August 30, 2006

Good grief, more on Ireland

A reader writes:

Another factor that you do not mention is membership of the EU/EEC and the transfer of funds to Ireland via this route.

Ireland joined the European Economic Community in 1973. For much of that time Ireland has received substantial funds from the EU/EEC. According to this article this amounted to 3% or 4% of GDP.

Naturally Mr Powell, as a member of The Cato Institute, does not believe that an extra 3% to 4% of GDP was the magic that propelled Ireland form rural backwater to Celtic Tiger. But I am certain that it helped. It is easy to make tax cuts if citizens of other countries are paying the taxes instead.

I know that I would not mind personally receiving a boost in my income from a richer neighbor down the road.

Oddly enough for much of that time the UK was the only net financial contributor to the EU/EEC. So Ireland was getting this money from the hated British.

My impression is that the first decade and a half of subsidies just subsidized Ireland's bad habits. Irish politics in Ireland were much like Irish politics in Boston and Chicago: corrupt, but not ideological and not brutal. Interestingly, the Irish boss who launched the free market drive in the late 1980s, Charles Haughey, was notoriously corrupt even by Irish standards, but I guess that's pretty common: see other free market reformers/thieves like Yeltsin in Russia and Salinas in Mexico.

And Angry Bear explains the tax dodge aspect of Ireland's implausibly large GDP per capita:

Well, the worst year of my life was spent at a Big X (at the time, X was equal to 6) accounting firm, doing transfer pricing. Transfer pricing often amounts to little more than highballing the amount of a company’s activity taking place in low tax jurisdictions and lowballing the amount that takes place in a high tax jurisdiction in order to reduce one's overall tax burden. It is often done creatively. Say company X transfers ownership of a logo to the subsidiary of company X in the Caymans. Then, every time company X sells a tennis shoe with that logo, it pays a royalty to its subsidiary in the Caymans. If taxes in the Caymans are lower in the US, X hires E&Y or PWC or whoever to argue that most of the value in the shoe sits in the logo (and therefore is income received by the Cayman subsidiary and thus taxable in the Caymans), and not in the shoe itself (which is income received by the parent company and taxable in the US).

So back to Ireland…. Say you’re a pharmaceutical company. You have hundreds of highly paid researchers scattered throughout the globe – in places like the US, Switzerland, Germany, etc. Because taxes are lower in Ireland than in the rest of these locations, when a blockbuster drug is discovered, it is advantageous to play up the contribution of the researchers in Ireland and play down the part of the researchers made elsewhere.

This has at least two obvious effects. The first is the direct artificial boost to Irish GDP (and an artificial reduction elsewhere). Since Ireland is relatively small, if a crumb is taken from the US, another crumb is taken from Switzerland, etc., the effect can be very large in Ireland. The second effect is indirect – in order to pull this stunt off, it is necessary to have at least some facilities in Ireland, leading to more hiring and building in Ireland as more companies get more heavily invested in playing the game. But its in nobody’s interest to say this is being as a tax dodge, so a mythology springs up (as it did in Argentina), and part of that mythology, at least, is self-sustaining.

This is not to say that Ireland hasn't made a lot of genuine economic progress, just that the statistics claiming it has a per capita GDP 35% higher than the UK aren't telling the whole story

By the way, I wonder how much high IQ labor is wasted annually trying to avoid corporate income taxes or lobbying to get Congress to give firms breaks?

My published articles are archived at -- Steve Sailer

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