Ireland ‘crazy’ on income tax, says architect of Reaganomics

Ireland is a paragon of economic virtue when it comes to corporation tax but certifiably "crazy" as far as income tax goes, according to US economist Arthur Laffer. He was in Dublin yesterday to speak at an event hosted by the Dublin Chamber of Commerce.

Dubbed the father of supply-side economics, Dr Laffer was the principal architect behind Ronald Reagan’s low-tax revolution in the 1980s, commonly referred to as Reaganomics.

His main contribution to the economics canon, the Laffer Curve, argues that there are diminishing returns beyond a certain "optimal" tax rate, and that governments can, in many cases, reap more revenue by cutting taxes.

It was apparently devised on a napkin in 1974 while dining with Dick Cheney and Donald Rumsfeld, who were working under then US president Gerald Ford.

As a low-tax evangelist, Dr Laffer’s conclusion about Ireland’s contradictory tax regime is perhaps unsurprising. He was, however, praising of the State’s current economic trajectory, claiming the Government had avoided the policy mistakes of others, and as a result Ireland was now emerging “very strongly” from recession.

“Ireland has an opportunity to really lead the world in economic growth and prosperity,” he said, suggesting the country should be proud to be known as a low corporation tax jurisdiction.

Asked about the European Commission's investigation into Apple's tax arrangements here, Dr Laffer said: "What the European Union, what Barack Obama, are trying to do . . . is force people to pay taxes in their own regimes . . . and Ireland is so successful that they want to stop them."

“To me you’re the saviour, not the enemy,” he said.

Dr Laffer’s basic premise is that higher tax rates deter people from working, make the rich devise better avoidance schemes and cause firms to relocate to lower-tax jurisdictions, and so governments are better off keeping taxes low.

"The dream, the North Star, is a low-rate, broad-based flat tax," he said.

He criticised what he sees as the growing politicisation of economics, describing himself as a Kennedy Democrat and Reagan Republican, who repeatedly voted for Bill Clinton.

“Economics has become so political but it isn’t left-wing or it isn’t right-wing, it’s not Democrat, it’s not Republican . . . people respond to incentives and when you change the incentive structure you change people’s behaviour.”

He sees the US as an “experimental base” in which nearly all economic policies have at one time been tried by at least one of the 50 states.

In his latest book, An Inquiry into the Nature and Causes of the Wealth of States, Dr Laffer argues that in the last 60 years the 11 US states that introduced a state income tax, on top of the obligatory federal tax, declined “relative to the rest of the nation” in all major economic metrics.

He advocates getting rid of corporation tax, suggesting it would be possible to replace the entire US corporate tax take, which is about 1-2 per cent of GDP, with a VAT hike of the same amount.