left going to refuse?
It’s not just the rate, of course; it’s also the amenability of the governing and taxation authorities here to the various schemes of profit moving, of intra-company transactions, of complex tax and business structures which have enabled the multinationals to avoid trillions of euro and pounds and dollars in tax and which have largely led to the current push against them. All that will be under more and more pressure, too.
Finally, the push for the minimum tax will put the remarkable political consensus in favour of the 12.5 per cent here under perhaps unendurable pressure. Currently every party is committed to it, and taxing corporations is therefore not a point of political contention. That is unlikely to continue.
If the rest of the world is demanding we tax the richest companies in the world a bit more, are Sinn Féin and the parties of the left going to refuse? Sinn Féin’s current position is squarely in favour of the 12.5 per cent. But is the party going to adopt a position to the right of Janet Yellen, the Financial Times and Boris Johnson? My guess is the political consensus on low corporation tax will shatter. That will end the status of the 12.5 per cent as a sort of national shibboleth, change future economic debates and, over time, the settled Irish economic model. Whatever your views on low corporation tax, it’s a big step.