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Colm McCarthy: Criticism of our tax policy the height of hypocrisy

IRELAND'S long-established policy of attracting foreign companies here through capital grants and a favourable tax regime has been in trouble for quite some time. Last week's brouhaha about corporate tax payments, including theatrical hearings at a US Senate committee, needs to be seen in the long-term context of a development model that had begun to falter before the financial crisis struck. The model is broken, and needs to be fixed if the unemployment crisis is to be addressed.

But first, what, if anything, does the Apple affair tell us about Irish policy and the steps the Irish Government might take? US companies are taxed domestically on their worldwide profits only when these are repatriated to the US. They are free to stash profits abroad indefinitely, paying low or no taxes locally, while fully compliant with laws passed by Congress, which includes the silver-haired senators who worked up such indignation during last week. This comment from the Financial Times sums up the position nicely: ". . . there is no evidence that Ireland struck preferential deals with Apple. Nor is there anything to suggest that Apple has acted illegally, as Tim Cook, chief executive, told the committee on Tuesday. Much of the avoidance cited is routinely used by US multinationals, thanks to a tax code which invites this through differing treatment of foreign and domestic earnings. At the last count, US companies held $1.7 trillion in unremitted profits. Rather than bash companies and foreign countries, the Apple example should encourage Congress to move on corporate tax reform."

Of course, actually doing something concrete, like writing new tax laws, would irritate the legions of corporate lobbyists on whom the aforementioned senators depend for campaign funding. It is a far less attractive option than televised fulminations against greedy corporations and shady foreigners. The grandstanding by former French president Nicolas Sarkozy on the Irish corporate tax code is cut from the same cloth. There is no area of international economic diplomacy more prone to rank hypocrisy than corporate tax policy.

No evidence whatsoever has been produced that suggests that the Irish Government has broken any international obligations, including EU obligations, regarding corporation taxes, or that any multinationals operating here are in breach of Irish or any other tax laws. If Apple, or any other business corporation, knowingly paid taxes anywhere in excess of the minimum required by law, its directors would be exposed to lawsuits by the shareholders, and rightly so. Companies are not permitted, by law, to dish out money unnecessarily, to governments or anyone else, just because they feel it will go down well with the media. If the laws are deficient, the remedy is in the hands of legislators, particularly legislators in the US.

If France or Germany would like to see new EU arrangements, including treaty changes, they are free to make proposals. The Irish media, as well as opposition politicians, have swallowed whole the line that all of this is somehow the fault of the Irish Government. This must be a source of great satisfaction to assorted political spin doctors, in the US and in Europe, who have found domestic Irish support for this latest attack on a long-established Irish tax code and on companies that are fully compliant therewith.

The undiscovered Pot of Gold is a recurring Irish fantasy, relentlessly peddled by the populist media and familiar from discussions of the enormous riches to be painlessly requisitioned from our vast oil and gas reserves. One Sinn Fein deputy even found airtime to blame the necessity for a residential property tax on the Government's failure to tax in Ireland the worldwide income of various multinational companies.

The latest instalment of the international Hypocrisy Derby on corporation tax will play out, probably without any great changes, over the next few years and there is little that Ireland can do about it other than to comply fully with our international obligations. Of greater importance is the urgency of reconsidering the adequacy of what, for want of a better term, might be called the business model employed in pursuing economic development here over the past several decades.

This model broke down, not at the US Senate hearing on Tuesday, and not with the onset of the financial crisis in 2008, but further back, somewhere around the year 2001. After a severe recession in the early 1980s employment in the manufacturing industry had fallen to just 182,000 by 1987. The numbers then proceeded to rise rapidly, with just a minor blip in 1999, to reach a level 70,000 higher in 2001. In round numbers, Irish manufacturing jobs rose by 40 per cent over this period. It is noteworthy that China, whose economic miracle started in about 1978, was already a major low-cost manufacturing base right through this period.

The expansion of manufacturing employment stopped stone dead in 2001, seven years before the bubble burst.

In the years since, all of the jobs created through the late 1980s and 1990s have been lost. Manufacturing employment was still falling in 2012 and is now about 13,000 below the previous low point in 1987. Ireland has had an Industrial Revolution (up to 2001) followed by an industrial Great Depression in the period since. The job losses were well under way by the time of the financial crash in 2008. Something strange must have happened in 2001 and we now know what it was. It was a credit bubble induced by the decision to join the euro which sucked resources out of the trading economy and into house-building, financial services, estate agents and property speculation. Why work in manufacturing when you can make more on a building site?

The decline in competitiveness which afflicted the traded sector of the economy through the last decade should be viewed, not as some deliberate outcome of policy (there was none, apart from: 'If I have it, I spend it') but as nature's way of telling you that you are having a credit bubble. Whenever bubbles emerge in the purely domestic sectors, such as construction or real estate services, the trading economy suffers, the ability to export is damaged, the balance of payments goes into deficit and eventually the bubble bursts. There is some evidence that the worst of the decline in manufacturing is over. Manufacturers can now expect to find willing takers for any jobs on offer, and at realistic pay levels, since the distractions of the sheltered sectors have (painfully) been brought to a halt. However, it does not follow that the economy can simply retrace its steps and repeat the job-creating performance of the 1990s.

Inward investment to Europe by US multinationals has been weak for many years and the US has itself been regaining competitiveness as a manufacturing location. The response of Irish official agencies, including the IDA and Enterprise Ireland, has been to shift the focus of job creation efforts away from manufacturing towards digital and financial services, and to emphasise university-based research in hi-tech areas as a job-creation tool. The export services figures look impressive but it is increasingly clear that they include fake exports, driven by corporate tax planning, and have created few jobs for unemployed Irish workers. The university-based government spending has created jobs in university but it remains to be proven that it will take unemployed Irish workers off the dole.

Whenever government ministers spell out ambitious targets for job-creation schemes, which they do on a depressingly regular basis, the first query should be 'job creation for whom?'. The unemployment rate has risen from 4 per cent to 14 per cent since the crash of 2008. Most of those who have joined the pool of unemployed have exited failing or contracting firms in construction and related sectors, in retailing and in other domestic non-traded activities. If these people are to be re-employed, it is unrealistic to expect that they can be absorbed in hi-tech businesses or in financial services, a sector that is contracting sharply around Europe.

If it was possible to expand manufacturing employment by 70,000 through the period up to 2001, it is possible to do so again. The Government needs to develop a new industrial strategy, which includes the vigorous defence of a growth-friendly corporate tax regime.

Irish Independent