What Brexit means for Ireland

As the ASI’s resident Irishman, I was asked to speak at an event at the Irish Embassy yesterday to consider, among other things, what sort of impact Brexit will have on Ireland and the Irish people. Although Ireland is small, its destiny matters to Britain. Ireland is the United Kingdom’s only land neighbour, Northern Ireland is still unstable, 5.1% of British exports go to Ireland (nearly as many as the 5.7% that go to France), half a million people born in the Republic of Ireland live in the UK, and six million Brits have at least one Irish grandparent.

Irish people living in the UK don’t have much to worry about from Brexit, beyond the normal concerns Brits have too. The right of Irish people to reside in the UK does not come from EU law, but rather stems from British domestic law. The Common Travel Area (CTA) between Ireland and the UK predates our countries’ EU/EEC membership and, provided Ireland does not join the Schengen agreement to get passport-free travel with the rest of the EU, there is little reason to think that this will change. This bilateral deal means that Irish people in the UK are already protected under UK law, unlike EU citizens (whose status should also be guaranteed immediately and unilaterally by the British government, and who remain in limbo until it is). 

The CTA is totemic when it comes to Northern Ireland, because it allows easy travel across the border, and any attempt to undo it would create serious problems there – avoiding even the perception of any backsliding on the progress made in Northern Ireland is a very high priority for everyone involved in the Brexit negotiations.

I think the difficulty of the UK ending freedom of movement while maintaining the Common Travel Area has been overstated somewhat. Freedom of movement is better understood as freedom to work and reside, which is normally not enforced at the border with people from countries we allow visa-free access to. For example, a Canadian citizen travelling to the UK can assume they will be granted access at the border to the UK without getting a visa first, but cannot stay here for more than six months or work here without getting a visa. Assuming we impose some controls on immigration from the EU27, but keep allowing visa-free travel, we will not be blocking Poles or Spaniards at the border but will be preventing them from getting a job (by punishing employers who hire them and deporting people who stay for longer than six months). 

The challenge will be to actually keep track of when EU citizens have entered the UK, so that that six month period is actually enforceable. In my view the best solution to this is to carry out checks on travellers between the island of Ireland (that is, both the Republic and the North) and the UK, and to have a more relaxed policy about people travelling from the Republic to the North. A unified border system along the lines I laid out in “The Border After Brexit” would make enforcement of immigration controls much easier, allowing British and Irish border forces to track entrants more easily. 

Customs checks are a bigger problem, and may prove to be quite costly for the Irish and British economies. Even with a very comprehensive free trade deal, it is likely that UK exports will be subject to ‘rules of origin’ checks by the EU. These checks are designed to prevent people by-passing tariffs by moving goods through middleman countries with low or no tariffs between both the origin and destination countries.

Imagine if the EU had 20% tariffs on Japanese goods but the UK had none on them, and the EU and UK had no tariffs between them. UK firms could import goods from Japan at zero tariffs and then sell them to the EU, again at zero tariffs, by-passing the EU’s tariff barriers. Rules of origin checks are designed to prevent this, and they mean that customs checks will still have to take place.

These can slow down the movement of goods and these delays can be unpredictable. For some products this can increase costs exponentially – for example food and pharmaceuticals that need refrigeration, which may spoil if they are unexpectedly delayed. I suspect these are unavoidable now that the UK is leaving the EU’s Customs Union, and will probably raise costs for Irish importers and, assuming the UK introduces similar checks, for Irish exporters.

Norway (which is outside the Customs Union and so subject to these Rules of Origin checks) and Sweden have minimised the burden of these checks at the border by creating a law enforcement and customs check zone 15km on either side of the border where police and customs officials from both countries can operate on both sides. Automatic number plate recognition allows for easier tracking of vehicles and unified customs paperwork reduces time, costs and complexity. In principle there is no reason that this should not be replicable between Ireland and the UK.

Of course tariffs and regulatory trade barriers on either side between the EU and UK will hurt both sides. I am optimistic about the prospect of a zero-tariff deal but not about the prospect of regulatory trade barriers being kept to a minimum, given the complexity of the issue, the lack of goodwill on both sides of the negotiating table, and the fact that many Conservatives do not seem to believe that regulations as well as tariffs can be a barrier to trade. 

We should be careful not to overestimate the effects on the Irish economy of barriers to trade with the UK, however. 14% of Irish exports go to the UK – a hefty proportion, but less than the 20% that goes to the US and roughly 50% that goes to the rest of the EU. The UK is now a much less dominant trade partner for Ireland than during most of the twentieth century when as late as the 1970s more Irish exports went to the UK than all other destinations put together (in the late 1940s and early 1950s, 90% of Irish exports went to the UK!). Incidentally, this is one reason that Brexit is unlikely to provoke an “Irexit” – the UK just isn’t as important a trading partner as it once was.

Apart from these direct effects, if Brexit reduces UK growth it will probably hurt Ireland too. You might say that when the UK catches a cold, Ireland sneezes – a 1 percentage point drop in UK growth seems to cause a 0.3 percentage point drop in Irish growth. One study projects that Irish GDP will be 0.8-2.7% lower by 2030 (almost as low as the UK) because of Brexit, but there's a lot such things cannot capture.

Dublin may be able to attract at least some City firms that need to move some operations into the EU for passporting purposes. Dublin is English-speaking and well-connected to the US, and Ireland is less taxed and less heavily regulated than France and Germany. But Dublin is also quite a small city, with a much smaller talent pool than London, and very high property prices caused by tight planning laws (though less high than London’s). It would only take a portion of the City moving to Ireland to substantially boost the Irish economy, and if Ireland could make itself attractive to them as a base in the EU it could find that Brexit turns out to be a net positive. Over thirty large insurers are in talks with the Irish Central Bank to relocate to Dublin.

The most serious long-term problem for Ireland after Brexit may be political. The UK and Ireland have long been close allies within the EU, sharing a basic belief in (relatively) low regulation and low tax compared as the way to prosperity. With the UK gone, one of the most powerful voices for this “Anglo-Saxon” model and certainly Ireland’s most close and powerful ally will be gone. Ireland, as a country of four and a half million people, will not have much influence on its own.

The effects of this might be seen in a renewed push by the European Commission for a “Common Consolidated Corporate Tax Base” (CCCTB) – a unified set of rules about what company money actually counts as taxable profits in EU states. The Apple case last year, in which the EC tried to force the Irish government to collect tax from Apple to stop it from acting as a sort of tax haven, was part of this area, and if a CCCTB is passed then harmonisation of the corporation tax rate may be next on the agenda – something that would be very bad for Ireland, which has attracted a lot of investment thanks to its low 12.5% corporate tax rate. Thankfully for Ireland, this is quite unlikely given the fact that matters of taxation at EU level require unanimous consent, giving Ireland a veto. Ireland is therefore only at risk if it decides to succumb to political pressure.

The optimistic thing about Brexit is that it might end up disrupting a lot of the sclerosis in Britain’s politics, giving us an opportunity to reexamine things like our own tax and planning systems – for instance, replacing corporation tax with a border-adjusted cash flow tax like the one being proposed by the Republicans in the US, which would shift the burden of tax from capital to consumption and boost investment and growth as a result. That would be very good for Britain and maybe for Ireland too, as growth here would drive growth there as well, though Ireland would lose much of its attractiveness as an international investment destination – its neighbour would now have a 0% corporation tax! A shift by Ireland to this kind of tax would of course give it that nice little advantage instead.

Brexit isn’t coming at the best time for anyone (both the British and Irish governments would like to have more wiggle room in terms of spending than the austerity-strapped budgets they have) but it’s happening and Ireland will have to ride out the storm. The UK matters less to Ireland than it once did, and unless Brexit is truly catastrophic for the British economy (my guess is that trade barriers with the EU will make us a bit poorer, but there are also big gains to be made if we take them) the main challenges are in implementing things like border and customs checks in a way that minimises time and costs, and figuring out how to stop the EU from turning into something very hostile to Irish interests. 

Many Irish people are shocked that Brexit is happening, and fearful about the future, but if Ireland can tempt over some of the City's banks, it may find that England’s difficulty is its opportunity.

We thoroughly approve of this national insurance backtracking

This will be, is being in fact, painted as a disastrous u-turn, career ending damage, the beginning of an omnishambles, (cont. page 94.) and yet we here thoroughly approve of the reverse that has happened in this short period since the Budget over national insurance contributions for the self-employed.

Not because of any insistence we have over the policy itself nor of the personalities involved. The collective view veers one way and the other on those two but none of us think that they're hugely important. But reversing a mistake, now that is welcome.

For mistakes do always happen, there is never going to be a system containing human beings and human decisions that doesn't contain more than the occasional oopsie. As here:

Philip Hammond has abandoned plans to raise national insurance for self-employed workers in this Parliament after admitting that it breached the "spirit" of the manifesto.

The Chancellor provoked a furious reaction from Tory back-benchers after using his Budget to announce plans to raise NI contributions for the self-employed by 2 per cent. 

Mr Hammond has written to Tory MPs saying that while the changes are justified the Government has chosen not to go forward with the rise in "class 4" national insurance contributions. 

Oopsies will happen, just as most business ideas will fail, there's always going to be a business cycle, bad luck will dog some people and so on. What matters is what we do when that mistake is made, that bankruptcy is obvious, that recession arrives, that disaster is visited upon the unfortunate.

One reason we so like the market system is that the mistake of a bad business idea becomes rapidly obvious and people stop making that mistake. They run out of money and that's that. Politics tends not to work that way because all the playing is done with other peoples' money and as St. Maggie pointed out it takes a long time to run out of all of that. Until it does happen the practice is run upon reputation, careers, ego - and it's easy enough to spend an awful lot of other peoples' money on protecting those. Yet here we've had only a week to reverse what is said to be a mistake, something we find encouraging.

We're note really sure whether it was a mistake or not, whether the reversal is one or not. But normally political mistakes run on and are stoutly defended to the death of the last kulak. That politics might correct such errors rather earlier, more like a market system would, we think to be a Good Thing. 

Transforming National Insurance

The now-withdrawn proposal to raise National Insurance rates for self-employed people from 9% to first 10% and then 11% has achieved one positive thing.  It has drawn attention to the absurdity of the dual system of income tax and national insurance.  Dan Hannan’s piece in the International Business Times makes the point that the retention of National Insurance is done to conceal how much tax people are paying.  He says people would be very angry if they knew that in addition to their basic rate of income tax at 20%, their National Insurance payments took it to a very much higher level.

He is correct, but an honest government should let people know what tax they are paying, even if it changes their readiness to submit to tax increases.  The two taxes on income should be merged.  In the first instance the myth of insurance should be exposed by renaming it a National Insurance Tax, and having it at the same rates and thresholds as income tax.  Income Tax plus National Insurance Tax would together constitute a “Personal Tax’ that people paid on all earnings above the starting threshold.  A basic Income Tax of 20% plus the 12% employee contribution to National Insurance Tax would give a Personal Tax of 32%.

Government could thus merge the two without having the headline basic rate of Income tax leap through the roof.  It would, however, make clear to people what they were actually paying in Personal Tax, and would end the anomalies of having different thresholds and separate calculations.

There is more, though.  In addition to the employee contribution to NI, there is the so-called employer contribution of 13.8%, so-called because in reality it comes from the wages pool paid by the employer and would otherwise be available as wages.  Although it is called an employer contribution, in fact its incidence falls on the employee.  This could initially be renamed the employer contribution to National Insurance Tax.  Personal Tax would then consist of 32% paid by the employee, and 13.8% paid by the employer, for a total of 45.8%.

Once this change had bedded in and yielded savings in simplification, the employer contribution to National Insurance Tax might be given its real name, “Employment Tax.”  It would be seen for what it is: a disincentive to create employment.  It might also add to popular pressure for further simplification of the tax code and to heightened intolerance of government wastage.

The FT's odd suggestion about the EIB

As we all know the government is considering asking for the capital back from the European Investment Bank when Brexit occurs. There's perhaps € 10 billion in there and according to the rules shareholders in the EIB must be EU members. All of which seems pretty cut and dried to us.

Which brings us to this remarkable suggestion in the FT

:But the obvious point here is that a proportional slice of the EIB’s funds is far smaller than the cash the UK would receive over the years by remaining a member. A one off payment in return for losing billions of yearly funding.

Err, what?

I shouldn't sell my stock in Barclay's because of the loans I can get from Barclay's?  Loans which I do have to pay back note, so the loans aren't free money. While that return of capital is in fact free money, money that we're free to deploy in any manner we desire.

More than this it's not exactly as if the UK has a problem in borrowing money these days, is it? The Treasury can in fact borrow near unlimited amounts at present, almost certainly at lower interest rates than the EIB would offer too.

Whether or not Britain should stay in the EIB isn't something we have a collective view upon. But the argument that we should stay in just because they might lend us some money is ludicrous.

Failing to spot that the problem with Ethiopia is....

Things are not going well in Ethiopia, this we know. Riots and protests erupt. This is not a good sign for a society. It's also very much a pity - not just for the usual reasons that violence is a pity - because Ethiopia is one of those places discovering the joys of the early stages of a lift off into the Industrial Revolution. They're taking those first baby steps to getting rich, that thing that we've all done and which has escaped all too much of the world until very recently.

What's happening is that those living on a piece of land, working it perhaps, are being thrown off it in favour of those doing something else with it. But why?

The Guardian tells us what is happening but doesn't quite manage to grasp that cause, even though they mention it:

All land is theoretically owned by the government, merely leased by tenants, and when the government says go, you have to go.

This is the problem that private property solves. OK, sure, you can construct a very rickety indeed case that all land is still owned by the Crown (it isn't, but) and that compulsory purchase equates to this. But that's not so - compulsory purchase means that you get paid at the market rate for having to move and then only in favour of a project which contributes to the public, not private, good.

But in a system where the government really does own all the land, and can allocate usage without reference to current occupiers, the end result is what we see in Ethiopia. Who gets to use the land depends upon access to the political system and those excluded riot as a result.

It might even be true that no one made the land so there's no reason why anyone should own it exclusively. Except that, as with democracy, all other systems are worse.

Absolutely not, no, no way ever

This is one of the more vile suggestions for public policy that we have seen in recent years. And the correct answer to the idea being put forward is absolutely not, no, no way ever.

Police forces raised more than £5 million last year by selling off a treasure chest of criminals' loot, including flash cars, luxury yachts, light aircraft – and even guns.

But now the windfall is at the centre of a political row as demands grow to allow forces keep more of the cash they get from such sales to fund frontline policing.

Currently, half of the proceeds are handed to the Home Office, with more money going to the courts and the prosecution service. But Thames Valley's police and crime commissioner Anthony Stansfeld said: 'I think we should have it all.'

We object to the basic idea, that property can ever, let alone should be, confiscated without conviction in a court of law of an actual crime other than having some property whose financing cannot be proven.

But we also do actually have a good example in front of us of what happens when incentives are aligned, as they are in the US. There police forces do indeed keep most to all of property taken. And the effect is that the population is subject to legalised plunder. As the ACLU, the IfJ, Cato and others continually point out.

Policing for profit is not something which has a place in anything approximating to a liberal polity. Those who do the confiscating must never be those who gain from the confiscation having been done.

Absolutely not, no, no way ever.

It's not obvious that the Mail has understood Corporation Tax

We're not quite sure whether to be amused here at the lack of knowledge or to beat our heads on the keyboard at the, err, lack of knowledge. For the Daily Mail has decided to give us a listing of companies not paying what they think is the correct amount of corporation tax.

They start by getting one thing right: 

All retailers are supposed to pay corporation tax — a levy on company profits, currently at a rate of 20 per cent but falling to 19 per cent next month. 

It is, as they say, a levy upon profits. We might want to add the tiny detail that it's upon cumulative profits but it is still a tax upon profits. At which point they have a go at Vodafone and EE:

Vodafone

Corporation tax: Nil

It’s because Vodafone handed over exorbitant sums to the Blair government for 3G licences, and set aside those costs and other investments against its earnings here.
 

EE

Corporation tax: Nil

But even though it registered big sales and profits in 2015, it wasn’t liable for corporation tax because, like Vodafone, it has carried forward costs from the £8 billion it invested in 3G back in 2000.

That is, neither firm has been paying corporation tax because they haven't been making any profits. The reason they've not been making profits is because they've already given all of the money to the government anyway.

In these days when we're all being told that we must be vigilant against the threat of fake news we can't help but feel that the legacy media might up their game a bit.
 

If women disproportionately suffer from austerity then they must have disproportionately benefited from the previous system

This is not something which we insist is right or wrong, something that should be or not, it's just a logical truth which we think is worth pointing out:

Labour has urged the Conservatives to carry out a gender audit of its tax and spending policies, as the shadow equalities minister, Sarah Champion, published analysis showing that 86% of the burden of austerity since 2010 has fallen on women.

Champion said research carried out by the House of Commons library revealed that women were paying a “disproportionate” price for balancing the government’s books.

Leave aside even whether there has been any austerity (spending seems to keep on going up after all) and whether, if there has been, there should have been. Concentrate instead just upon the logical implications of this:

In total, the analysis estimates that the cuts will have cost women a total of £79bn since 2010, against £13bn for men.

It shows that, by 2020, men will have borne just 14% of the total burden of welfare cuts, compared with 86% for women.

If cutting that welfare state means that women are getting less out now then that obviously means that before the cuts to the welfare state then women were getting more out.

No, we don't know either what is the correct split between taxing everyone to benefit women and taxing everyone to benefit men is. We might even point out that as men make the higher wages they get taxed more to boot. But that is still the correct question to be pondering. Not how much has that distribution to male and female changed but what is the righteous and just structure of that distribution in the first place?

The Treasury and the self-employed

The Adam Smith Institute has had many a run-in with the Treasury over the issue of self-employment. Fundamentally we like self-employment and they don't. They deny that, of course, but their actions over the years evince their attitude. They try to have as many as possible classified as employed rather than self-employed, and have moved whole categories of workers from the latter camp into the former.

It is easy to see why they take this position. Tax is easier for them to collect if the employer sends it off under PAYE.  It takes longer for a self-employed person to assess what they owe and to send it off.  Furthermore, the self-employed have legitimate deductions if they, for example, use part of their home as an office.  The Treasury prefers to get its money the easy way, without taking into account the effect it might have on individual lives or on the economy as a whole.

One group of Treasury officials actually suggested that all wages should be paid by employers direct to HMRC, who would then graciously remit to employees the sums they were due to be paid after tax.  It is illustrative of a mindset that sees all money in the UK as belonging to the Treasury except that which they generously hand out to its citizens. They actually refer to not taxing the wealth in our bank accounts as a "tax cost."

We like self-employment because it provides space for independence and for scope for entrepreneurship. It is an engine of growth and it creates jobs. Self-employment has helped prevent our jobless totals from ballooning after the 2007-2008 Financial Crisis. It is, for many, a step on the way to realizing the dream of owning and running their own business.

The Budget of March 2017 was a political miscalculation of the highest order. It broke a clear manifesto commitment and will be thrown at every future promise the Conservatives make. No less importantly, it hits the very people we should be trying to encourage. The self-employed are the aspirational, the upwardly mobile, the people who will create tomorrow's jobs and tomorrow's wealth. For them to face higher National Insurance sends the wrong signal. 

The reduction in tax-free dividend income is a further blow to people setting up and managing their own businesses. These two measures look like Treasury spreadsheet thinking that likes neat rows and columns. The self-employed pay less National Insurance than their employed counterparts, true, but they receive far fewer social benefits in return. 

MPs with political intuition have understood what a political disaster these twin measures would be, and implementation has been delayed pending consultation. It is not too late for the government to listen to objections and abandon the measures. It has happened before.

As Shell sells its oil sands it calls for a carbon price

As regulars around here will know we've rather annoyed everyone over this past decade. The point being that there's such a head of steam about climate change that the science doesn't particularly matter, something is going to be done. We've thus been insisting that if something is to be done then it should be the sensible thing, a carbon tax to provide a price for emissions.

At which point we get the news that shell is selling its oil sands operations:

Royal Dutch Shell has agreed to sell most of its carbon-heavy Canadian oil sands assets for $8.5bn (£7bn) as the chief executive warned that the industry risked losing public support without progress towards cleaner energy.

We would happily wager that that's little to nothing to do with emissions and all about money - we're really very sure that it is the folding stuff which motivates. As something much more akin to a manufacturing process shale is still getting ever cheaper and that changes the economics of high fixed costs production like sands, or even the larger deep sea or Arctic projects. The oil world has changed.

However, this part hasn't:

Van Beurden said that the transition to a low carbon energy system would take decades and government policies including putting a price on carbon emissions would be essential to phase out the most polluting sources of energy such as coal and oil.

Quite so, if we want to - and note at the top, we're saying that something will be done, not that necessarily something need be done - change behaviour in this manner then the method to use is putting a price on that externality. A carbon price, a carbon tax. As Nordhaus, Stern,. Quiggin, Tol, Weizman, Mankiw and every other economist on the issue insists.

If anyone actually wants to implement a solution then we know what the correct solution is.