Europe Needs to ‘Harmonize’ to Ireland, Not to France

Higher taxes harm growth, undermine the welfare state
July 23, 2018 Updated: July 25, 2018

Whenever we talk about tax cuts and growth-oriented tax programs in Europe, many tell us that “it is not possible” and that the European Union does not allow it.

The naysayers assert a falsehood. Attractive, growth-oriented tax systems are not only possible in the EU, but those countries that implement them have higher economic growth, less unemployment, and first-class welfare states. To deceive us, they want us to ignore Ireland, the Netherlands, and Luxembourg, as well as most of the technology and job-creation leaders.

Lower taxes and greater liberalization than the rest of the eurozone mean higher growth, better wealth, and superior social welfare. The economic miracle of Ireland does not derive from statism. Its secret is to make budgetary stability, investment attractiveness, private initiative, and disposable income for citizens the pillars of economic policy. Ireland has a corporate tax of 12.5 percent and a 6.25 percent rate on income from patents and intellectual property, a key factor that attracts technology companies.

Yet Ireland’s minimum wage is almost double that of Spain, Portugal, and other eurozone countries; the average pension is higher; and its health and education systems are of the highest quality. The nation of fewer than 5 million inhabitants has nine universities among the best in the world, according to the 2018 Best Global Universities ranking. Ireland’s debt-to-GDP ratio is 73 percent, unemployment is 5.1 percent (youth unemployment at 11.4 percent), and the public deficit is just 0.7 percent of GDP.

Coping With Crisis

Only a few years ago, Ireland was close to the edge financially, and its 10-year bond yield rose to 14 percent. Ireland was considered one of the countries with a high risk of default, along with Spain, Portugal, Greece, and Italy. Since then, low taxes, budget restraint, and reforms aimed at attracting capital have made Ireland the fastest-growing European economy, with an unemployment rate less than half that of Spain, for example.

Deficits have been slashed; debt is under control; the economy is expected to grow by 5.1 percent in 2018 and to reach full employment in 2019.

The EU does not need to harmonize fiscal systems, but if it did, it would best implement the systems that promote growth and jobs, not the ones that promote stagnation.

A confiscatory tax system and a hypertrophied public sector have only created debt and stagnation in the eurozone countries that have implemented them. France is a key example.

Bad Model

The last time France had a balanced budget was in 1980, and since 1974, it has never generated a surplus. Public debt has reached 97 percent of GDP, and the economy has been stagnating for two decades. Unemployment stands at 9.2 percent (youth unemployment at 20.4 percent), and in 2017, it still had a current-account deficit of 6.5 billion euros, while the eurozone had a surplus.

In a country where public spending exceeds 57 percent of GDP, public-administration spending has grown by more than 13 percent since 2008, and 22 percent of the active population works for the state, local governments, and public entities, talk of austerity is a bad joke. In addition, France has spent tens of billions of euros on “stimulus plans” since 2009, including 34 billion euros in 2009 and 2010 alone.

When we talk about taxation in the eurozone, we usually talk about tax revenues versus GDP, and not the tax wedge, which is what each of us pays in taxes on our total income. According to the PricewaterhouseCoopers Paying Taxes study of 2018, European companies suffer a tax wedge of 40 percent. That fiscal wedge is almost 40 percent lower in Luxembourg, Ireland, and Denmark, and 12 percent lower in the Netherlands.

If we look at family tax burdens, the result is analogous. Most eurozone countries have a tax wedge on families with one salary and two children that is twice the average of Ireland, Switzerland, and Luxembourg, and 20 percent higher than the Netherlands.

But what about social protection and welfare? Ireland, the Netherlands, and Luxembourg have some of the best and most efficient welfare systems.

Interventionists often talk of the Nordic countries as high-tax nations, and yet their tax wedge is lower for companies and families than the eurozone average. Countries with higher taxes do not have better welfare or social protection, but they do have higher unemployment rates, weaker growth, and higher debt. High taxation discourages economic activity, investment, and consumption, and, to make matters worse, it erodes the long-term tax base.

Macron is calling for a harmonization of the tax systems in the EU. I agree. Let us harmonize to the Ireland level. But no, what Macron implies when he uses the word “harmonizing” is “increasing taxes”—the recipe for unemployment and stagnation.

Governments willingly ignore the beneficial effect of growth-oriented taxation because their objective is not growth, investment, nor employment, but control.

Europe’s tax model cannot be to impose what does not work. We need to lower taxes to grow economic activity and create more employment. High taxes do not guarantee the welfare state; they make it unsustainable.

Daniel Lacalle is chief economist at hedge fund Tressis and author of “Escape From the Central Bank Trap,” published by BEP.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.