Insights

Policy preview: double Irish surprise
Ireland’s political economy is set to undergo a rather momentous shift. As a result of the 8 October agreement brokered by the Organisation for Economic Co-operation and Development (OECD), states are to set out a global corporate tax regime that will see a minimum 15% tax on corporate earnings instituted for multi-national enterprises. Ireland had been a hold out to the pact when it was first teased earlier this year but was reportedly brought on board by a commitment that this rate would not be later increased. Nevertheless, for an economy that has attracted numerous multinationals over the last two decades precisely due to its 12.5% corporate tax rate, though often even a fraction of that because of Irish rules around ‘patriating’ foreign earnings, this marks a potential significant departure.

The Irish government has acknowledged as much in its budget, presented by Finance Minister Paschal Donohoe on 12 October. Corporate taxes will indeed rise from 15% for large corporations, albeit only from 2023. Given Ireland has so long been a jurisdiction of choice for multinationals, rather than necessity, the Finance Ministry warned that move that Ireland has warned will cost at least £800m in tax revenues – imply what you will about what this says about the ministry’s confidence in the 15% minimum tax actually being globally enforceable.

Although the government has not directly tied the two tax shifts to another, Donohoe’s budget announcement did include a new tax that should be able to fill this gap in the budget; a zoned land tax, also due to come into effect in 2023. It is nominally instead meant to replace a vacant sites levy and similarly designed to address a national shortage of homes, but in reality sets a platform for local authorities to radically revisit Ireland’s zoning practices. The rate will be 3% but the power for local authorities to reclassify major swathes of the country as having the potential for development will see the land tax base expand significantly.

The move may well ultimately be successful in raising tax revenues and spurring new development in Ireland. But it is not the first time that Ireland has relied on a mix of land development and tax incentives to expand government spending. A similar mix fuelled the Irish real estate bubble that so dramatically burst in the global financial crisis – one would hope this serves as enough of a warning to ensure the same mistakes are not repeated. Irish debt to national income soared to 108% in 2020, but Donohoe has pledged the new budget will see it fall to 99% in 2022. Whether this bears out may well prove a significant bellwether, or early warning sign.

“Tax competitiveness has brought our country the only prosperity we’ve known”. Bono

Power Play: Small-town hero?
Central Europe is experiencing a wave of political change -the last week has seen the erstwhile wunderkind of Austrian politics Sebastian Kurz resign his premiership amid a corruption probe and in the neighbouring Czech Republic, populist billionaire Andrej Babis’ premiership has also apparently come to an end with an opposition coalition forming after the 10 October elections in the country. Both departures stand in contrast to the relatively orderly ongoing departure of Germany’s Angela Merkel. All three moves, however, hang heavy over the future of Europe’s second-longest serving leader after Merkel, Hungary’s Viktor Orban.

Orban has faced repeated corruption scandals, much like Kurz, though so far has been impervious. He has reshaped Hungarian politics to solidify his Fidesz party’s grip on power, shifting the parliamentary system and engaging in gerrymandering that has outraged liberal opponents – something Babis tried, but failed, to do. However, Hungary’s opposition has finally begun to unify after over a decade of repeated splits. Much as the Social Democrats, Greens, and liberal Free Democrats in Germany are now holding coalition talks that have the potential to put Merkel’s Christian Democratic Union in opposition for the first time in 15 years, Orban’s political opponents have shown a willingness to cross traditional ideological divides in an effort to ‘reset’ Hungarian politics.

Hungary’s opposition has even organised a primary contest to choose a united nominee for prime ministership in the election due to be held next spring. But in a shock turn of events, the contest’s most prominent figure – Budapest Mayor Gergely Karacsony – withdrew from the race on 8 October. Karacsony has built a name for himself at home and abroad as the driving force behind the ‘Pact of Free Cities’ an alliance between mayors across central and eastern Europe that has often challenged their more nativist governments in recent years. Yet in withdrawing, he endorsed the conservative Peter Marki-Zay, mayor of the small town of Hodmezovasarhely.

Marki-Zay had finished behind Karacsony in the first-round of the opposition primary, but the pair are united by a belief that Klara Dobrev, a left-leaning MEP who edged out Karacsony, will be unable to defeat Orban in the national election. The second round is already underway, with votes due by 16 October but Marki-Zay is seen as the favourite. There is precedent in the region for a small-town mayor to upset a political stalwart, in neighbouring Romania Klaus Iohannis did just that in 2014, defeating Prime Minister Victor Ponta in a race for the presidency in 2014. Marki-Zay will be hoping he can likewise make his mark on the region’s politics.

“To tell the truth, I have always seen the 20 years between 2010 and 2030 as a unified era” Hungarian Prime Minister Viktor Orban

Dollars and sense: corporate income tax a la française
Emmanuel Macron is not often hailed for his successes. He has been pilloried from the left and the right domestically, while he has had little success in winning over France new allies internationally – and has arguably further strained relations with both the UK and fellow EU members. His self-perception and actions have earned him the sniggering sobriquet Jupiter. Yet four years into his presidency he has one unalloyed success on which he should be proud to rest his laurels: France’s effective top-end corporate income tax rate has fallen from 44.4 per cent to 28.4 per cent.

The tax is set to fall even further to an effective top rate of 25.8 per cent in 2022. Although the COVID-19 pandemic has strained France’s finances just as it has for so many other economies, Macron has steadfastly insisted that he will maintain the cut plan. This is in contrast to many of his would-be rivals, with Paris Mayor Anne Hidalgo coming out in favour of renewed higher taxes (in particular the ‘wealth tax’ on the highest earners that Macron also abolished). The far-right’s perennial candidate of the last decade, Marine Le Pe, is also in favour of a higher tax rate, though it is unlikely to be a major area of her campaign. Those vying for the nomination of the Republican party, the latest iteration of France’s traditional centre-right party, have been critical of Macron’s debt binge, but hesitant to call for further tax rises out right.

Yet despite the headline success, Macron is not expected to make the tax cuts a key feature of his 2022 presidential campaign. Macron is reportedly wary of being seen as too business friendly, least this shift votes to a more left-leaning candidate such as Hidalgo in the first round of the election, or cause the left to stay home in a potential run-off against Le Pen.

But rumours have been circulating that a second Macron presidency would seek to plug the gap in the French budget through a one-off corporate tax, enabling Macron to avoid an embarrassing permanent reversal of his signature success. Macron has already shown himself willing to engage in such taxation accounting fudges – in 2017 the very year he began his cut agenda, a one-off tax of 10.7 per cent on firms with revenues over €250 million. Plus ça change, plus c’est la même chose.

“Can a people tax themselves into prosperity? Can a man stand in a bucket and lift himself up by the handle?”

Winston Churchill