Unleash the dogs of capitalism (Boston Globe)

20101017 Unleash the Dogs

Unleash the dogs of capitalism
Kevin Cullen (Boston Globe)
17 October 2010

What should come after disarmament? How about tax policy?

As Owen Paterson works the room in Washington on Tuesday, schmoozing at a job creation conference for Northern Ireland hosted by Secretary of State Hillary Clinton, prospective investors may be tempted to do a double take at his name tag.

Paterson is an Englishman, Britain’s secretary of state for Northern Ireland. But when it comes to tax policy, his pitch is decidedly Irish.

In fact, when it comes to tax policy, Paterson wants to out-Irish the Irish.

The Republic of Ireland’s economy, troubled at present due to a meltdown of its housing and banking sectors, was for much of the last two decades the fastest-growing in Europe. Much of the credit for that growth was attributed to the Republic’s 12.5 percent corporate tax rate, the lowest in Europe, which enticed many multinational companies, especially American ones, to establish a gateway to Europe there.

Northern Ireland, saddled with a 28 percent rate like the rest of the United Kingdom, could only look south with envy. Who would open a business in Belfast or Derry when they could drive an hour south, on the same island, and pay less than half as much tax?

Paterson hopes to change that equation. Next month he will present a policy paper to the power-sharing Northern Ireland Assembly, recommending a drastic cut in the corporate tax rate. Paterson will call for undercutting the Republic by instituting a 10 percent rate. At the very least, he said, the rate in Northern Ireland needs to match the Republic’s.

Paterson and his boss, Prime Minister David Cameron, want to reverse a decades-old policy of building and sustaining peace by heavy government spending. It’s time, they say, for Northern Ireland’s vaunted peace process to be pushed along by the natural flow of free market capitalism, not the artificial stream of state subsidy.

“I know that’s revolutionary,” Paterson said recently, sitting in Emmet’s, a pub on Boston’s Beacon Hill named for a 19th-century Irish rebel who was executed by the British in Dublin. “But it’s irresponsible to do nothing. We have to give the private sector a chance to grow.”

For many years, the prevailing model in post-conflict societies like Ireland has been to buy off the combatants (or their constituents) with publicly funded jobs and huge state-funded bureaucracies. But now a new idea has begun to gain traction: transforming divided societies by encouraging the private sector. Writing recently in Foreign Affairs, Carl J. Schramm, president and CEO of the Ewing Marion Kauffman Foundation and coauthor of “Good Capitalism, Bad Capitalism,” suggested the traditional approach of international development in post-conflict and post-disaster societies has to shift. In Iraq and Afghanistan, he notes, the economies are faltering despite the infusion of billions of dollars because massive public spending creates dependence instead of innovation. A faltering economy, meanwhile, threatens whatever political progress is made.

“There is a proven model for just such economic growth right in front of US policy makers’ eyes: the entrepreneurial model practiced in the United States and elsewhere,” Schramm wrote. “This model rests to a huge extent on the dynamism of new firms, which constantly introduce innovations into the economy.”

In Northern Ireland, public spending constitutes 77 percent of GDP, more than twice what is found in many other regions of the United Kingdom. The vast majority of people work for the government or government-funded agencies. The private sector is tiny and hasn’t grown in the decade since the worst of the violence ended.

Those government subsidies, meanwhile, underwrite the separate but equal division of social services, from schools to health clinics, that may have helped keep the peace but has also kept most Catholic nationalists and Protestant unionists living parallel lives without much interaction. Some estimates place the duplication of services in Northern Ireland, a place roughly the size of Connecticut with a population of less than 2 million, at more than $1 billion a year.

While the infusion of billions from the British exchequer helped remove many of the biggest grievances at the heart of the conflict in Northern Ireland, especially the inequality in housing, the failure to develop a real market economy has held back the cause of integration and reconciliation.

Tax equalization on the island of Ireland would be one step toward making its unification more realistic. But losing that competitive advantage over Northern Ireland would test the Republic’s commitment to unity.

Ironically, some of the strongest voices calling for tax equalization belong to unionists, those who want Northern Ireland to remain part of the United Kingdom. Unionists tend to be overrepresented in Northern Ireland’s relatively small entrepreneurial class, and they appear to view tax equalization as gaining an equal footing, not a slide down a slippery slope.

Paterson acknowledges that weaning people in Northern Ireland from such a heavily subsidized society “is a huge cultural shift.” But the cuts are coming anyway. A sweeping overhaul of the UK’s welfare system and shrinking of state spending is the centerpiece of the coalition government led by Cameron, the Conservative Party leader. The Labor government that did so much to propel the political process that led to peace steadfastly refused to lower Northern Ireland’s corporate tax rate as a way to stimulate investment.

For Paterson, an admirer of former prime minister Margaret Thatcher, and an avowed Euroskeptic, his enthusiasm for free market economics and thumbing his nose at the mandarins in Brussels who frown on low corporate taxes are complementary positions.

But can a Thatcherite normalize Northern Ireland?

Paterson said American business officials he met in Washington and Boston on a recent visit were intrigued by the prospect of cutting the tax rate.

“Smart people realize this is a good time to get into Northern Ireland,” he said.

Padraig O’Malley, the Moakley Professor of Peace and Reconciliation at the University of Massachusetts Boston, and director of the Forum for Cities in Transition from Conflict, agrees that Northern Ireland needs to wean itself from the British taxpayer.

But he said emulating the Republic’s recipe for promoting investment with low taxes looks less attractive while surveying its current budget deficit and stagnant growth. Some companies have left Ireland for better deals in the Far East and elsewhere. He thinks Chinese companies might be more tempted to locate in Northern Ireland than American ones if the tax rate is dramatically lowered.

How much a company pays in taxes is just one of many factors that go into a decision to locate in a particular country. Some countries in Europe lowered their tax rates in response to the Republic of Ireland’s success, but none came close to going as low as 12.5 percent. The low-tax approach to attract business is more common in parts of Asia.

Getting politicians in Northern Ireland to agree to reducing tax revenue while simultaneously absorbing drastic public funding cuts, all in the name of creating a more normal economy and society, will be the biggest test of their fledgling power-sharing democracy.

“It’s up to them,” Paterson said. “But the status quo is not acceptable.”

Kevin Cullen, a Globe columnist, formerly headed Globe bureaus in Dublin and London.

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