Mises Wire

The EU vs. Apple vs. Ireland: Why Tax Competition Is a Good Thing

It has now become clear that in many ways the European Union is a cartel of high-tax governments whose goal is to restrain tax competition. The EU’s supposedly free — this is, regulated — trade policy is none other than an excuse to homogenize the tax and regulatory regimes of the nation-states.

The ultimate goal of the high-tax member states such as France is to use the EU to milk as much as possible from the productive members of society without losing their tax base. This has never been so clear as it is now with the recent condemnation of Apple by the European Commission which claims that Apple must pay €13 billion in “undue tax benefits” to the Irish government. Commissioner Margrethe Vestager, in charge of competition policy, said: 

Member States cannot give tax benefits to selected companies — this is illegal under EU state aid rules. The Commission’s investigation concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years. In fact, this selective treatment allowed Apple to pay an effective corporate tax rate of 1 per cent on its European profits in 2003 down to 0.005 per cent in 2014.

A History of Crushing Tax Competition 

The European Union has undertaken a battle against Ireland’s low-tax policy since 2001. At this date, the European Commission started to use the state-aid rules to stop tax breaks for specific business sectors. This led to the abolition of the Irish International Financial Services Centre (IFSC). Under this regime, the financial companies based on the Dublin dockland were subject to a 10% corporate tax rather than 30% levied on other Irish companies. The European Commission argued that the Irish IFSC was equivalent to illegal state aid to specific industries.

The reaction of the Irish government to the ban of the IFSC was quite ironic. The specially reduced 10% rate of tax for particular industries was replaced by a general low tax rate of 12% for all companies, thus thwarting Brussels’s attempt to reduce tax competition. For the political class of the high-tax countries, this policy created an outrage. Since the 2009 crisis, Ireland has systematically been designated as the official scapegoat of every politician, witch-hunter, and other demagogue trying to avoid any discussion about the real problem: the explosion of unproductive and anti-competitive government expenditures.

The Benefits of Competition

Standard theories of tax competition are largely motivated by the view that tax competition is either entirely bad or at least problematic in some cases. Most of these “standard models” rely on untenable assumptions such as welfare-maximizing governments. Obviously, without considering state organizations for what they are — i.e., parasitic organizations — our conclusions concerning tax competition are doomed to be wrong. After all, the alleged benevolence of states can be called into question by merely noting the fact that the very existence of states fundamentally relies on coercive means — namely, taxes. By violating the property rights of its subjects, taxation leads to a lower level of division of labor and capital accumulation. If, therefore, tax competition is to reduce the resources diverted from the productive to the government sector, then it is a boon for the economy and the consumers.

In the case of Ireland, it is argued that those tax loopholes enjoyed by Apple are distorting economic activity and are therefore reducing efficiency. The problem here is apparently about sector-specific tax breaks rather than about tax competition. This way of reasoning is entirely flawed for a simple reason: tax loopholes are not loopholes. As Murray Rothbard wrote :

Of course, government economists have been doing their part as well to try to sugar-coat the pill of tax increases. They never refer to [the suppression of tax loopholes] as “increases.” They have not been increases at all; they were “revenue enhancement” and “closing loopholes.” The best comment on the concept of “loopholes” was that of Ludwig von Mises. Mises remarked that the very concept of “loopholes” implies that the government rightly owns all of the money you earn, and that it becomes necessary to correct the slip up of the government’s not having gotten its hands on that money long since.

Loopholes are the cracks through which capitalism breathes. The benefits of tax competition does not depend on the existence of a single uniform tax rate but, on the contrary, on diversity of the tax regimes. Thus, if the aim is taming the Leviathan, then the Irish government has until now had a relatively better policy of competing with other countries for the same tax base. The EU, on the other hand, continues its attempt to impose itself as a superstate, as during the good ol’ pre-Brexit days.

Will The Tax-Competition Issue Destroy the EU? 

This might be a fatal mistake which will destroy Brussels’s authority. Indeed, the Irish government just challenged the European Commission and reclaimed its right not to tax Apple. The Irish finance minister warned that he will fight the European Commission through the courts. The Irish Revenue Commissioners and the Department of Finance have even already spent some €670,000 on legal fees fighting the case.

The question now is: how far is the Irish government willing to go? At this point, the EU has much more to lose in letting a member state go rogue than does the Irish government in complying with Brussels’s injunctions. On the other hand, the Eurocrats, in a time of growing Euroscepticism, are walking on a minefield and cannot afford frustrating any member state. Needless to say that the outcome of this controversy is highly uncertain, but EU imperialism might very well be dead.

Louis Rouanet is currently a student at the Paris Institute for Political Studies. Contact: email.

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