Analyzing the Irish tax model. 
Celtic Tiger meets the Challenges of Globalization and Ageing.
Never In the last 30 years has the World economy been booming like in 2004: an average growth rate of 5 pct. China and India have fabulous growth, and the US and Japan continue their remarkable recovery.

Meanwhile Europe slides further into stagnation, possibly even recession. Europe's weak growth undermines the fundaments of its social system.  Europe's demotivating fiscal burden is the fundamental cause. Europe's overall tax burden is 15% higher than in the American and Japanese, and 9% higher than the OECD average. Extreme tax burdens are demotivating, and withhold essential resources from the private sector to the advantage of an increasingly inefficient government apparatus. 
Yet Europe also knows remarkable exceptions. Luxembourg, Portugal and particularly Ireland. Ireland bas been booming at an average growt rate of 5.6% over the last 20 year. In barely half a generation Ireland evolved from the second poorest to the second richest country of Europe. The Irish success is attributed to its fair-tax system: a low overall tax burden combined with a balanced distribution of the tax burden over direct and indirect taxes. Ireland has demonstrated that its alternative model works and leads to economic and social success.  The Irish model is realistic and applicable in the rest of Europe. Where does one wait for?

Luc Van Braekel interviews the people of WorkForAll

on their remarkable investigation.
You have been investigating the causes of the wealth differences in Europe. How did you come to that initiative? 

It started from the observation that there are remarkable growth rate differences between the European countries, although these countries have a very similar state of development, and similar labour ethics. We noticed for example that Denmark grew only with 35% in the 18 years period from 1984 to 2002. Ireland's wealth on the other hand rose by no less then 167% over the same period. In barely half a generation Ireland evolved from the second poorest to the second richest country of Europe. We found similar differences in job creation. This raised the question as to what causes these remarkable growth differences.  We were wondering if other countries could achieve the same economic and social performance like Ireland or Luxembourg.

On what evidence was your reseach based? 
A number of factors that boost prosperity are known from the economic literature.  It is known for long that there is a robust negative relation between tax burden and prosperity growth.  Gwartney and also Laffer and Armey have performed pioneering investigation on this subject.  Gwartney examined the causes of growth differentials between the OECD countries over a long period of 1960 until 1996.  He found that in countries and periods in which government spending was smaller than 25% of GDP rose on average with 6.6%.   Countries with government spending over 60% realized growth rates of 1,6% only.  In his research, he found strong evidence of the robust negative relationship between government spending -and therefore indirectly tax burden - and prosperity growth. 




This relationship appears also evidently from the spreadsheet between growth and public spending in the EU-countries.  A yet stronger negative relationship appears on the spread diagram between prosperity growth and taxation on wages: the higher the tax burden, the slower growth.



However, there are other factors influencing growth than only tax burden?

Yes of course!  Our group has examined no less then 25 possible causes of growth differentials in the same manner.  Among others the influence of age structure, the level of education, inflation, annual working hours, saving rates, the interest rates, the proportion between direct and indirect tax, size of public spending, the influence of the accession to the EU, etc. All these data are known from the OECD, and were processed in an encompassing multiple regression model, in which time lags of zero to four year were incorporated.

Multiple regression analysis allows calculating with mathematical precision the exact individual effect and the relative weight of many simultaneously playing factors.  It is with the same technique, that medical science establishes relationships between living or feedings habits on our health, life expectation or illness phenomena.  On our website, one can examine the results of our investigation.  http://www.workfo... 

The most important conclusion from this regression, which explained for 93% of the growth differentials, is that two main causes lead to poor growth performances.  Excessive government spending on the one hand and a de-motivating tax structure, with heavy burdens on work, income and profit on the other hand.  These two factors appeared by far the most important of the 25 causes examined to determine prosperity growth.  Far more so than factors like level of education or age of the population for instance.

As a decrease in government spending by 1% for instance leads to an additional annual growth rate of 0.6%.  The results of our investigation are confirmed at large in an IMF study of July 2004.  The IMF used the identical research technique, but examined a different country group over a different period.
http://www.fma.gv...

Furthermore, it appeared from the figures "deficit spending" and lowering interest rates had no positive effect on economic growth whatsoever.  This in contrast to what the believers in Keynesian policies continue to pretend.




Download printerfriendly version of the interview
These abstract calculations do not mean very much to our readers.   
It is however the standard scientific procedure to resolve such a problem.  Unfortunately, one cannot illustrate a line in 25-dimensional space by means of 2-dimentional graphics.  One simply has to rely on mathematics for that. In order to illustrate our findings we have therefore compared two countries with totally opposite economic and fiscal policies: Belgium and Ireland. 

In 1985, Ireland's economical situation was dramatic, and much worse than Belgium's: excessive budgets deficits, weak growth performances, and a wealth that amounted to only 65% of the Belgian level. In addition, Irish unemployment outfigured the Belgian one by 17% to 10%.  Until 1985 both countries followed similar Keynesian policies and let government spending derail.  In 1983 Belgian public spending exceeded the psychological cape of 50% of the GDP... 

This excessive spending was accompanied by a continuous increase of the tax burden, state debt, and much unproductive public spending.  The negative spiral was initiated.  On the graphics one notices that until 1980 Irish public spending evolved approximately similarly with the Belgian, and growth performances of both countries also paralleled. 

In 1985 Ireland however changed policies dramatically.  They drastically lowered the tax burden.  All superfluous government spending was dropped, and in three years time the public spending was lowered with no less then 20%.  In this way Ireland gave the start to a period of explosive wealth growth averaging 5.6% in the period 1985 until 2002.  This is roughly the triple of the Belgian growth rate. 

Belgium chose for a very different policy.  Belgium barely lowered the tax burden at all, but tried to boost the economy with all sorts of micro-measures. Even under favorable cyclical conditions, public spending remained above the 50% GDP level.  Under these policies, growth stagnated around the 1,9%.  In 2003 the authorities still took 51.4% of the Bealgian wealth creation. In the meantime Irish Authorities had had pushed back public spending to  35.2% of GDP. 
.



Today Belgian public spending is 46% larger than the Irish is, and the growth rate differential is accordingly. Although the Irish prosperity in 1970 was barely half Belgium's, today it is significantly larger.  As consequence of unequaled wealth growth Irish authorities today have large margins for all sorts of social, cultural and environment-initiatives as in absolute terms Irish government disposes of more resources than the Belgians do
However, the Irish wealth is still felt best in purses of its citizens.  The increase of the BNP/head by 167% in a 17-year period with an additional drop in the tax burden of one-third amounts to a multiplication of disposable income with no less than a factor 3.5. Can you imagine what this means?

One notices this wealth explosion when one visits Ireland in all aspects of daily life; one notices the unequaled optimism.  Around Dublin, a forest of tower cranes limits the skyline. In the countryside new houses everywhere, the newest car models, modern factories and offices.  One also notices it in the reorganization of people's neighborhoods, and in the care they spend at the environment.  The wealth is visible in the absence of criminality and in the view of unclosed cars. One reads also luck in the eyes of people, in the birth rate, and in the welfare-ranking.  In this ranking Ireland hased to number one as the most pleasant country in the world to live in.
End of part 1: click here to continue
 

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The Path To Sustainable Growth
Lessons From 20 Years Growth Differentials In Europe
Martin De Vlieghere, Paul Vreymans

Abstract:    While the rest of the world is booming, Europe lags behind. Europe's performance is weak in spite of high productivity and knowledge, high level of development and good labour ethics. Growth is also remarkably dissimular among regions. France, Germany and Italy are stagnating, and so do Denmark, Sweden and Finland. All gained less than 44% prosperity over the last 20 years. The Irish economy grew 4 times faster, gaining 169% wealth over the same period. In half a generation Ireland so metamorphosed into Europe's second richest country creating jobs for all.
 
" Big government " is the main cause of Europe's weak performance. The oversized Public Sector
lacks productivity and is undoing the entire productivity gains of the Private Sector, eradicating all of its outstanding performance and productiveness. Europe could improve its overall performance by copying the Irish success formulas: Scaling down Public Spending, downsizing bureaucracy, and shifting the tax burden from income on consumption. This book demonstrates why the Lisbon Agenda and decades of Keynesian inflationist demand stimulation have failed. It devellops an alternative and workable supply-side strategy as well as effective cures for a humane and financially sustainable development.
 
This book reads as a   step-by-step manual for economic recovery.   It is a data-reference for students and politicians interested in growth, wellfare and in social modelling.   It is a  classic  for  economists concerned about   Big Government,    poor public sector productivity   and for parents worrying about  their     declining standard of living    and
their    children's future.
the path to sustainable growth
free download here

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