Reduced corporate and individual tax rates produce phenomenal growth.
Last May 9, the Montreal Economic Institute and the Canadian Club co-hosted the former Prime Minister of Ireland, the Honorable John Bruton, a key artisan of the economic reforms that helped bring about the Celtic “Miracle.” This expression refers to the phenomenal economic growth of Ireland over the last dozen years.
We have intentionally put the word miracle in quotes because, as Mr. Bruton says, such growth is not the result of unplanned or fortuitous events. Rather, it was produced by implementing a logical sequence of short- and long-term elements. His full speech may be found elsewhere on MEI’s website site.
The “miracle” thus sprung largely from a reduced tax burden on companies and individuals, cuts in public spending and a consensus to keep wage increases low. Policies designed to stimulate work and give impetus to investment were adopted. The result was increased productivity, ultimately followed by a better standard of living. In fact, just fifteen years ago, the Irish had half the wealth of Canadians but today are richer(1).
Between 1987 and 1997, Ireland’s constant dollar GDP grew at an average annual 6%, one of the briskest rates in the industrialized world. By comparison, the average annual growth rate in Canada was a mere 2.5% during that time. In 1999, the Irish GDP rose more than 8%. Simultaneously, unemployment plummeted from 17% in 1987 to 6% in 1999.
The average tax rate for the Irish (income tax plus employee contributions) dropped from 35% of earnings to 28,6% in 1996, according to an OECD study. This translates to a net rise in worker income. By contrast, the tax rate of Canadian workers climbed 3% from 1988 to 1993. The Irish corporate tax rate is 12.5%. As Mr. Bruton puts it so well, better to have 12.5% of something than 100% of nothing. In Canada, the effective rate for corporate taxes is 25% in the manufacturing sector and 33% in the service sector, according to the C.D. Howe Institute.
This does not mean the land of John Bruton is the best of all possible worlds. Ireland has been experiencing high inflation for some time, particularly compared to the European average. And the surge of prices for Dublin housing has had a negative impact on worker purchasing power.
Those seeking a level playing field for assessing the situation will certainly be concerned that interest and dividend earnings rose 16% between 1992 and 1998, while wages increased a “mere” 65%. But Canadian workers would have been “pleased” with a 65% salary hike. Over the same period, their wages increased by only 22%.
Naturally, we must be careful with comparisons and avoid the pitfall of overly simplistic analyses. Canada is not Ireland and would not be likely to import the full regime of Irish economic measures.
Still, while the Canadian economy has been healthy for a few years now, one fact remains clear. Less wealth is created in Canada today than ever before. Furthermore, economic growth in Canada, relatively speaking, is much lower than in other Western nations that have cut their tax rates and their scopes of government. See our publication on this subject called Taille de l’État et richesse des nations – The Scope of Government and the Wealth of Nations.
The “Road to Growth”(2) is not based in nuclear physics or quantum mechanics. Some kinds of government policies obviously generate more wealth that others. And the case of Ireland demonstrates that principle very well.
1. Canadian constant dollar GDP per capita was 2.5 times that of its Irish counterpart in the mid-1980s. Today it’s lower.
2. In particular, see the remarkable work entitled Road to Growth: How Lagging Economies Become Prosperous, by Fred MacMahon (Atlantic Institute for Market Studies, 2000).
Michel Kelly-Gagnon is President of the MEI, Norma Kozhaya is Economist at the MEI.