Mark Cullinane, in a significant two-part Crisisjam piece published yesterday and today, thoroughly fillets the  instrumentalisation of Irish education policy, an example of which was provided in a very barefaced way by the President of DCU yesteday. The University, we hear, “plans to make its students model graduates”. “It’s our responsibility to ensure we’ve done all we can to make sure they are developing the attributes that we know employers want today,” Prof Brian MacCraith said. The aim, he continued, is to “develop entrepreneurship” with initiatives such as “campus business plan competitions and bringing role models to speak to students will be introduced”. While “not all graduates would emerge entrepreneurs because of an “innate spectrum of abilities“, it “can instil in them the concept of enterprise and taking a risk”.

The purpose of third and fourth level, this implies, is to make new graduates compliant with a pro-business philosophy, which will lead them to accept the flexibility and commitment required of the employer without having to go through the difficulty of thinking critically and challenging accepted nostrums about the naturalness of the free market.  Or to put it more plainly, encouraging people who believe that they have the ability and opportunity to become ‘entrepenuers’ are easier to push around. And this is a good thing.

A “similar approach could be taken in reform of first and second-level education” Prof MacCraith helpfully suggested.

Mark argues that all public discussion about Irish education, at second level at least, comes down to the performance of Leaving Cert students in Maths and Science. This, Mark argues, follows the idea “that given Ireland’s high dependence on American manufacturing industry, our education system should primarily orientate itself in the service of such industry”.

This idea of basing policy on our percieved dependence on foreign direct investment is rarely challenged.

“Without critical reflection and open debate on whether industry-driven education policy is desirable or appropriate, we are left with the familiar Irish mentality of the colonised.

Sometimes this mentality of (unproblematised) dependence on foreign capital is given open expression, as was the case last month on RTÉ News when, commenting on the implications of Google’s purchase of mobile phone manufacturer Motorola, reporter Paul Colgan casually reminded viewers that ‘of course, Ireland’s interests are tied up with those of Google‘. Ireland (the nation) and Ireland Inc. (the tax haven for foreign capital) have evidently ceased to be distinct entities.”

The key phrase for me here is the “mentality of dependence on foreign capital”. One of the greatest expressions of this ‘dependence’ are the recent and ongoing arguments surrounding Ireland’s 12.5% corporation tax. Of course, the issue has intensified more recently because of comments from France that any financial aid to Ireland from the EU/IMF/ECB troikia through the EFSF should be dependent on Ireland increasing its corporation tax rate. But the issue has been ongoing long before that. The moves to create a Common Consolidated Tax Base (CCCB) in the EU were initiated in 2007.

However, the argument from successive governments, IBEC, the American Chamber of Commerce, politicans and many economists is that Ireland’s corporation tax level is the ‘cornerstone’ of Ireland’s industrial policy. If we were forced to increase it those corporations upon whom we ‘depend’ would go elsewhere and our economy would suffer immeasurably as a result.

Any challenge to this is vigously shouted down.

Thankfully there is an important new working paper out by Jim Stewart which critically examines the question: How Important is the 12.5 % Corporate Tax Rate in Ireland? And it makes for esstential reading.

Jim approaches the overall question by asking four subquestions: what are the distribution of tax rates among companies registered in Ireland? How Important are Corporate Tax payments to the Irish economy? What is the Effective Tax Rate in Ireland? And How important are low corporate tax rates in attracting Multinational investment to Ireland?

By approaching the subject in this way Jim is able to critically examine the premise of the claim that our low corporation tax is the “cornerstone” of Ireland industrial policy. First of all lets get back to that word that Mark used in his piece: “dependence”.

It is an illustration of an extremely weak and vunerable industrial policy that successive governments should put such incredible emphasis on what is ultimately an attempt to appeal to the worst charactertics of a business: it’s attempt to increase profits by reducing its overall tax bill. By retaining this policy as a ‘cornerstone’ has meant that other industrial policy geared towards a strong and sustainable indiginous industrial sector is ignored.  Why are we so dependent on FDI?

As Jim Stewart puts it in the introduction to the paper:

“excessive reliance on tax reliefs and on the attraction/retention of foreign direct investment has led to the development of certain tax haven type features for the  Irish economy. Tax haven type features are in turn at variance with the development of sustainable firms.”

When people say “we have no other option” they are making a political statement. There are always other options. It is just that politically, they are not options that they want to take. We can see this in the decision of Pat Rabbitte to go ahead with the sale of oil and gas rights before the Dail resumes and prior to a review of the rights already established, even though he called for a review while in opposition. We can see it in the Green Party campaigning for the implementation of the Kenny Report before entering Government, only to completely ignore it when in Government and to vote in favour of NAMA, the set up of which flies in the face of its recommendations.

However, it is in the detail covered in each question that the greatest value of this paper is provided and how it can be used to challenged the long held acceptance of what is ultimately a legacy of our colonial economic structure.

On the distribution of tax rates, Jim Stewart shows that the majority of companies in Ireland pay no, or minimal corporation tax. Most of these are small and indiginous. However, if most of the companies in a country do not pay or expect to pay corporation tax the rate of tax for that majority is irrevelant as it will never apply to them. How then can it be a cornerstone?

Similar to the pattern in other countries only a small number of companies pay corporation tax: 428 paid 70% of corporate tax for 2008 (p2). In the UK, where the distribution is similar, the majority of corporate tax came from three sectors  (Energy and water supply, Banking finance and Insurance and Business services accounted for 62 % of corporate tax paid).

On the question about how important are corporate taxes to the Irish economy, Jim shows that corporate tax payments as a % of total tax revenue are higher in Ireland than for many other EU countries - the reason itself is simple: foreign owned companies are highly profitable in Ireland, because profits are ‘switched to Ireland’ via transfer pricing (p3).

“This occurs not just because of a low tax rate, but because of other factors such as a network of double tax treaties, a corporate tax regime that is very responsive to demands from existing and potential foreign investors, and ease of incorporation.  These features are shared by tax havens and low tax jurisdictions.”

So, if we follow the logic of those who object to a change in the rate of corporation take this means that any increase will reduce the incentive of these companies to switch profits in Ireland - maintaining the rate helps to keep the switching of profits here.

However, one of the most definitive sections is on the effective tax rate. Readers of the newspapers will be very familiar with the reports a number of  months ago about the PWC/IFC data which said that the effective rate for corporation tax in Ireland was 11.9% , and 8.2% in France.

This, however, is not based on real data, but on an assumption. That is,

“on a “standard firm with 60 employees”, a standard size (102 times income per capita PWC/IFC, p. 8), and a fixed gross profit margin of 20% (p. 13).  Existing nominal tax rates are then applied in estimating tax paid etc.  This means that estimated tax rates apply to small companies employing less than 50 and with capital employed of under €3 million.”

However, “Effective tax rates can be measured as cash tax paid/ profits before tax llowances. This measure can be derived from company accounts as tax paid/(pre-tax profits plus provision for depreciation).”

The result is the following table which is based on tax rates derived from accounts of individual subsidiaries.

“As a result some of the reported profit and tax paid is outside Ireland.  A similar low rate can be found for some Irish companies as well.  For example Ryan Air had an effective tax rate of 7% for the three years  ending March 2009, and Grafton Group 4.2%, for the three years ending December 2009.”

However, Jim also uses an alternative measure, the “profit type measure”. Using this measure

“US affiliates earn more profits in absolute terms in Ireland than any other country in the world. The effective tax rate in Ireland is the lowest in the EU area at 7.3%.  The effective tax rate for France is 37%.”(p6).

On the question: How important are low corporate tax rates in attracting Multinational investment to Ireland? Jim looks to the Ernst & Young survey which has, since 1997 asked  70% of companies undertaking investment what factors they consider most important when making a decision whether to invest or not.

The 2010 survey found that the “the best way for states to stimulate future European attractiveness is (with per cent of respondents in brackets):-

(1) to support small and medium sized enterprises (29%);

(2) support high-tech industries and innovation (27%);

(3) reduce taxation and increase flexibility (22%).(page 8).

To confirms the findings of the FDI barometer which Michael Burke has highlighted. However, there is no doubt that certain companies are here exclusively because of the loose taxation policies which allows them to switch profits and pay a very low effective tax rate.

These companies though are almost exclusively what one would consider to be ‘footloose’. They have very little long term commitment, and they can re-locate easily with leaving any thing behind. This is the type of company that the “cornerstone” of Ireland’s industrial policy is designed to attract, and not sustainable companies that at to the indiginous economy.

It is also apparent in the ‘knowledge economy’ that we hear so much about, and around which education policy is supposed to be based. As Jim puts it:

“Current industrial policy in Ireland is largely thought of in terms of tax reliefs. The stated purpose of Building Irelands Smart Economy (2007) was to develop “an exemplary research, innovation and  commercialisation ecosystem”. In addition to other factors, this was to be achieved by introducing 16 new or extended tax reliefs. A tax based industrial policy will not result in an innovative, research led economy.”

In short, we have a tax relief based economy, not a knowledge based economy. And those that are expert in the tax system tend to benefit most.

A tax based industrial policy leads to an emphasis on tax reduction. Those skilled in knowledge of the tax system become senior management (In 2009, 8109, or 66% of all qualified chartered 10accountants were employed in business, Source: Chartered Accountants Ireland, 2009, p.7) . In turn their skills require constant updating and they become dependent on tax advisors. Those firms skilled in understanding the tax system and selling tax services become large and powerful. The dominance of accounting/taxation specialists in senior managerial positions is at the expense of those skilled in new product development, production expertise , logistics, and marketing.

As Conor has shown, there is “virtually no change in foreign-based industrial employment from the early 1980s onwards - in fact, as a percentage of the workforce it has steadily declined since 1981″.

But where there has been an expansion in “foreign investment in Ireland in the past twenty years is in foreign-based equity firms setting up shop in the IFSC”.

So with no long-term sustained US high tech manufacturing companies in Ireland leading an increasing demand for highly qualified science graduates we are left with the maths bit.

No wonder the points for law and accountancy are always so high. And the press release about the creation of model graduates who are entrepreneurial ‘risk-takers’ starts to make sense.