Ireland's low corporate tax sees Leo Varadkar get a chilly reception with world leaders at Davos - a change in mindset is needed.
There was a somewhat chilly reception for Taoiseach Leo Varadkar in Davos last week at the World Economic Forum, the annual get together for world leaders and top CEOs. Not that anyone in the international media noticed much because we're hardly a world player. But there was definitely a touch of ice in the air for the Irish this year, and it's a warning for us of what lies ahead.
Davos is the ultimate networking opportunity for business and political leaders. This year the attendance included all the top international CEOs and political heavyweights like Angela Merkel, Emmanuel Macron, Theresa May, etc. -- The Donald was the star turn.
His arrival created as much excitement as if Elvis had come back from the dead and walked into the room. They may snigger at his tweeting, but those CEOs appreciate how much his policies are boosting their profits.
The frosty atmosphere that greeted the Irish had nothing to do with the heavy snow in Davos last week and everything to do with tax. With the British leaving, France and Germany are now free to push the EU towards a common corporate tax regime, mainly to get the giant digital multi-nationals to pay their fair share instead of playing countries off against each other. Ireland's low corporate tax regime is in the firing line.
There was withering criticism at one session in which the Irish Minister for Finance Paschal Donohoe was questioned about how our already low 12.5 percent corporate tax rate ends up being less than one percent for some of the digital giants here. Donohoe blustered away, but there's no denying that what we have been doing here for years on corporate tax is "borderline criminal,” as an Italian business leader told him bluntly.
This new concentration by the EU on Ireland's dodgy corporate tax regime is likely to intensify in the coming year, at the very time that we are relying on the EU to support our stance that there can be no hard border after Brexit. It's not a great position to be in.
And that position is being made even worse by Trump's new corporate tax policy which is already starting to have an effect. Apple announced in the last two weeks that it is to pay $38 billion in U.S. tax so that it can bring profits held overseas back home. Other tech giants are talking about doing the same and expanding operations in the U.S. again.
None of this is good news for Ireland, where we have allowed ourselves to become so heavily dependent on U.S. multi-nationals for jobs and tax revenue -- over 15 percent of our total tax revenue here now comes from a handful of these big companies. If they were to move away because of a combination of less attractive tax arrangements here and a more appealing tax set up back in the U.S., the damage to our state finances would be enormous.
Even the Central Bank has been warning the government about the danger of our heavy reliance on corporate tax revenue from foreign companies here, with most of it coming from the five biggest multi-nationals. To be that dependent on a handful of big companies is dangerous, no matter how much they tell us they love being here.
They may love us, but the main reason they are here is the tax breaks they have been given. The EU decision to force Apple to pay us over €13 billion in underpaid tax was a signal that this era is now coming to en end.
And it's not just the direct loss of corporation tax that would be a problem for us if the multi-nationals start cutting back here. Foreign companies employ 10 percent of the workforce in Ireland, so income tax returns would fall and welfare claims would rise.
It doesn't bear thinking about. At present we are being told not to worry too much because the biggest digital multi-nationals are well embedded here. But the effect over time seems certain to be a slowdown in foreign direct investment coming here and a steady decline in the sector in Ireland.
The point about Trump's new 15.5 percent tax rate on money held offshore by multi-nationals is that it will apply whether the money is brought back to the U.S. or not. Under the old system U.S. multi-nationals could avoid paying tax on overseas profits if they held the cash outside the U.S. Now there will be little incentive for these companies to hold and reinvest billions in profits overseas when they can bring the cash home and use it there.
As we said, it's not good news for us and the fallout is just beginning. And if the EU forces us to impose even half of our headline 12.5 percent corporate tax rate on the U.S. multi-nationals here instead of giving them a virtual free pass, it's going to be even harder to keep them here.
As if that grim backdrop was not bad enough, there is also Brexit coming down the tracks, the effect of which on Ireland could be catastrophic if Britain crashes out and starts importing cheap food from global markets. All of which means that we are facing into a very uncertain future.
It might not seem like that at the moment, given our extraordinary growth rate and the prediction from the ESRI, the main economic research body here, that we will reach full employment by the end of this year. There is a strong feel-good factor here right now, which explains why Varadkar and his party are doing so well in the latest opinion polls.
But appearances can be deceptive. The present situation has the eerie feeling of the calm before a storm.
It may not pan out like that, of course, and somehow we may get lucky and all may be well for our economy in the years ahead. But it would be prudent for us to hope for the best and plan for the worst -- or at least plan for things not being quite as rosy as they are now.
Which brings us to the unrealistic expectations of too many people here now, whose sense of entitlement is being continually stoked by opposition politicians, particularly on the left. We're barely out of the bailout and are just about managing to balance the budget again but every day we hear more angry and indignant demands for extra state spending.
It's a legacy of the boom years when state spending and welfare benefits and free services soared. We appear to have trained a whole section of society to expect the state to provide everything they want for free.
They are encouraged in this by what a colleague of ours calls the Pay for Nothing parties on the left and some sections of the serious media who really should know better. Even Fianna Fail, the main opposition party, has been joining in the whinge fest.
Last week, for example, there was a lot of contrived outrage when Varadkar mentioned in passing that some young couples trying to buy a home might be able to get a loan from their parents -- what we used to call the bank of mum and dad. He was called the “Posh Boy Taoiseach” who does not understand that most "ordinary" parents don't have the money to do this.
This is a narrative being pushed by the left all the time now, characterizing the government as middle-class posh boys who refuse to build enough social housing to solve the housing crisis.
In spinning this tale it was wrongly assumed that Varadkar himself had been given a loan by his parents to buy his apartment. It turned out that this was wrong, that he had got a 100 percent mortgage, and that he was still deep in negative equity having bought during the boom.
But of course none of this lessened the scorn that was heaped on him. The fact that there is no instant solution to the housing crisis was ignored. As was the fact that the cause of the crisis (the property crash) had nothing to do with the present government.
Even in the present difficult housing market most people here manage to find their own accommodation, either rented or bought, often with the help of wider family. But thanks to the welfare explosion that came with the boom and the entitlement culture it fostered, there are many people here now who do nothing to help themselves and demand that the state provide for them. And if they don't get what they want, they run to the media.
It's the same with the public health service, another topic being used to flay the government at the moment. It's always a problem at this time of the year and right now the usual winter overcrowding in emergency departments is being made worse by a flu outbreak across the country. So there are lines of people on trolleys waiting for beds in public hospitals.
People who pay insurance for private health care can avoid much of this. But more than half the population don't pay for health insurance. Many can't afford it, of course. But there are also many who choose to spend the money on other things, like cars, entertainment, a sunshine holiday, etc., and think that they should get all the health care they need for free and without any delay.
Changing this mindset will be one of the main challenges for the government in the years ahead.