I’m in Kilkenny, Ireland where Kilkenomics V begins tonight. Kilkenomics is the economics festival in which economists and professional comedians combine to produce a blunt presentation of issues involving economics that have enormous effects on our lives. One of the traditions of Kilkenomics is that the travesty of some act by the Troika (the European Central Bank (ECB), the International Monetary Fund (IMF), and the European Commission (EC)) is revealed just in time to kick off the festival. This year, the Troika produced a double-barreled blast. First, the ECB’s November 2010 letter extorting the Irish government to inflict austerity and produce a second Great Recession in Ireland was leaked.
But it was a second leak that revealed a scam that could have even more critical political implications for Ireland, the EU, and the UK. The scam is what a former senior U.S. tax official aptly labeled the “magical fairyland” that is Luxembourg when it comes to corporate (non) taxation. Luxembourg is one of the most notorious tax havens in the world. While U.S. firms are the worst actors in this (im)morality play, UK firms are also huge players. But Ireland also plays a role in which massive corporations reduce their taxes to single digits by combining Ireland’s and Luxembourg’s penchant for aiding foreign corporations to evade nearly all taxes.
This will likely become a serious political issue in the UK for several reasons. First, the head of the EC is Luxembourg’s former Prime Minister, Jean-Claude Juncker. The great bulk of Luxembourg’s increasingly infamous “let’s make a (secret) deal” tax scams were done under Juncker’s leadership and Juncker has been a leading apologist for the deals. Second, the UK’s PM, David Cameron, made it his personal mission to try to block Juncker from being made head of the EC. Cameron, who loves austerity, did not criticize Juncker on the basis of Juncker’s self-destructive demands for austerity. Cameron’s critique was that Juncker favored EU bureaucratic power. Cameron’s effort to block Juncker was routed. Cameron’s defeat was seen as increasing the chances that the UK would eventually vote to leave the EU.
Third, Northern Ireland’s economy is in deep trouble, in part due to the UK’s austerity while Eire, fueled in no small part by its aggressive role as a tax haven, is (finally) recovering. Indeed, in the valley of the blind that is the eurozone, the Irish economy now reigns. Powerful Northern Ireland politicians are demanding that their province’s corporate tax rates be slashed to match the Republic of Ireland. All of this, in conjunction with Cameron’s demands for changes in EU internal migration policies, increases the chances of the UK exiting the EU. Given the eurozone’s pathetic economic results – produced by German diktats to inflict self-destructive austerity – the prospect of the leading financial power in the EU choosing to exit what has been exposed as a non-“union” is deeply unsettling.
Fourth, the EC is “investigating” Luxembourg’s “let’s make a deal” corporate tax scams. Luxembourg is stonewalling the EC. Juncker runs the EC and has already proclaimed that Luxembourg is innocent of all scams. Any real investigation would implicate not just Luxembourg, but Juncker and his top political allies as well as many of the leading EU firms – particularly in the UK – and Ireland. Whether Luxembourg continues to stonewall and prevail (which is the smart bet) or there is a real investigation and crack down the results are likely to increase the likelihood of an UK exit from the EU.
Will Cameron cite the new revelations about the scandals in Luxembourg under Juncker’s rule? “I told you so” is so sweet that it is hard to pass up the opportunity. We’ll see whether Cameron calls on Juncker to resign and clear the way for a real investigation of Luxembourg.
Oh, and the empty suits posing as President Obama and Attorney General Eric Holder could end the scam by making public the results of their investigations and prosecuting the senior corporate officers and the top tier audit firms leading these secret deals that have created a “Gresham’s” dynamic in corporate taxation. The worst firms gain the greatest competitive advantage by buying influence in the worst tax havens. Remember that the worst firms are predominately (nominally) U.S. firms.