Notes on the Front

Commentary on Irish Political Economy by Michael Taft, researcher for SIPTU

October 17th Lunchtime: The Recession Diaries

October 17, 2008

It's raining medical cards – in the nightmares of the Fianna Fail backbench TDs. What were they thinking? Is the €100 million savings worth the political disaster the Government has brought on to itself? €100 million? It's peanuts in the grand scheme of things – not even representing a fifth of 1 percent of all government spending. For someone on the average industrial wage it would come to 16 cents per day. And they're not even going to save that amount – not with their make-it-up-as-they-go-along adjustments in thresholds, not with the extra costs it will impose on other health expenditure (drug repayments, resources to monitor the means-test, etc.). It's bad politics, bad health, bad accountancy, and bad policy.

But there's one policy statement in the budget that will provoke no outcry, no opposition, not even a passing glance.

'The 12.5% rate of Corporation Tax is an important element in our taxation system. It has been a cornerstone of our industrial development in the last decade. I want to emphasise that this rate of tax is not for changing upwards and it will continue to be a central part of Ireland’s economic brand. Ireland’s economic prospects are dependent on a vibrant and modern business base and I know that virtually all sides of this house will agree with me that our rate of Corporation Tax is essential to this.'

State it and move on. No political party in the Dail – not Labour, not Sinn Fein – will disagree with the Minister's declaration. A reader of this blog, Yvonne, asked a pertinent question:

'What I don't understand is why corporation tax is 'untouchable'? Surely a small percentage increase here wouldn't precipitate a mass exodus of TNCs?'

This question raises more issues than just finding a bigger revenue stream; it goes to the heart of the historical failure to create a strong indigenous enterprise base and the on-going (and intentional) obfuscation of the health of Irish business – as opposed to the health of companies in Ireland.

And here, before, the Court of Progressive Thought, I admit heresy. For I would not support increasing the corporate tax rate at this time, and for a considerable time to come. I know that Paul Sweeney of ICTU has argued cogently for such an increase. ICTU supports the raising of the corporate tax rate to 17.5 percent. The Left – in the Labour Party and other parties – is generally convinced its a good idea. But still I resist.

First, we are stuck in a painful dilemma – and the Minister inadvertently raised this: the low corporate tax rate is the cornerstone of our industrial development; or more honestly, it is the cornerstone of our addiction to foreign capital. Let's not be under any illusions: were it not for the success of the IDA in bringing foreign capital here in the late 1980s and early 1990s, there would have been no Celtic Tiger economy. If we had relied on indigenous enterprise we would still be competing with Greece and Portugal for the prize of being the poorest country in the EU-15. The multi-nationals didn't come here for the weather, never mind our crumbling infrastructure; they came for the tax – or lack of it.

So addicted to foreign capital are we that only 10 percent of our exports – whether goods or services – comes from our indigenous sectors. And the biggest of our homegrown sectors, Food, is relatively low-waged and over-reliant on the UK market. In terms of the high value, high skill jobs and activities – these are by and large in the foreign sector.

Second, in terms of the amount of corporate tax receipts as a proportion of GDP, Ireland has one of the highest take from the corporate sector in the industrialised world. Is this because we're such a go-getting, entrepreneurial economy? Hardly. It's because we have prostituted our corporate tax regime to multi-nationals who engage in transfer pricing and brass-plate operations. Our high tax take from the corporate sector is not a reflection of a progressive tax regime (hardly), nor does it reflect real-economy activity (though there is that in the foreign sector). It reflects our glorified tax-laundering shelters we give to companies.

Third, would increasing the tax rate drive out foreign capital? Probably not as much as the doomsayers over at the American Chamber of Commerce predict. Multi-nationals get bedded down in the economies they are located and moving out over a few percentage points on profits they don't even make here would be a costly affair.

But – and this is the heart of my argument – it would undermine the IDA's attempts to get multi-nationals to set up shop. The main selling point is not our energy infrastructure or our broadband network or our port infrastructure. It's the tax. The problem is that we don't know what the effect would be on future foreign capital projects, but if tax is your main selling point, then it would be a brave government to risk it.

We don't have a brave government. We have a lazy one. It has given up on indigenous enterprise development. It pretends that new export sales to Asia are evidence of the health of the Irish economy when, in fact, it is only evidence of multi-national export strategies devised in boardrooms in other countries and from which Ireland is just a physical launch point.

Is this sustainable? No. The Enterprise Strategy Group nailed this one correctly. We can't keep relying on importing foreign capital to do the job that we are unwilling or unable to do. But until we start doing that job, we need foreign capital to keep this economy ticking over. If not, we can either go back to the plough or pay the new €10 air travel tax and find somewhere else to work.

If the Left ever comes to power in this country it will have to keep focused on the real problem in our economic base. It's not that companies pay too low a tax rate (though they do), it's that we don't have enough indigenous companies paying the tax, exporting its goods and services, growing to a scale where it is internationally competitive, investing in R&D, pursuing progressive labour relations – in other words, we don't have enough homegrown companies acting in a modern, wealth generating way.

It is only to the extent that we solve that problem, that we will be in a strong position to start raising the corporate tax rate. Because then we won't be addicted to foreign capital. Were they to leave or not come in the droves they have been, it won't have such detrimental effect. And those that do come will do so because we have a modern infrastructure, a modern way of doing business.

That's the prize. That's the ground where the right-wing parties have no strategy, no ideas, no policies except to continue our unsustainable addiction to foreign capital. That's where the Left can start its fightback to be taken seriously on economic issues. The corporate tax rate is the end-game, not the opening gambit.

6 responses to “October 17th Lunchtime: The Recession Diaries”

bjg

October 17, 2008

I agree that indigenous companies are so weak that we can’t afford to lose the multinationals at present. Recently I have been reading post-independence Irish economic history; some governments weren’t terribly interested in developing indigenous industry while others weren’t very good at it. But industrialists and entrepreneurs don’t seem to have been terribly good at it, or interested in it, either. So, yes, policies are needed, but what should they be? As V I Lenin so eloquently put it, “What is to be done?”
bjg

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James

October 17, 2008

I think this is a great post Michael, and I thoroughly agree (although I think it’s exagerated to say that tax is the only factor behind FDI).
Looking at the politics of this, we also have to acknowledge that regardless of how important low corporation tax was in the boom, it’s popularly percieved as having been the absolute key. Even if a rate increase didn’t cause net job losses, we can be sure it would be blamed for every bit of bad news on the FDI front.
From a policy perspective, I wonder what is the argument for focusing on corporation tax as opposed to progressive income tax on individuals. Surely if we are concerned about income inequality then profits that are retained and reinvested are not such a problem as are executive remuneration and dividend income for shareholders?

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Aidan OSullivan

October 17, 2008

Great post!

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Chris Bond

October 17, 2008

Interesting
Do you think that if we were to radically improve our infastructure over the next few years, we would have more of a cause to raise the corporation tax.
Also, do you think slashing the corporate tax rate to 12.5% was the correct decision at the time, or is it just a case of now that it is low it has to stay low.

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Tomaltach

October 18, 2008

Well said and in particular the inability to create a vibrant indigenous sector is a huge problem.
Still, I think the difficulty in doing so should not be underestimated. I think it’s fair to say the issue has been acknowledged and certainly the streamlining of Enterprise Ireland and its focus on Irish companies and startups is a major step in the right direction.
But there are structural difficulties. One is that there is likely a crowding out effect by large MNCs – in some ways we are a victim of the success in attracting FDI. The big MNCs repeatedly attract the best graduates for example (for a number of very understandable reasons). But there are other issues. In Ireland we are not good at being wise with our money – what I mean is, the important thing for indigenous industry is to get money, VC especially. In Ireland the financial channel between savers and investors in indigenous firms is shockingly thin (way thinner than, for example, the channel of money between savers and property in spain or bulgaria). The flow of Irish savings into say startups is paltry, and we have failed to create a VC, incubational culture, say something along the lines of Silicon Valley.(I think our financial industry here has been lazy and hasn’t come up with clever ways to price risk and create smart products that allow the channel to exist)
There are other routes to get seed money – one is from government, but the quantity available so far is too small, and wedded as we are to lower taxes, there was no political prospect of more tax for enterprise.
In short, I think you are right about our addiction to FDI – but I think in official Ireland the addiction is recognised, but we haven’t quite figured out how to rehabilitate ourselves. I suspect it can happen by one of two routes – a tough, courageous government willing to tell us the consequences of our addiction to low tax, or the more painful route, a sudden decline in FDI, in which case we would have to learn the hard way. No prizes for guessing which way I think it will happen

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Michael Taft

October 19, 2008

James, I certainly didn’t mean to suggest that FDI was the only factor. There was capital expenditure (courtesy of the EU taxpayer), demographics, the single market, the 1993 devaluation, etc. However, FDI did manage to increase our exports by an extra-ordinatey 2.5 times in a few years – something never achieved in our history. Without FDI (or a lot less), the Celtic Tiger would have had few less claws. And, yes, retained and reinvested profits are exactly what we need. And if this means giving tax breaks to renumeration and dividends in these productive sectors, let’s go for it. But as a general rule, let’s tax property – it’ll bring in a fair bit of change and divert investment resources away from an extremely unprorductive sector.
Chris, no I don’t think that building up our infrastructure could lead to a situation whereby it would be ‘good risk’ to start increasing the corporate tax rate. The balance of risk depends on the health of our indigenous economic base. In any event, the Fianna Fail strategy of investing in the infrastructure smacks of the ‘build-it-and-they-will-come’. It assumes that a bar to indigenous development lies in external factors. Rather, it is in the instrinsic shortcomings of that base itself. I fear that with the best infrastructure in the world, our indigenous sector if left on its own still wouldn’t produce the goods. Thus, the need for an interventionist strategy in which the public interest plays a disproportionate role. Leaving it to international or national markets to sort out this problem is a sure way of ensure the problem doesn’t get solved.
As to the second question – let me put this diplomatically: it was a miscalcuation to drop the tax rate to 12.5% (I could say ‘economically criminal’ but I want to be diplomatic). At the time, when our various corproate tax rates were required to be merged into one by the EU, leading bank and corporate economists were expecting (and accepting) that the tax rate would be cut to 17.5%. That would still have been ‘competitive’ while ensuring a greater tax-revenue stream. But we didn’t and the concern of agencies like the IDA is that an increase would ‘send out the wrong signals’ – at a time when other countries are cuttig theirs. To use the phrase the US military pioneered in the Vietnam war – this is a ‘cluster-f**k’.
Tomaltach – that is an excellent comment. There is a history in our financial sector that has shied away from productive investment. A future progressive government would have to resolve a number of things: ensuring capital, especially risk and long-term capital, for the indiegneous base; a planning framework to ensure that this activity fits the overall needs and potential of our economy (a targeted rather than scatter-gun approach); a sustainable commercial means of assessing such investment; and, lastly, to ensure we have the enterprises and entrepeneurs to implement this approach.
And it is on that latter point, bjg, that you have asked the most important question of all: how is this to be done, especially given that all attempts in the past (the 30s, the 60s, the late 70s) have failed. It is on these and other points that I will try to start addressing.
Because at the end of the day – we produce and sell abroad. Or we stagnate.

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