If we can't have it then nobody can have it!

Exactly a week ago, CityUnslicker asked "Irish bailout, why now?" and Spanner Monkey suggested:

Ireland was attracting more businesses to relocate to take advantage of the low tax rates, thereby reducing the tax take of other Euro countries.

By performing the G.Brown vs Lloyds trick of leaking market unsettling rumours to precipitate a bailout (which might otherwise have been less severe at a later date) the consequence is the surrender of control of the Irish economic and financial policies to the EU.

=>No more tax haven.

Which would appear to be borne out by this snippet from the FT:

French, German and European officials told the Financial Times that the tax rate had emerged as a major point of contention as negotiators from the European Union and International Monetary Fund arrived in Dublin to discuss a potential bail-out...

“They need lots of money and we note they have a corporation tax rate that is very low,” the [French] official said. “Supply must follow demand.”

“Without an increase in tax intake, the deficit can’t be reined in,” said a German government official, though he added that the size of any corporate tax increase had yet to be discussed. “That depends on [Ireland’s] financing needs, which are still unclear.”

D'you see what they did there? Ireland does indeed have a deficit, €12 - €15 billion a year, from memory, in the medium term they will have to increase tax revenues and/or cut spending (or just stop promising to bail out the bloody banks). But as I explained yesterday, because Ireland is a small country, cutting its corporation tax rate has the effect of increasing its corporation tax revenues by about €1 billion a year (this trick only works for small countries, I'm afraid).

1. Either the French and German officials are incredibly stupid, and don't know this, or they are doing it because they hope that some of the €24 billion profits that were channelled via Ireland (half of which are on paper and half of which are 'real', for sake of argument) will head their way, which is not going to happen. If the paper profits have to go via the EU, the chances are they will go via The Netherlands or Luxembourg. As to the 'real' profits, see 5. below.

2. As Onus Probandy pointed out when we discussed this yesterday, half of that €24 billion is 'real' profits, and he listed a few well known companies who set up their European head quarters and a bit of actual manufacturing in Ireland, such as "Dell, Google, Microsoft, Sun (now Oracle), Oracle, SAP, etc, etc... These are all highly mobile companies, that will have no trouble moving elsewhere when Ireland has a higher corporation tax rate imposed on them by the ECB."

3. We note that those are all US American companies. The US has a high corporation tax rate (about 40%, being a large country) and US tax laws are very strict, in particular as regards offshoring stuff. It would be quite easy for the US government to tweak the law slightly so that any advantage that US companies can gain by relocating to Ireland is wiped out (by taxing CFC profits), but they don't - because we know that US Americans are historically very pro-Irish (and anti-English).

4. So for these US companies (and Ireland) to benefit, it requires the forbearance of both the Irish and the US government - the whole exercise boils down to surprisingly efficient 'Third World Aid' payments from the USA directly to Ireland, and there's no reason to assume that the USA would be as generous with other EU countries.

5. So if Ireland were forced to increase its corporation rate, these companies, with their €12 billion of 'real' profits might well "move elsewhere", but there is no particular reason to assume that these companies would shift their head quarters to another EU country; it is just as likely that they will shut up shop completely and return to the US, or to PR China or heck knows where.

6. And so the French and Germans would gain nothing; the Irish treasury would lose €1 billion a year; and the Irish economy as a whole might lose €12 billion. The only winners will be the US treasury, but I doubt that the gains to the US treasury would even show up in the statistics, as its economy is sixty or seventy times that of Ireland.