Ireland and the US: Depth of Corporate Ties May Be Surprising
Market participants are rightfully focused on the contagion of Ireland within Europe. However, the depth of US corporate ties to Ireland may surprise many investors. The value-added of majority owned affiliates of US companies account for more than a fifth of Ireland’s GDP. This is the greatest share that American affiliates account for in any country by a wide margin. In second place is Singapore, for example, and the value added of the majority owned US affiliates account for a little more than 11% of Singapore’s GDP. The US affiliates employ around 93k Irish workers (2008) half of whom are in manufacturing.
Ireland exports almost 80% of its GDP and the vast lion’s share comes from multinational companies. There is some concern that if Ireland is forced, on condition of getting assistance to raise its 12.5% corporate tax rate, which many countries, including Germany, have often complained about, that it could have significant adverse reaction on Ireland’s attractiveness to multinational companies. An OECD study found that a 1% rise in Ireland’s corporate tax rate cut spark a 3.7% decline in foreign direct investment.
Contrary to the popular impression, Ireland does not have the lowest corporate tax rate in Europe. That honor goes to Bulgaria and Cyprus where the corporate tax rate stands at 10%. However, as we know, the tax schedule is one thing and the effective rate can be a different story. Ireland, for example, has a high real estate tax rate that corporations pay that is separate from the corporate tax rate. Moreover, studies suggest that Ireland’s revenues from corporations are higher as a percentage of GDP than the average in western Europe.
Good post Marc. A corporate income tax hike in Ireland would cause companies to leave the country and financially impact their economy which would make them more dependant on the EU. Lowering or eliminating corporate taxes is something that the US Congress needs to implement if they want to grow their economy and create jobs. http://www.eliminatecorporateincometax.com
The problem is that Ireland is running out of options. Ultimately it will have to default. Maybe not this year or next, but the level of debts of its banks are so high that it will fail eventually. The first thing that they need to do is drop the bank guarantee. That will reduce the risk to the sovereign. Then wait. The collapse of the banks will happen but leave the systemic risk to the ECB to resolve.