The Loneliness of a Low-Tax, Low-Wage Economy

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The new Global Competitiveness Report is out. This is produced by the World Economic Forum (the crowd that occupies Davos once a year). It purports to rank countries by their business competitiveness. Ireland was ranked 25 in 2014. Last year we were ranked 28. Our competitiveness has improved. Yawn.

The rankings are based on a number of indicators – infrastructure, taxation, business efficiency, labour market, ease of doing business, etc. The rankings are compiled based upon a survey of 13,000 ‘business leaders’ throughout the world. So it is subjective – opinions formed by the executives of multi-nationals and large companies. You can only imagine what they might think. They’d probably give gold stars to countries that have hardly any tax, any wage, and require workers to bow every time the owner’s son drives by.

GCI1aBut actually, no. These captains of industry and finance actually like (or don’t dislike) high-tax, high-spend, high-regulated economies – everything that we have been told is bad for our economic health. Here’s how our peer group – small open economies in the EU-15 – rank in competitiveness.

All the other small open economies are ranked higher than Ireland. Two of the countries are ranked in the top 10 in the world – Finland and Sweden. Let’s go through some of the economic sins as written down in the orthodox bible and see how the different countries fare (taxation data is taken from Eurostat’s Taxation Trends).

(a) Personal Tax

GCI2aSurely, the reason why Ireland trails behind these oth er countries is because we are so high-taxed – and we all know that high taxes undermine competitiveness.

Well, no. Ireland has the lowest level of personal income taxes (including PRSI) on employees among the five countries. (NOTE: some might be surprised that supposedly high-tax Sweden is only marginally ahead of us. That’s because the high taxes are levied on employers and the corporate sector, not employees income).

(b) Corporate Tax

GCI3aWe all know that Ireland has an ultra-low corporate tax rate. But maybe the other five countries also have low corporate tax rates – even if it is not a bottom-dweller like ours.

No, that’s not it. All the other five countries have much higher corporate tax rates than we do. In fact, we’d have to treble (and then some) to reach the levels pertaining in the top three countries.


(c) Employee Compensation

Now this is where we surely are falling behind. Everyone knows that workers here are pricing themselves out of the market, what with high wages and all.

Colour me pink. Hourly employee compensation is much, much higher in the other five countries. We’re low paid and still our competitiveness, as assessed by business authorities, lags well behind.

(d) Employers’ Social Insurance

GCI5aEmployers’ social insurance (or PRSI) – well, that’s just a tax on jobs. So obviously Ireland must have a very high ‘jobs tax’ that explains our lagging competitiveness position.

Geez, those other countries have much higher employers’ social insurance than Ireland – really high. Denmark is the exception but they don’t have a social insurance system (they make it up with the highest corporate tax rates among the six countries). For the other countries, despite the really high employers’ PRSI, the surveyed business executives still believe they are more ‘competitive’.

(e) Labour Market Flexibility

GCI6aFlexibility is code for employers getting their way on working conditions – ease of hiring and firing is one example. According to the orthodox wisdom, the more flexibility you have the more competitive you are. To get a rating on flexibility let’s turn to the IMD’s World Competitiveness Yearbook which rates labour market regulation on the basis that ‘Labor regulations (hiring/firing practices, minimum wages, etc.) do not hinder business activities’. So the higher the score, the more flexible you are and the less you hinder business activities.

Hmm. According to this survey all the other countries hinder business activities more. Denmark, with their ‘flexicurity’, is the exception (but this is made up with very generous social protection payments: if a single person on €35,000 becomes unemployed in Ireland they get €188 per week; in Denmark they get €385 per week). But compared to other countries, Ireland is the most flexible, less ‘hindering’. And, yet, we are still the least competitive.

* * *

What does all this tell us? Not much unless your world pivots around the opinions of international business executives. However, there is one insight.

As this is a survey of business, it is noteworthy that countries that have higher personal tax, corporate tax, wages, employers’ PRSI, and more labour protection (which is defined as hindering business activities) are still considered more competitive than Ireland.

This is not a cause and effect. Our competitiveness won’t automatically increase if we start taxing more, increasing wages and pass all manner of labour protection laws.

But the survey does show that even business doesn’t believe that high taxes, wages, etc. are an obstacle to competitiveness. Competitiveness derives from other sources: infrastructure, investment, innovation, etc. Higher taxes and wages can help – more government revenue for infrastructural investment, more demand to induce business investment in innovation and expansion.

So the next time you hear some Government Minister or commentator going on about how we need to keep taxes and wages low, and make our workers more flexible, just remember – not even the international business community believes this.

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