Merkel adviser says no alternative to increase in Irish corporate tax rate

Tue, Nov 23, 2010, 00:00

GERMANY:IRELAND HAS no alternative but to increase its corporate tax rate, according to German economist Peter Bofinger, one of Chancellor Angela Merkel’s economic “wise men” advisers.

As Berlin digested Dublin’s rescue application yesterday, German officials made it clear that Ireland’s 12.5 per cent tax rate is still very much up for discussion.

Minister for Finance Brian Lenihan told RTÉ Radio that, as far as Ireland was concerned, the issue was “off the table”.

“You can’t ask for solidarity on the one hand and on the other side not behave fairly on the [corporate] tax issue,” said Prof Bofinger, suggesting that Ireland was offering “four-star hotel rooms for a two-star rate”.

“It’s understandable from a position of national interest, but it’s not fair behaviour. States need more income and now would be a good opportunity to raise taxes.”

Prof Bofinger, an economist and professor at the University of Würzburg, suggested that Ireland might be convinced to raise the tax rate in exchange for a preferential interest rate on loans from EU partners.

Views like that chime with the mood in the corridors of power. Though Berlin officials are more discreet in their choice of words, they see the corporate tax issue as an intrinsic part of a wider discussion looming.

“Whether the [tax] issue becomes a concrete condition remains to be seen,” said one senior official, who spoke on condition of anonymity. “It’s all about improving national income and there are many ways of doing that. The loans will be subject to very tough conditions.”

Dr Merkel’s junior partner, the Free Democrats (FDP), welcomed the Irish decision to take advantage of the European rescue fund.

“It was clearly the right decision to prepare so that we wouldn’t be caught unprepared, as we were in the case of Greece,” said FDP leader Guido Westerwelle. “Now the task is that Ireland fulfils various criteria [for a rescue].”

The pro-business FDP has made no call for Ireland to increase its corporate tax rate.

Germany has a federal corporate tax of 15 per cent; German local authorities fund themselves largely through a separate commercial tax, which varies from region to region, bringing the total tax bill for German businesses well over 20 per cent.

Germany’s opposition parties agree that Ireland must be supported, but some have asked why, with the 2008 bank guarantee, the Government made a promise it could not keep.

The opposition Green Party sees Ireland’s corporate tax rate as “unsustainable for Europe” because it allows businesses to shift their taxable profits out of the countries which finance the infrastructure that makes it possible for them to do business.

“All we can ask is that Greece and Ireland act differently in the future,” said Dr Gerhard Schick, Green Party finance spokesman.

“Our problem is that we tried to solve this nationally without seeing the danger of our banks individually for Europe as a whole. I expect now from Ireland active support for a European corporate tax and centralised financial regulator.”

The opposition Left Party criticised Dr Merkel for prescribing “austerity measures for taxpayers and giving care packages to bankers”.

Leading German economists are in no doubt that the corporate tax issue will be at the crux of the upcoming rescue fund negotiations.

“Otherwise, they cannot explain why they are subsidising low Irish taxes with German and French tax money,” said Prof Wim Kösters, economist at the University of Bochum.

“For that reason it’s important the Irish build up trust by getting the bank crisis under control and by building up trust in a new, transparent and tough financial regulator.”