Influence of income taxes on migration patterns still matters

The debate on corporation tax has focused attention on how differences in tax rates can affect where economic activity takes place. The more globalised the economy, the greater the scope for activity to move country to avail of lower tax rates. Key factors are the kinds of tax involved, and how mobile is the particular economic activity.

It is easy for multinationals to shift where profits are legally earned from one jurisdiction to another, especially profits from intellectual property. As relative taxes can play a big role in such company decisions, this has given rise to tax competition. While this has benefited Ireland, it imposes costs on the wider world economy. Hence the pressure for Ireland to sign up to the latest OECD tax proposals.

Differences in excise and sales taxes, alongside fluctuating exchange rates, have led to significant cross-Border shopping that has ebbed and flowed over the years. In the 1980s people headed north for bargains as prices of whiskey and petrol were cheaper in Crossmaglen than in Clones, whereas in the mid-1990s the flow was in the other direction.

However, research on this cross-Border shopping concluded it wasn’t on a scale to justify changing our national tax rates to dampen it. For most people, the cost and the hassle of travelling long distances to get a bargain price for butter isn’t worth it. Ireland is sufficiently large that having higher prices for alcohol and tobacco than our neighbours is sustainable. However, a tiny country such as Andorra, sandwiched between two much bigger neighbours, can make money by keeping excise levels low, as it gets enough cross-border business relative to its size. However, France and Spain don’t lose enough business to worry about it.

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Brain drain

While the influence of income taxes on migration has attracted less attention, the evidence suggests that tax differences have mattered and still matter. This was particularly marked in the 1980s when the Thatcher government cut UK government spending to permit big lower taxes. By contrast, Ireland was trying to extricate itself from a fiscal crisis and it had exceptionally high income tax rates. The tax difference encouraged significant numbers of young Irish to move to the UK, where lower taxes allowed them enjoy a better standard of living. In the late 1980s this brain drain was a particular concern for the IDA, which was trying to attract business to Ireland, only to find that some of the skilled labour the new foreign firms needed had left for the UK.

Research suggests that over the last 50 years Irish people have been happy to work at home for 5 per cent or 10 per cent less after tax than they could get in the UK. However, if the gap widened, many would move to the UK or, if it narrowed, return to work in Ireland. Of course, as important as taxes are, there are other factors that affect the relative standard of living, especially housing costs and public services.

This mobility of labour has not prevented Ireland from pursuing its own path on income tax, which has fluctuated quite a bit relative to the UK’s. The average personal tax rate here was similar to the UK in the mid-1990s, fell below the UK’s prior to the 2008 crash, then rose above the UK level following the financial crisis. By 2019, the UK rate was converging towards the Irish one.

Graduates

The fact that Irish labour is mobile and is sensitive to tax rates does not prevent the government from pursuing its own tax policy. What it does mean is that wage rates must adjust to handle tax differences. This helps explain why wage rates for graduates are higher in Ireland than in the UK, because they face higher tax rates.

There is international evidence that some very high-paid individuals do move to locations such as Monaco to avoid paying high taxes. The number of such high-income individuals is a very small proportion of all taxpayers: the evidence suggests that footballers and rock stars are especially footloose. The Beatles famously expressed their view on high marginal tax rates: “There’s one for you, 19 for me, cause I’m the taxman . . . should 5 per cent appear too small, be thankful I don’t take it all.”

While some high-income individuals move to low-tax jurisdictions, the loss of revenue to the State is minimal and does not justify having special tax regimes to attract them or hold them. If we need to attract footballing talent, it is better to pay them a higher wage and let them pay tax like the rest of the population.