Richard Murphy and I have been having a (minor) spat over at his place about his assertion that Ireland is a tax haven. Subsequently, we had a live conversation and while I find it hard to disagree with his view that Ireland’s admittedly preferential tax system of itself confers haven status, I don’t believe it can be viewed in isolation.
Richard wants a fair global system of taxation – and who – if they’re honest disagrees? But…tax is a business cost and in my day clients considered a rate of 1% unacceptable. Look at how UK house price negotiations operate when considered against the backdrop of Stamp Duty.
Despite Richard’s assertion that Ireland’s prosperity has arisen out of EU grant funding and not business wealth creation, the country has one of the best educated and smart workforces on the planet. That was not the case prior to Ireland’s policy of attracting inward investment. No doubt, Richard would argue – yes but by any means possible, including a preferential tax system. And maybe he’s right.
A combination of grants, tax incentives, lower cost labour forces and relatively cheap property are powerful incentives to business relocation – including profit relocation. It is the same economic combination that has allowed the South East Asian economies to develop an outsourcing industry. But what are the outcomes? In essence we have a paradox.
While in Zaragoza I spent a lot of time talking to Fergus Burns and others who are trying for all their worth to attract inward investment for innovation to Ireland. It’s a tough ask. Why? Despite the favourable tax regime, Ireland has, quite frankly, outpriced itself. Labour and property costs are relatively high and no amount of preferential tax status can overcome that issue. The same is happening in India according to Vinnie so now companies are casting their gaze to China. Ken Frost believes North Korea is a good place to go. If it’s anything like South Korea then I’d have to disagree. The food is just plain awful – unless the prospect of monkey brains as an aphrodisiac appeal.
Preferential tax systems may be a standard weapon in the armoury of state fiscal planners but it can’t be viewed in isolation when considering economic growth and the long term consequences of fiscal policy. So the larger question has to be – are preferential tax rates/regimes the driver for growth that has a sting in the tail?
More important still. What happens when business runs out of places to relocate?
Technorati Tags: innovate europe, inward investment Ireland, tax avoidance, tax gap
