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July 2, 2006

Tax incentives produce perverse effects – another nail in the Celtic Tiger’s coffin

Filed under: Ireland, Tax avoidance — Richard Murphy @ 12:12 pm

The Irish Sunday Times ran an interesting article today. Anyone should read it for the mixed package of messages it offers.

First of all ordinary Irish people are paying more tax then they need to. They suggest that’s because they don’t understand the tax system and so don’t claim the reliefs that are due to them. I will be more prosaic. It’s because middle income PAYE earners can’t afford accountants and accountants can’t be bothered to market their services to them in a way they can afford. There’s also the real chance that they are actually behaving rationally – the reliefs aren’t worth claiming at their level of income. Which suggests that in this case those who support flat tax have an argument – complexity can favour the rich. Just be careful not to relate this argument to the UK though. We can’t claim deductions for medical expenses and bin collection charges here, so that does not work.

Second. They point out that the average tax rate paid by the top 400 taxpayers in Ireland has fallen from 28.9% to 24.4% – a depressing confirmation that around the world the rich are getting richer at the expense of the population in general.

Third it suggests that in the last six months 150 people paid tax penalties amounting in all to €55 million. As it says “On the list were prominent priests, jazz musicians, hurlers, publicans, farmers and conventional businessmen, many of them pillars of society.” No surprise there then. The biggest penalty appears to have been a pair of builders. As it says “The €22m in tax and penalties the Baileys paid to the Revenue Commissioners is just a small fraction of the wealth they accumulated during the years they used unpaid tax to fund their business expansion.” Experience in the UK says small offenders pay much higher rates of penalty than large ones. There is no level playing field in this area of taxation.

But perhaps most significant is the fact that 6 of the richest people in Ireland paid no tax at all due to tax schemes that are available for them to exploit. Ireland offers very generous tax reliefs for investment in property. The result is obvious. As the article points out “Reputable independent consultants have calculated that property reliefs may have cost the state €2 billion in foregone revenue. They also resulted in unnecessary construction in unsuitable locations, solely so rich people could claim tax relief. And they contributed to rampant inflation in property prices.” Put it another way – far more than the tax collected from Microsoft in Ireland has been given away in tax relief to Ireland’s already wealthy elite.

And as the article makes clear, rampant property prices are the result of wholly inappropriate tax reliefs given at considerable cost to the state with the benefit going to the few.

And that’s only the direct effect. Ireland is losing out enormously from the tax driven distortion of its economy. House price inflation has forced wages up as property inflation has increased the cost of living. And tax driven property inflation has denied many the opportunity to simply buy their own home. This is the external cost of giving tax subsidies to the rich. Those on ordinary pay – teachers, health professionals, civil servants, small business people, middle income earners – let alone the poor, all bear the cost of subsidising the rich each and every day through the extra cost of living they suffer.

It’s happened in Jersey. It’s happening in Ireland. Please don’t call it the Celtic Tiger. And please don’t say it’s a success story. It’s just a story of what happens when greed takes over an economy.

June 28, 2006

There is no Celtic Tiger

Filed under: Ireland, Tax avoidance — Richard Murphy @ 8:58 pm

OK, I’m an Irishman (after all, what did you expect with a name like Murphy?). Alright, I was brought up in the UK, but 27 million of the world’s 30 plus odd million Irish passport holders were born outside the place, but we remain Irish all the same. And unlike a lot of them I’ve run a real company in Ireland, for seven years, so I know something about its economy and its taxes. So, let me respond to Dennis Howlett’s comments on my article on the Taxpayer’s Alliance, below, from that view point.

And let me make one thing clear – there is not, and never has been a Celtic Tiger! Nor are there leprechauns, by the way, but if you believe one you might also believe the other, so I thought I’d better add that just to make sure.

So let’s look at what I said – which was to suggest that Ireland has “the intent(ion) … to undermine the income stream of other nation states”. Which I contend to be true.

What’s the evidence? Well, let’s take this from on article on Microsoft’s tax in the Wall Street Journal on 7 November 2005 (to which, I admit, I contributed quite a bit of the research, and which did quote me). It gave these stark facts (which are facts):

1. Microsoft’s subsidiary Round Island One Limited is Ireland’s biggest company;
2. It had gross profits of $9 billion in 2004;
3. It paid tax of $300 million in Ireland in 2004 – not bad in a country with about 4 million resident people;
4. In the rest of Europe Microsoft paid just $17 million of tax in 2004 – although those countries had populations exceeding 300 million.

So let’s be clear – massive profits are being declared in Ireland (by implication of the tax paid they must be at least $2.5 billion) but the domestic revenue in Ireland is vastly lower than that. And almost no profits are being reported elsewhere – including in the UK where it looks likely from Round Island One’s accounts the turnover is around the billion dollar mark (give or take). The same pattern is true, broadly speaking for Google, NCR, Oracle, Pfizer, Dell, Apple and Intel, amongst others in Ireland.

This means that Irish GDP is being massively inflated not by real economic activity being relocated there (NCR are believed to have less than 100 employees there, but book about half their world wide profits in the country) but by profits being booked there. It so happens this boosts GDP because GDP includes profits coming in – even if they then flow straight out again. And that’s true even if the profits are not generated by local labour but by patent and copyright royalties on licenses transferred from the US, which like the revenue authorities of all the European countries where Microsoft appears to have paid less than you would expect based on relative turnover, also loses out from this wholly artificial, tax driven booking of profits in Ireland.

So the evidence is clear – this is not real growth in Ireland. For that to be the case real trade would go there. But what’s actually happening is transient profits are going there from which they cream off a bit. Which is why no one else can replicate this – as it would lead to tax war, not tax competition. It explains why Ireland is a tax haven that should be denied the benefit of international tax recognition by treaty, and it’s why the Celtic Tiger is just an accounting trick, not a matter of economic substance.

If the economic miracle were based on something of such substance – like Guinness – I’d be all for it. But it isn’t. It’s a con. So please don’t buy it.

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