What is the difference between Ireland and Iceland, Alex?

Yes, I’m stealing the joke, but it is a rather darkly funny one borne out of the latest round of currency crisis.  The EU is coming under fantastic pressure right now, as the spread between German debt and the weaker members of the union widens.  Unless you have a real stomach for potential losses, I would not be holding Irish, Portuguese, Greek, Italian, or Spanish debt right now.  There might be some interesting plays in there for short term gains, but the bailout plans that Germany has offered have been telegraphed to involve the bondholders taking losses.  So trade away, but don’t be caught holding the hot potato.

There are a lot of factors that go into all of these crises, and it would be far to simple to identify one factor.  But there are some common threads that explain some of what happened.  In my not so humble opinion, I think there has been some good press covering the unevenness of revenue collection in several of these nations.  Iceland is a little different, but it will share a root in the problem of shared goods and costs.

The NYT did a good story on tax evasion in Greece, and Vanity Fair had one on the Vatipedi Monestary and their role in land swaps and private enrichment.  And now, in the story at the top, we see another strange imbalance.  An unreasonably low business income tax that gives name to the Double Irish, a tax evasion scheme that is used by large multinationals to bury profits and inflate losses.

I will grant my colleagues on the right one thing.  Eventually, a tax rate can become so high as to induce evasion.  But what that doesn’t say is how that rate gets raised.  In my mind, there are two great promises we’ve made that we can’t keep.  The first is an effective rate of business taxation that allows for hyper-wealth creation.  I know our rates are still respectably high, but as long as there is low ground elsewhere, money will move.  Evasion makes sense if there is somewhere to go.  The other promise comes in the form of pensions and entitlements.  I acknolwedge that many of these may need to see reductions in future years.  But those promises were made to individuals, ones who right or wrong, depended on the assurances they recived.  A last minute clawback can’t be considered fair.  See also, the Minneapolis Police/Fire pension mess.  We shouldn’t have promised those benefits.  But we did.  We might be wiser about future promises when it comes to entitlements, but it really is too late to negotiate most of the deals we’ve made in the past.

The first promise, however, is one that has been implicit, not set in stone.  Businesses do rely on it, but they were never granted such assurances.  They still have the possibility to generate income against which to balance increased liabilities.  Austerity measures rightly get a bad rap.  They are generally creatures of conservative governments willing to create economic retrenchment to avoid re-balancing the field.  The rich always survive a recession better than the poor.

But how else to talk about laying clear which promises we can’t keep?  Or to take a hard look at the effect of a Irish level business tax? Austerity implies a harshness, but it also invokes a simplicity and clarity..the equality of monastic asceticism.  Should a Irish deal go forward, or the German economic engine be further required to backstop European losses, it is my sincere hope that austerity will mean a renewal of shared sacrifice, not saddling Labor with a bill that Capitol rang up.  Let’s take this moment to say collectively…you can’t run a nation on a 12.5% business tax rate, or with huge numbers of people evading ever rising taxes.

When Iceland and Ireland were pressed to assume the debts of their banking sectors, we saw the urge to nationalize losses similar to our own TARP and bailouts.  This, to some extent, will remain irresistible.  Immediate losses require capping for the general good.  But the question is if the resulting austerity will be the poverty of the people who took losses on both ends of the transaction, or if it will be a clarity about who will pay the next round?

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