It has been particularly interesting listening to Finance Minister, Paschal Donohoe, talk about his plans for tax rates. He wants to reduce income tax on the ‘squeezed middle’. This is undoubtedly a laudable move. Excessive taxation cripples people, as too do excessive retail prices.
In Ireland, we have a vicious combination of excessive cost of living and a heavy burden of tax on the average person. To give you an example of this, the price of a typical basket of food in Ireland is on average 31pc higher than a similar basket in Germany, yet German and Irish wages are about the same.
Add to this the fact that, on average wages, the typical Irish person is paying over 40pc tax and it is quite understandable that most Irish people do not have any money left at the end of the month to bolster their savings.
Therefore, it is not surprising that the Finance Minister wants to reduce taxes. However, if he reduces taxes in one area, he will have to either raise taxes somewhere else or cut expenditure. The Fine Gael party wants to be all things to all men ahead of an election, so it won’t risk cutting expenditure. Thus, the minister’s objective looks impossible – unless we get significantly more growth.
More economic growth is the result of more spending and investing in the economy, and as spending and investing are taxed, taxes rise. Furthermore, as unemployment falls, income taxes rise too, and welfare spending falls, thus giving the State a virtuous cycle, where revenues are increasing. Such buoyancy allows the State to cut taxes without hitting expenditure and still balance the books.
This high-growth scenario is the Garden of Eden for all would-be reformist finance ministers. It also allows the luxury of integrated thinking. When your back is against the wall, it is difficult to see things clearly, but now that we are motoring, it’s possible for the minister and his officials to think a bit laterally.
One thing puzzles me and has done for a long time and it is this: why doesn’t anyone in the Government articulate coherently what exactly the plan is for the country, not just in terms of growth, but also in terms of fixing other problems? And why does no one link one with the other?
So, for example, why not link our industrial strategy with our housing strategy?
All around the world, small countries have big vision that identifies the industries and the strategies that they want to focus on which may facilitate growth and achieve other objectives. These always involve an industrial/commercial plan. These plans are usually integrated to address not just growth but to alleviate some other problems that the country may have. What is Ireland’s plan apart from low tax for multinationals?
Have we ever thought of integrating this plan with, say, a plan for housing and hit two birds with one stone?
Consider something as obvious as linking on-going generous tax breaks to multinationals that locate in Dublin with an obligation for those same multinationals to provide accommodation for their prospective employees; this is a bit of an “I scratch your back and you scratch mine” strategy.
MORE than 100 years ago, Guinness was doing precisely this by constructing the Iveagh Buildings all around the city; it is not revolutionary. As the rent returns to the mother company, it is actually a very attractive use of capital for the corporation, while at the same time making these companies better corporate citizens and embedding them in the city much more concretely.
For most multinational companies, the attraction of Ireland is two-fold. The first is the tax breaks; the second is access to potentially the best micro workforce available in the 500 million-strong population of the EU. If Ireland (and for the moment we are really talking about Dublin) can host the best European talent, then American capital will continue to flood here. This is actually much more important than the tax breaks because the single biggest factor holding back corporations is talent, not capital. In a world of almost zero interest rates, capital is cheap; people are expensive.
Ireland can host these people who are coming from other European countries as well as India and other parts of Asia, provided we can house them. The latest census figures, released this week, revealed that Ireland is a cultural melting pot. The problem is rents and taxes.
Taxes are too high and rents are too high. If we want to capitalise on Brexit and become the location of choice for English-speaking commerce within the EU, then we have to sort both of these. The commercial future for Ireland is to turn itself into a trading hub, not unlike urban Shanghai in the period 1890 to 1940, when Shanghai was a free-trading city, linking China with the rest of the world. Venice did something similar in the 1500s, as too did the Hanseatic ports of the Baltic before that.
An obvious way would be to jump together with global companies and outline a 30-year plan where we pledge to keep corporation taxes low, and keep our doors open to European talent. In return, they undertake to use their burgeoning balance sheets to do as Guinness did and build infrastructure for their precious employees. Initially, Dublin would be the epicentre of this, but with an upgraded motorway and higher speed transport, there’s nothing to prevent urban centres like Cork, Limerick, Galway, and Waterford benefiting hugely.
It’s time to see the country as one small unit in a globalised world where for most foreigners the distances between our major cities are commutes, not journeys.
We could be on the cusp of something very big, all we need is to open our arms to the world, make the place welcoming, and give the world a plan for Ireland.
In that context, the minister’s plans for tax would appear very achievable and frankly a little unambitious.