Low Taxes and the Irish Property Boom

Henry Farrell stands up for the view that low taxes were too an important source of the Irish property bubble:

The simplified political economy story goes as follows. Ireland had low nominal and even lower effective corporate tax rates. It also had low personal taxes, both because of the belief that this would foster entrepreneurship etc, and because the government used to periodically sweeten bargains between business and labor by promising tax cuts (which of course favored the rich more than the poor), inter alia buying off unions who might otherwise have started getting feisty about organizing the unorganized bits of the new Irish economy.

The result was that even with booming economic growth, the government faced a fiscal hole. This hole was filled by taxes on property transactions which, as the property market got ever more bubbly, became an ever more important source of government revenue. This provided the government with an extremely strong incentive not to deflate the bubble, reinforcing the already considerable incentives towards inaction resulting from cronyism between politicians and property tycoons, ideological notions about not interfering with ‘free’ markets etc.

When the bubble burst and the bezzle came into full view, the results were quite unpleasant, as this ESRI graph shows.

As a causal story, I still don’t really buy this. We had property booms in the United Kingdom, in Spain, in the United States, in Iceland, etc. all under different tax trajectories. And I can’t think of any examples of a government anywhere deliberately acting to deflate asset prices. The fact that the Irish government didn’t do so isn’t really a fact in need of explanation.

But I now understand that not only was the property bubble, rather than tax cuts, the driver of Irish growth but it was also the driver of Irish tax cuts.