Irish Economy

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Opening the Low-Low Corporate Tax Rate Door

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The Government’s paper on Ireland’s effective corporate tax rate confirms what the dogs in the street have known for a long-time:  Ireland has a low,extremely low, corporate tax rate.

There is that vexed question of what corporate income counts for the purposes of determining the actual rate of tax companies pay here.  Professor Jim Stewart produced data which showed that the effective tax rate of US multinationals operating here was 2.2 percent in 2011.  This was disputed because Stewart – using the US’s Bureau of Economic Analysis – included the $140 billion that US multinationals move through Ireland on their way to other places, including tax havens.  Some claim you can’t count this because it is not taxable in Ireland.

But, of course, that is the point.  The issue is not the Irish corporate tax rate per se but the role that Ireland plays in the global tax avoidance chain – the ability of multinationals to use Ireland to avoid paying taxes that would be due elsewhere.  That is the character of a ‘tax-haven conduit’.

In this respect, it is worth remembering:

Tax havens attract foreign investment not only because income earned locally is taxed at favorable rates, but also because tax haven activities facilitate the avoidance of taxes that might otherwise have to be paid to other countries.

The Irish corporate tax rate is the sign on the door.  It’s an inviting sign – a low-tax rate of 12.5 percent.  But the real goodies are what’s behind the door – the prospect of using Ireland as a transit point in the global avoidance chain.

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National Competitiveness Council Twists the Evidence to Suit a Political Argument

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Take a very quick look at the green line on the chart below.  Very quick – the green line represents Irish labour costs.

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On a quick look, it appears that Irish labour costs started growing in 2010; and that by last year labour costs growth in the EU and Ireland converged.   Now take a closer look.  In reality, Irish labour costs actually fell in 2010.  In fact, the gap between the EU and Ireland are widening.  The chart was ‘structured’ to not only elide over these inconvenient facts but to actually give the opposite impression.  Welcome to the world of massaging stats to fit a political purpose.

For make no mistake – the National Competitiveness Council’s Costs of Doing Business in Ireland completely fails to present the reality of wages, labour costs and taxation in the Irish economy.  Instead, they construct ‘evidence and arguments that neatly into line with the Government’s desire to depress wages and cut taxes.  Funny that.

Are wages a danger to ‘competitiveness’?    First, let’s remind ourselves of the current situation, something the National Competitiveness Council (NCC) fails to do (again, funny that).  Using the last year for available date we find, using the mean average:

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Whether using the labour cost survey (which surveys firms) or the macro-economic data contained in the national accounts (where you divide employee compensation by hours worked) the results are pretty much the same.  We are well below averages – in particular, when compared to EU-15 countries not in bail-out (excluding really low-waged Greece and Portugal) or other small open economies.

So we start out pretty low.

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Pressing On Both Sides of the See-Saw

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The slump in the Irish economy continues to be driven by the collapse in investment. The fall in investment more than accounts for the entire contraction in the economy during the recession.

The chart below shows the annual totals for both GDP and investment (Gross Fixed Capital Formation, GFCF) versus the peak in 2008. The worst GDP outcome was in 2010 when it was €12.7 billion below the 2008 peak. But by 2013 it was still €9.5 billion lower. Not much sign of genuine recovery.

Investment has fared even worse. It carried on falling even after GDP had stabilised. The low-point was in 2012, when investment was €16.6 billion below the previous high-point. But in 2013 it was still €15.9 billion lower.

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Over the 6 years of the slump GDP has fallen by 9.6%. Investment has fallen by 47%. As a result, investment as a proportion of GDP has fallen from 20.8% to 12.1%. Since the level of investment is decisive for the long-term productivity of any economy, a falling rate of investment will hurt growth over a prolonged period.

The relative weakness of investment by firms in Ireland is shown in the OECD chart below. Over a prolonged period leading up to the crisis private firms (Private Non-Financial Corporations, or PNFCs) operating in Ireland invested much less than firms in the other industrialised countries.

This weakness has been further exacerbated by the crisis. Since 2008 firms’ profits have actually risen in cash terms, by €6.7 billion. But on the same basis, investment in transport equipment and other equipment have both fallen by €1 billion, road building and other construction apart from homes have slumped by €5.4 billion.

Private Non-Financial Corporations Investment:  Decade Averages

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One of the key factors which has worsened the crisis is that successive governments have cut the state’s own level of investment. On the same cash basis, government has cut its investment by €7.6 billion. This was not always the case. Previously, when the economy was growing rapidly government had a higher level of investment than in the other industrialised economies, as shown in the chart below.

This is the see-saw of the Irish economy: very low levels of private firms’ investment and relatively high levels of government investment. The policy of austerity is pushing down on both ends of the see-saw at once. As a result the economy is cracking.

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Three Cheers for the USC

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The Universal Social Charge (USC) is a great tax.  Many progressives were critical of its introduction and rightfully so.  In replacing the Income and Health Contribution levies, the USC ended up increasing tax on low income earners – at a time when the economy was still melting down, people were losing their jobs and income was falling. That was inequitable and economically irrational.

However that is a criticism over rates and thresholds – elements which can be easily changed. The reason the USC is great tax is because it is simple, transparent and, most of all, no matter how many tax accountants you hire, you can’t escape it.  The tax has almost no exemptions, reliefs, or allowances – unlike the income tax system.

Dr. Tom Healy of the Nevin Economic Research Institute made an interesting observation:

‘Perhaps there is a case for abolishing income tax as we know it, replace it with USC, make the rates more progressive (e.g. by introducing three or even four bands) and then re-term it as ‘income tax’! . . You see – the beauty of USC is that, it applies to many different kinds of income,  it is not riddled, to the same extent as ‘income tax’  with all sorts of reliefs and exemptions,  it is reasonably simple to understand and operate.’

Now that’s blue-sky thinking.  Check out this little stat:  income tax– with tax rates of 20 percent and 41 percent – raises €11.4 billion in revenue.  The USC, with a tax rate of 7 percent raises €3.9 billion.  At a much lower rate, it raises over a third of the entire income tax system.

To raise the same amount as income tax, the USC would need to be raised to 20 percent (with the lower rates rising proportionally).  A tax rate of only 20 percent would raise as much as income tax.  That’s pretty effective and efficient.

This is not an argument for a flat-rate tax.  Dr. Healy points to the potential of introducing three or four different tax bands.  In fact, in the EU-15 only Ireland and Germany have two tax rates.   Other countries have three or more:

  • Austria and the UK have three rates while Sweden has two central tax rates and one local
  • The Netherlands has four tax rates
  • Belgium, Finland, France and Italy have five tax rates
  • Spain has seven central tax rates and four regional rates
  • Luxembourg has 18 tax rates (yes, 18)

So a number of tax rates can be used, rather than an essentially flat-rate.

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Anglo: Not Our Debt Campaigners Alarmed at ECB Pressure

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Debt Justice Action – a coalition of community, trade union, global justice, academic, faith-based and other groups that hosts the Anglo: Not Our Debt Campaign –  has described as “alarming” media reports that the Irish government is being pressured by the European Central Bank to quickly sell on to the private sector the government bonds it issued to replace the Anglo promissory notes in 2013.

Spokesperson Niamh McCrea said that any such sale would “make an already bad deal even worse”.  She said, “The debts run up by a bank like Anglo, which is under criminal investigation, should never have been taken on by the Irish people through the promissory notes, and those notes should not have been turned into sovereign debt, as the government did last year, extending the repayment period but with no write-down of the debt”.

Andy Storey pointed out that as the bonds are currently held by the Central Bank of Ireland, any interest paid on them stays with the Irish state, but that “if they are sold to the private sector, as the ECB is now pushing to happen quickly, then the same class of creditors and bondholders whose gambles were made good by the Irish government will end up making yet more money by raking in the interest payments due”.

Ms McCrea called on the Irish government to “for once, resist ECB pressure and insist that the bonds remain with the Central Bank with a view to negotiating the write-down of this odious and illegitimate debt”.

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Friday Stat Attack: Ireland Holds the Record for Longest Domestic Recession in the EU

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Some commentators are celebrating our ‘recovery’.  Some have even said that we have recovered relatively quickly, after a dramatic fall.  Here we go again – rewriting history, distorting the current situation.

Ireland holds the record for the longest domestic demand recession in the EU.  And the really bad news is that we may not be out of it yet.  The following table breaks down the length of consecutive domestic demand recession that EU countries have suffered since 1960.

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Almost all EU countries have, since 1960, suffered at least a two-year domestic demand recession – with the exception of France and Malta (though data only goes back to 1996 for the island).  Some domestic demand recessions have been harsh – Estonia’s two-year experience saw a fall of over 30 percent; some have been mild – Poland’s two-year experience saw a fall of less than one percent.

Ireland – along with Spain and Greece – have the longest consecutive domestic demand recession:  six years.  And in the tradition of breaking the tie, let’s count the number of years that domestic demand fell since 1960:

  • Ireland:  12 years
  • Greece:  10 years
  • Spain:  9 years

With 12 years where domestic demand fell, Ireland wins on points.

Indeed, Ireland wins the double:  longest domestic demand recession and the highest number of years where domestic demand fell.  Since 1960, Ireland has spent 23 percent of the time suffering from falling domestic demand. That’s the cup.

But, surely, this is nit-picking – what with all that recovery going on.  So don’t worry about it.

Enjoy the weekend.

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In Ireland, the Jobs River Flows Uphill

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There’s a lot of confusion out there.  IBEC found the recent fall in consumer spending ‘puzzling ‘ – what with all the increase in employment.  Others have found it strange, too – strong employment growth but falling consumer demand.  Shouldn’t the big increase in employment translate into higher consumer spending and domestic demand?  What’s going on here?

Well, it’s only puzzling if you accept that employment grew by 60,000 over the last year.  However, once you lift the lid on the numbers and find that the 60,000-growth number in the CSO’s Quarterly National Household Survey (QNHS) is a statistical quirk, then it starts to make sense.

First, let’s note the CSO’s warning about interpreting trends in employment growth during the period they are realigning their sampling base with the 2011 census.  This realignment ensures that their Quarterly National Household survey sample is aligned with the population.  They do this after each census.

‘After each Census of Population the sample of households for the QNHS is updated to ensure the sample remains representative. The new sample based on the 2011 Census of Population has been introduced incrementally from Q4 2012 to Q4 2013. This change in sample can lead to some level of variability in estimates, particularly at more detailed levels and some caution is warranted in the interpretation of trends over the period of its introduction.’

Now let’s look at the employment numbers.  Between the 4th quarter in 2012 and 2013, employment grew by 60,900 – or 3.3 percent (not seasonally adjusted).  However, self-employment grew by 33,400, or 11.5 percent.  So, self-employment made up 55 percent of all employment growth.  Is this realistic?  No.

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Friday Stat Attack – War is Peace, Ignorance is Strength, Recession is Recovery

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RTE’s David Murphy described the Quarterly National Account numbers as ‘really good’.  Professor John Fitzgerald said the numbers showed a ‘reasonably robust recovery’.   We are told the actual numbers  aren’t all that important– the ones that show economic growth actually declining in 2013, the ones that show that the decline in the final three months of last year was the worst quarterly performance since 2008.  Don’t mind any of that downer stuff.  Like the following chart.

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Domestic demand comprises consumer spending, investment and government spending on public services (excluding exports and imports).  This makes up 75 percent of GDP.  It is one of the better indicators of the domestic economy, but by no means the only one.   Another great advantage is that it is not as sensitive to multi-national accounting activities as other indicators.

So what does the above chart show?

A flat-line for the last three years.

Stagnation.

Six years of a domestic demand recession.

It goes up a bit and a down a bit (slightly more down), but never strays too far from the flat-line.  Domestic demand fell in three out of the last four quarters.  Since the Government took office, it has fallen seven out of eleven quarters.   In the final three months of last year, the fall in domestic demand was the most severe since 2011.  ‘Really good’?  ‘Robust’?

Some commentators pointed to rising GNP.   The problem with using GNP is that it is determined by international flows; if a company keeps profit here, GNP goes up; if they export it, GNP goes down.  Whichever the company does has little impact on the domestic economy.  So GNP went up last year – but it was not based on rising domestic activity.

RTE news last night, as part of its coverage of the CSO economic numbers, featured a successful café.  The owner claimed that patrons have started spending a little bit more – which I’m sure is true (the business opened its third outlet).  This anecdote was used to portray the entire economy as starting to grow through higher consumer spending.

But the CSO reported that consumer spending fell last year.  It fell faster than the year before – 2012.  It fell three times more than the year before.  Nothing on that in the RTE report – that would cut across the constructed narrative of an improving economy.

Sigh.

Have a good St. Patrick’s weekend.  Have a better one than the economy is having.

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From Youth Guarantee to Mandatory Labour

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The Youth Guarantee programme is potentially a positive development.  To prevent long-term youth unemployment, the Government launched a programme that would guarantee young people either a place in education, training or a job.

However, a couple of developments put in question the operation and effect of this guarantee – and both revolve around our old friend, JobBridge.  First, as part of the Youth Guarantee Implementation Plan, JobBridge will now become mandatory:

In the case of young people, failures to engage that will give rise to sanctions will include:

  • Failure to apply for or accept an opportunity on the national internship scheme (JobBridge)

This suggests two things:  first, young unemployment must now pro-actively apply for JobBridge – something that wasn’t required before.  Second, it seems the Department will pro-actively create new JobBridge opportunities (that is, contacting employers to participate in the scheme) and then offering them to young unemployed; previously, JobBridge opportunities were generated by businesses alone.  This indicates a substantial increase in the scheme.

And the sanctions will be pretty harsh.  Young people could see their Jobseeker payment cut by up to 25 percent.

The second development is the news that one company – Advance Pitstop – has taken on 28 interns.  This company employs 200 people nationwide so the interns, whose labour is essentially free, make up 14 percent of their payroll.  Unsurprisingly, this made national news and not a little bit of criticism (this company is not the only one that has been featured in the media).

Should a scheme that provides labour to employers for free be mandatory?  Clearly, there are areas of social protection which are already mandatory.  For instance, a Jobseekers’ recipient must show they are available for, and actively seeking, work.  Past practice also requires recipients to meet with Department officials as part of the evaluation process, take up a ‘legitimate’ offer of training / job or attend an accepted training / education course (of course, there’s a number of issues with ‘legitimate’).

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Irelands’ Bank Guarantee: A Lesson In Class Power

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The following article by Conor McCabe, is taken from the first issue of the relaunched The Bottom Dog, published by the Limerick Council of Trade Unions. Copies of the full print issue are now available in Connolly Books. You can also follow The Bottom Dog on Facebook.  

At the start of 2013 the indepen­dent TD for Wicklow, Stephen Don­nelly, stood up in the Dáil and ta­lked about the bank guarantee. He said it was passed because ‘of a di­ktat from Europe that said no Euro­pean bank could fail, no Eurozone bank could fail and no senior bond­holders could incur any debt.’ It is a curious opinion to hold, as the on­ly foreign accents heard on the re­cently-released Anglo tapes are imitations done by Irish bankers of considerable wealth and influence.

The tapes shone a light on the short-term focus, the scramble for capital that was to the front of the bank’s management team. John Bowe, the head of Capital Markets at Anglo Irish Bank, told his collea­gue Peter Fitzgerald that the strate­gy was to get the Irish central bank to commit itself to funding Anglo, to ‘get them to write a big cheque.’ By doing so, the Central Bank wo­uld find itself locked in to Anglo as it would have to shore up the bank to ensure it got repaid.

The Irish financial regulator, Pat Ne­ary, in a conversation with Bowe, said that Anglo was asking his offi­ce ‘to play ducks and drakes wi­th the regulations.’ Once the gua­rantee was passed the bank’s CEO, David Drumm, told his executives to take full advantage but advised them to be careful and not to get caught.

This was reinforced by an article in the Sunday Independent on 17 No­vember 2013 which looked to the British Treasury’s archives for in­formation on Anglo and the bank guarantee. ‘The documents reve­al’ said the newspaper, ‘that the Fi­nancial Regulator tipped off Britain that Anglo might be “unable to roll €3bn [in funding] overnight,” but not to worry as if that happened the Central Bank or Government would step in to bail it out.’

The idea for a blanket guarantee, however, did not originate entirely with the Anglo management team, regardless of how much they em­braced it. In the weeks leading up to the decision, the idea of a gu­arantee was flagged in the natio­nal media by people such as David McWilliams and the property deve­loper Noel Smyth.

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Normal Euro zone Countries Don’t Export Their People

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The Live Register has fallen below 400,000 – the first time since May 2009.  While the Live Register is not an official measurement, the Seasonally Adjusted Standardised Unemployment Rate shows unemployment at 11.9 percent.  Our unemployment rate is now down to the Euro zone average.  This led the Minister for Social Protection to state:

‘Minister for Social Protection Joan Burton said the figures were encouraging and signalled Ireland’s return to being a “normal euro zone country”’.

Yes, when it comes to a straight unemployment rate we may well be a ‘normal euro zone country’.  But there’s something that has been not so normal and which has impacted directly on the Irish unemployment rate.  Yes, I’m talking about emigration.

Let’s compare the increase in Irish emigration since 2008 with that of other EU-15 countries.   We’ll do this by taking the annual average number of emigrants between 2008 and 2011 (the last year Eurostat has data for) and comparing it with the annual average number of emigrants between 1998 and 2007.

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Spain has been particularly hard hit – with over 400,000 emigrating in 2011.  Ireland comes second followed by Portugal.  After these three countries, the next hardest hit by emigration was Italy.

Irish emigration has been more than five times the average of other EU-15 countries.  In terms of emigration, Ireland is hardly normal.

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A New Government Study on the Effective Corporate Tax Rate? Hint: It’s 5%

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According to Finfacts:

‘Michael Noonan, finance minister, signalled in a statement last Thursday that his Department is preparing a report on the corporation tax rate that is expected to be ready by the end of March as part of a publicity offensive to counter claims that Ireland’s effective rate (actual tax paid or provided for in an accounting period as a ratio of reported net income) is in low single digits.’

Apparently, the Government has ditched its previous claim that the effective corporate tax rate is 11.9 percent – when the study this was based on was shown by Dr. Jim Stewart to be defective as a comparator.  Now it needs a new study to substantiate an old claim (it helps that the Government has already predetermined the conclusion, now they just have to fill in the numbers).

This blog has always endeavoured to assist the Government.   So I’d like to point the Government to some reasonably robust numbers.  It can use either Eurostat or its own Central Statistics Office.  Either way, they show Ireland has a low-low effective corporate tax rate.

One part of the equation – how much corporate tax rate is paid – is easy to determine.  What is more difficult to estimate is the level of profits.  Both Eurostat and the CSO use the category ‘entrepreneurial income’.  Eurostat defines it this way:

‘. . . net entrepreneurial income . . .  approximates the concept of pre-tax corporate profits in business accounting. ‘

The CSO defines entrepreneurial income as

‘ . .  a more comprehensive measure of corporate profitability.’

So, armed with this ‘more comprehensive measure of corporate profitability’, what are the effective corporate tax rates for EU-15 countries – combining both financial and non-financial companies?

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Tales From Tax Haven Ireland: Running the Numbers Game

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“The extremely low effective rate figures that have been quoted over the past week and attributed to Ireland are based on a flawed premise. The figures are estimated by dividing the amount of Irish tax paid by a total profit figure that includes substantial profits made by companies that are not tax resident in Ireland. They are running together the profits earned by group companies in Ireland and in other jurisdictions and incorrectly suggesting that Irish tax does or should apply to both.”

So, Michael Noonan rejects the recent findings of Jim Stewart of Trinity College, Dublin that US companies in Ireland have an effective corporate tax rate of 2.2%. In this he is following the insistence of Feargal O’Rourke of PriceWaterHouse Coopers who claims that Stewart erroneously includes companies that are incorporated in Ireland but do not operate here.

These are companies, like, for example, Google Ireland Holdings, Bermuda, which is ‘tax resident’ in zero tax jurisdiction Bermuda but is in effect a letter box company with a registered address in Sir John Rogerson’s Quay, that is, the office of solicitors Matheson Ormsby Prentice.

The basis of O’Rourke and Noonan’s (and the government’s) objection to Stewart’s finding is that the TCD economist uses US Bureau of Economic Analysis (BEA) data.

As Seamus Coffee puts it in a response to the 2.2% rate claim, BEA methodology highlights

“…that for companies, US residency rules are based on paperwork rather than activity.  Under US law, the tax-residence of a company is the country where it is incorporated.  All companies registered in Ireland are thus considered “Irish-based” under US law.”

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