O Henry is not a spousal demand for the presence of poor Harry. It was the pen-name of American short story writer William Sydney Porter. Under his pseudonym, Porter coined the term ‘Banana Republic’. Not a lot of people know that.
More people know O Henry’s short story ‘The Gift of the Magi’. It is about a married couple who live in poverty, but who love each other so much they secretly wish to give each other expensive Christmas presents. The man sells his gold watch to buy expensive clasps for his true love’s tresses. The woman sells her hair and buys a watch-chain with the money. Is there a moral to this story? Perhaps it is to show moderation in present giving. You can’t have have your cake and eat it. O Henry could have just written that. But that would not have had the lasting fame of ‘Magi’.
Modern governments seem to have the same dilemma regarding having and eating the cake. It is in the form of corporate taxation, employment and welfare. They can collect corporate taxes at a higher level from those businesses that cannot operate elsewhere with fewer jobs but more welfare payments. Alternatively, they can charge lower corporate taxes and have the businesses operate on their soil and provide jobs, which hopefully means lower welfare demand. The consolation is that income taxes may be levied on more employees. Higher corporate taxes could mean lower income taxes, but then the corporate taxation could result in lower employment, which means less income tax revenue and more welfare payments.
This was the issue that probably faced the government of the Republic of Ireland when it was doing deals with Apple. In the 1980s, the Irish economy was, to use delicate parlance, in the toilet. I recall being in Dublin in the late 1980s and seeing election posters talking about emigration as a political issue. According to one study, ‘During the late 1980s, emigration of university graduates from the Republic of Ireland rose to unprecedented levels. More than one quarter of the graduates was living abroad nine months after graduation, according to statistics issued by the Higher Education Authority.’
Ireland needed commerce. Commerce thrives in a low tax environment. Fast forward a quarter of a century and low corporate taxation became a thorny political issue. Why? The Great Recession has depressed tax revenues. Governments now have deficits they need to finance or eliminate. Their ability to borrow has been curtailed. So they need tax revenue. But the revenue is not there from personal taxation due to unemployment or low wage jobs that do not generate enough income tax. So companies are the focus of tax raising. But they are not paying the taxes. And this is where we are.
The reason appears to be the European Single Market. It seems that the market is not all that ‘single’. Multinational corporations may trade across Europe in this single market, but they are able to declare their taxable profits in one locality. It is a single market for commerce, but multiple markets for corporate taxation. Companies can select a locality with the lowest corporate taxes, or which has a ‘sweetheart deal’ to make them near zero. The benefit to the locality is that the corporation may hire its staff there. Tax or employment. Having or eating the cake. Watch or chain. There are more votes in employment than there are in corporate taxation. That’s democracy for you. It took the EU 30 years to cotton on to this. This is why they are going after Apple.
In the USA, corporate taxes are levied in part at the federal level. That would solve the problem over Apple paying taxes in the EU if some corporate taxation was raised by an EU Revenue organisation and the cash went directly to Brussels for redistribution. However, that would be a massive sovereignty grab by Brussels. Suddenly EU politics would have greater significance. If the EU raised, say, three billion pounds in corporate taxes from the Irish Republic, and redistributed some of that wealth to Bulgaria, then it would be incumbent on the Irish MEPs as well as the An tAire Airgeadais at the Council of Ministers to argue for more of ‘their’ EU money back. Are Californians really that happy seeing their tax dollars spent in Tennessee? People would have a reason to vote for this or that MEP, just like Californians vote for their congressmen. Their taxes would be at stake.
There would not appear to be a better solution to EU tax dodging than ‘ever closer union’, with Brussels given direct tax raising powers over its member states. On this basis, the UK leaving the EU thanks to this first, and last, time ever opportunity this year was a good idea. It also means that Apple could consider relocating away from Ireland to regenerate regions outside London.