Cutting off noses

Ireland/tax: Ireland's Hamlet-like hesitation in asking for an EU bailout has morphed into a confrontation over the country's low tax regime, which inflames its potential continental European creditors. But complaints from Germany and elsewhere about how Ireland is competing unfairly with its taxes miss the point.

Thirty years ago, Ireland was a poverty-stricken nation on Europe's periphery economically dependent on its big neighbour, the UK. The rock-bottom 12.5 per cent corporate tax rate helped the country catch up. Now it has companies like Microsoft and Pfizer that have invested billions of euros.

Forcing Ireland to increase the tax rate to, say, 20 per cent - as some of its neighbours want - wouldn't just hurt the emerald isle. It would hurt the rest of the euro zone, even if it gave the likes of Germany satisfaction that they weren't being unfairly undercut on tax.

It's relatively easy to see why Ireland would be damaged by a higher corporation tax rate. It wouldn't do much to boost revenue from companies: the extra take from the higher rate would be undercut by the loss of revenue as companies moved elsewhere. What's more, as investment dried up, economic growth would be constrained and the revenue from income tax and other taxes would also be hit.

It might seem that other euro zone countries would benefit from such a hobbling of Ireland. But the likes of Google probably won't shift to high-tax locations such as Germany and France. They'd be more likely to relocate to low-cost countries outside the European Union such as Switzerland. If they are go anywhere in the EU, it is more likely to be the UK with its competitive currency, relatively low corporate taxes and labour flexibility. The irony is that it is actually the UK which is giving the strongest backing among EU countries to Ireland's campaign to hold onto to low taxes.

Moreover, insofar as Ireland is hurt by higher taxes, it is more likely to become a ward of state for the rest of the euro zone. This is something which France acknowledges.

Even if economic arguments don't win the day, Ireland holds a trump card: the rest of the euro zone is desperate for it to take a bailout in order to stop the rot spreading to Portugal and possibly other countries. Not only should it be allowed to keep its low taxes; it probably will.