After the Trump victory, the big question is whether the IDA will maintain foreign investment. The Government should consider cutting corporation tax, reports Kyran Fitzgerald.
So Trump has done it. The president elect has visited Barack Obama in the Oval Office. The handover process has begun.
Senior folks have kissed and made up, but make no mistake about it. A revolution will be kick-started in late January, one that will not bring much in the way of comfort to most people on this island.
Initially, at least, the greatest shakeup will be in the area of economic policy. The new administration is unashamedly pro-business. The key players will be looking to hit some early home runs while the wind is at their back — that is, during the famous first 100 days of the presidency.
Naturally, we are worried. The incoming administration is committed to a transformative tax package, including a cut in the US corporation tax rate from 35% to 15%. Tax reform lies at the very top of its agenda.
Mr Trump’s economic adviser, Stephen Moore, rattled nerves over here, when he stated in a BBC interview that changes in the tax regime would result in a “flood” of investment and jobs from countries including Ireland, that have benefited greatly from current anomalies in the whole business taxation area.
Mr Moore, however, hinted at the likelihood of compromise. He suggested the tax rate would drop to “between 15% and 20%”. In an interview on Newstalk, he was at pains to stress that Ireland was not a particular target.
Eamonn Fingleton, a leading international expert, has pointed out that it is just not realistic to expect that America can pull back to its shores vast quantity of business operations.
Multinationals need to have operations overseas in order to tap large markets such as the EU. The 21st manufacturing chain is highly sophisticated and strung out. Large amounts of money have been invested in state-of-the-art plants.
The big question is whether bodies like the IDA will have a struggle to maintain foreign investment activity at reasonable, let alone the recent elevated levels. A few months of acute uncertainty lie ahead — during which many plans are effectively put on hold.
The Trump administration will be able to count on a Republican-dominated Congress, with a large majority in the House of Representatives. The House Ways and Means Committee has jurisdiction in relation to tax and welfare entitlements. Its chair is Texan congressman, Kevin Brady.
In a post-election interview on CNBC, Mr Brady said he was “thrilled” that Trump is “ready to move on the economy... we need to fix our broken tax code”. Mr Brady singled out as key items, a redesign of the tax code and a “reduced regulatory burden”. “Infrastructure spend can play a role but it is not quite the silver bullet,” he said.
It is 30 years since the Reagan administration passed the Tax Reform Act. Its supporters insist it helped pave the way for sustained growth. Since then, the tax code has become much more complicated, with 4,400 changes.
Unlike Ronald Reagan, president Trump will not have to negotiate with a Democrat-led Congress, but he will not have a completely free hand. The current Speaker, Paul Ryan, favours fiscal orthodoxy and will look for cuts to vastly expensive programmes like Medicare. Obamacare lies on the chopping board. But the Trump team will be happy to run a larger deficit.
Returning to Ireland’s prospects for foreign direct investment, while there are grounds for concern, there may be no reason to panic just yet.
Padraic White served as IDA chief for 10 years. He remains an active business player. “I do not believe we are at an end of an era. The big impact will be felt by US companies which relocated to Mexico, China, Vietnam. The rationale for Ireland is entirely different,” he said.
He points out that every US president elected since the mid-1970s has talked of bringing jobs back to the US.
He insists that tax considerations are not at the top of the list for US multinationals, here. Many would beg to differ. Significantly, he believes that we should not rule out further corporation tax cuts in what will be a more competitive environment.
Mr White is more concerned about the assault on our position being led by EU commissioners Margrethe Vestager and Pierre Moscovici and by the impact on our indigenous sector from Brexit. He believes many companies hit by the fall in sterling and the impending British exit will opt for diversification.
He believes that Ireland remains attractive to investors as it will soon be the only English speaking country in the EU and he points out that former UK chancellor George Osborne has already cut the Brirish corporation tax rate from 32% in recent years without destroying our economy in the process.
TCD professor of business Frank Barry believes that Ireland can weather whatever storm may be coming our way from across the ocean.
While Ireland’s attractiveness in relative terms may be diminished, Prof Barry doubts that we are at a turning point where we need to tear up our long established US-driven foreign investment strategy. He agrees that some feared reforms such as the OECD crackdown on tax havens ended up boosting Government revenues from corporation tax.
There is of course, little room for complacency. Public sector workers may need to rein in, somewhat. Finance Minister Michael Noonan has warned the fiscal space for any further easing in budgetary policy may have largely disappeared by the next budget.
At the same time, the pressure to start delivering on the housing front is now imperative if our labour market competitiveness is to be restored. Human relationships still count and as a country, Ireland needs to build relationships with the new White House.
It was significant that the president elect has recommitted to the cherished St Patrick’s Day encounter with the Taoiseach. Ireland retains an inside track of sorts. Our Governments should stick to certain principles, but a bit of good old fashioned pragmatism on occasions can go a long way.
We may have reason to be glad about Mr Noonan’s much-derided decision to welcome Donald Trump to Ireland at the time of his visit to Doonbeg golf links, a couple of years ago.
We should, however, be aware the president is answerable above all to his domestic constituency and Mr Trump owes big favors to those blue collar states such as Michigan and Pennsylvania which delivered his victory.
Ireland has enjoyed a great run on the investment front, but there are no guarantees in this life. We will need to be nifty on our feet.
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