- The Washington Times - Tuesday, June 26, 2001

Irish voters recently dealt a stunning blow to the Eurocrats in Brussels, voting to reject a plan to expand the European Union (EU). This is sweet revenge. A few months ago, the pro-tax European Union voted to condemn Ireland's supply-side tax policy for causing "too much" growth.

By voting no, Irish voters showed that they want to protect and maintain the "Celtic Miracle" the economic gains caused by sweeping tax-rate reductions. It was only 15 years ago, after all, that Ireland was the "sick man of Europe." Unemployment topped 15 percent. Government spending consumed more than one-half of economic output, confiscatory tax rates stifled growth, and budget deficits skyrocketed to 15 percent of GDP.

Unlike some other nations in Europe, Irish lawmakers courageously decided that radical surgery was needed, and tax rates were slashed. Corporate tax rates have fallen from 50 percent to 20 percent and will drop to 12.5 percent in 2003. Personal tax rates have been reduced from 65 percent to 42 percent, and capital gains tax has fallen from 60 percent to 20 percent.

What is the result of this experiment in Reaganomics? Today, Ireland enjoys unprecedented prosperity. The country's economy is booming, expanding at about 9 percent annually. Unemployment has dropped by nearly 10 percentage points. Growth has been so robust that Ireland now has to import workers, an amazing development for a nation that traditionally has seen many of its people emigrate in search of jobs.

As one might expect, this astounding performance has attracted attention from Ireland's European neighbors. Surprisingly, though, this attention has been hostile. High-tax nations such as France are upset that Ireland has lowered tax rates. They argue that low tax rates are a form of "unfair" competition. In a truly Orwellian twist, European bureaucrats even assert that Ireland's low tax rates are a form of "state aid."

As mentioned above, the EU voted formally to condemn Ireland's fiscal policy on the strange theory that tax cuts will overheat an economy and cause inflation. This rationale is preposterous, particularly to Americans who remember how inflation fell after the Reagan tax-rate reductions. More likely, EU officials just wanted an excuse to attack Ireland for cutting taxes and making the rest of them look bad.

This is not the first time Ireland's supply-side policies have come under attack. A few years ago, other European countries charged it was unfair for Ireland to have a 10 percent corporate tax rate for certain industries. These high-tax nations wanted to force Ireland to boost this special rate to the 30 percent-plus level that existed for other companies.

But Ireland's leaders instead chose to apply a uniformly low 12.5 percent rate to all businesses.

As one might imagine, this was not what Ireland's jealous neighbors had in mind. Therese Raphael of the Wall Street Journal reported that the Irish decision to implement one low corporate rate "sent a number of European Union leaders into a rage. The French, Germans and Italians favor harmonizing some tax rates in Europe by which they mean upward. Ireland's low-tax regime, its more flexible labor markets, and its business-friendly environment stick in the craw of EU governments burdened by welfare systems they can no longer afford."

Instead of attacking Ireland, other nations should be enacting similar supply-side policies. They can learn two powerful lessons from the Emerald Isle:

Lesson No. 1: Lower tax rates help balance budgets. Tax cut critics routinely claim that tax cuts cause big budget deficits, yet Ireland shows this isn't the case. Ireland implemented huge tax-rate reductions, and is enjoying its first surpluses in 50 years.

Lesson No. 2: Lower tax rates help reduce debt. Another common argument is that tax cuts make it harder to reduce the government debt burden, but Ireland demonstrates that supply-side policy helps rather than hurts.

Government debt in Ireland had reached 120 percent of GDP. After dramatic tax-rate reductions, however, government debt has fallen by more than half, down to about 50 percent of GDP.

With so much success, is it any wonder why Irish voters are skeptical of the European Union? The EU, after all, is a big advocate of "tax harmonization." Like the "harmful tax competition" initiative being promoted by the bureaucrats at the Organization for Economic Cooperation and Development (OECD), the EU tax harmonization effort is designed to prop up uncompetitive welfare states.

Combined with the Bush administration's wise decision to pull the plug on the OECD anti-tax competition proposal, the Irish vote should send a signal to politicians in Europe's welfare states. They can maintain their costly and wasteful tax systems, but they have to bear the consequences.

This means jobs, capital and entrepreneurial talent will continue to escape high-tax nations and add to the prosperity of low-tax nations.

Daniel J. Mitchell is the McKenna senior fellow in political economy at The Heritage Foundation.

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