The Tories should take a tax lesson from Ireland

David Cameron must prove to voters that Conservative economic policy will be more than just Brownomics with a posh accent, says Allister Heath. The Irish have shown him the way

Between 1994 and 2003, Ireland cut its corporation tax from 40 per cent to its current rate of 12.5 per cent. By contrast, Britain’s corporation tax under Labour will have fallen to 28 per cent, while key loopholes which made this rate more bearable have been wiped out and the Treasury is now at war with many large companies over a proposal to tax foreign earnings more heavily.

The results of Ireland’s tax cuts, combined with Brown’s economic mismanagement, have been spectacular. In 1993, income per capita was 28 per cent higher in Britain than in Ireland. The Irish economy then took off, with average real-terms economic growth between 1994 and 2006 of 7.4 per cent. In contrast, Britain managed just 2.9 per cent real-terms growth in the same period. Today the Irish enjoy income per capita 20 per cent higher than in Britain; for the first time in history, ambitious young Brits are emigrating to Ireland to find good jobs.

Ireland has been so successful in expanding its economy by attracting international investment that its corporate tax revenues have been growing more quickly than Britain’s. Between 1998 and 2006, UK corporate tax income increased by 69 per cent, a reasonable performance. However, Ireland’s corporate tax revenue grew by an astonishing 186 per cent. The case of Ireland confirms that Arthur Laffer, the great supply-side economist, was right after all: lower tax rates can generate increased tax revenues over time under certain circumstances.

All of which means that Ireland has not just increased income and investment, but now enjoys the revenues that can fund further tax cuts. Bold decisions in the mid-1990s created a virtuous cycle that stands in stark contrast to Britain’s fiscal position, which leaves so little room for manoeuvre.

Critics who claim Ireland’s awe-inspiring economic performance is down to EU subsidies are missing the point. Benjamin Powell, in a report for Washington’s Cato Institute, showed how Ireland enjoyed higher subsidies (4 per cent of GDP) when its economy was doing appallingly between 1973 and 1986 than when it took off from 1995 to 2000 (3 per cent of GDP). Other countries receiving just as much EU subsidy, such as Greece, did not enjoy the same record of growth.