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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.
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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.
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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.
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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.
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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.
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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.
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free download here
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Do
You have remarks or suggestions ?
or mail us at:
paul.vreymans@workforall.net |
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