David McWilliams: Here’s what we could do with extra corporation tax

This week Ireland slayed its most golden of golden cows – the 12.5 per cent corporation tax. When the dust settles, things will work out just fine. But such a move gives us a chance to pause and consider what type of economy we want to construct from here.

On every measure, the Irish economy has grown faster than almost anywhere in the past 30 years. The contrast with what went before, the lost years, is startling. In 1991, we had fewer people working than in 1951 – 1.1 million in total. Today we have 2.2 million working. The workforce has doubled in a generation.

While tax is an important original incentive, as economies mature companies tend to cluster in areas and regions where others are based. People count, networks count and, most importantly, success breeds success

The multinationals – and they are not going anywhere – explain part but not all of the story. In fact, despite the Department of Finance claiming that tax revenues could fall by €2 billion because of diverting profits that used to be claimed to be Irish, I’m willing to bet that, after a small adjustment, corporation tax receipts will be higher in the next few years and the 12.5 per cent rate will be forgotten, much like the once-thought sacrosanct articles 2 and 3 of the Constitution.

While tax is an important original incentive, as economies mature companies tend to cluster in areas and regions where others are based. People count, networks count and, most importantly, success breeds success. We see this down the ages: those cities, regions and countries that provide economic opportunities go on to attract creative people plus capital and tend to be more innovative. Ireland has become such a place, and this won’t change if the tax rate goes up marginally.

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There is an old German expression, “stadtluft mach frei”, meaning city air makes you free. The idea here is that the city, as opposed to the countryside, facilitates innovation and creativity because it allows people to do as they please, without strictures, dogma and the suffocation of some creed that everyone has to believe or subscribe to.

Commercial self-expression

The city is looser and the theory goes that the less stifling the environment, the more it fosters questioning, dissent and, ultimately, creativity. If we see commercial self-expression as being part of overall personal self-expression, then the more a society becomes open to all classes of self-expression, the more likely commercial self-expression will follow.

By commercial self-expression we mean going out on your own. Consider setting up a business as an act of defiance, a signal of personal autonomy, based on the inner drive that “I can do this better myself”. As a result, the more societies are open to more types of people – immigrants, LGBTQI+ people, disruptors, minorities – who want to follow their own rules, the higher the chance of having a vibrant, creative economy.

Over the past 30 years Ireland has relaxed or dropped religious and social strictures, becoming a more welcoming place for those who might want to break away from the crowd and express themselves, commercially as well as sexually, morally or artistically. The economy took off at the same time. Economics is an attitude, not a number.

This dynamic societal change – far more than any static tax rate – is the reason for Ireland’s economic turnaround. Direct foreign investment is part of that story. If it was tax alone, how do we explain that there are 10 other European jurisdictions with lower corporation tax rates than Ireland, but none have been anywhere near as successful in attracting business? There’s more to success than tax rates.

A good way to assess where multinationals are going to locate is to examine their commercial intentions. A recent CBRE report ranks Dublin as having the third largest tech cluster in Europe, just behind London and Madrid, among those cities with more than 70,000 tech workers. The same report reveals that more than 40 per cent of Dublin’s office take-up was accounted for by tech companies.

Moreover, another report from Knight Frank suggests that major tech companies such as Google, Amazon, Facebook, Microsoft and LinkedIn will occupy 4.5 million sq ft of office space in Dublin by 2025. To put that in context, that’s more than the 4.1 million sq ft they currently lease in London, a city with 10 times Dublin’s population.

This is our chance to link multilateral moves to a unilateral pivot. Why not use the extra money as a 'start-up' not 'pension' fund for the country?

So now that our tax rates will go from 12.5 per cent to 15 per cent, what are we going to do with the new 2.5 per cent that the State will get?

Here’s where we can be inventive and treat that extra 2.5 per cent as the basis for a sovereign wealth fund. This is our chance to link multilateral moves to a unilateral pivot. Why not use the extra money as a “start-up” not “pension” fund for the country?

To remain competitive, Ireland needs to stay creative. One of the impediments to starting up a company is finance. Banks won’t lend to start-ups because start-ups are too risky. Too many companies fail, putting investors’ money at risk. The key, therefore, is to “de-risk” early investments.

Why not be creative in using the additional gains made from the rise to 15 per cent corporation tax? Rather than use whatever extra revenue accrued from the higher rates for spending, it could be invested on behalf of the people of this country in the form of an Ireland start-up fund.

Sovereign wealth fund

In 2020, Ireland collected net corporation tax revenues of around €11.8 billion at a 12.5 per cent rate (though effective rates may be lower). Assuming no leakage and that all those 2020 profits were booked at the higher 15 per cent rate being suggested among OECD members, with a total haul of €14.2 billion, revenue would jump by €2.4 billion.

Let’s say we could secure that extra €2.4 billion each year and stick it into a State-owned stake in an equity fund yielding around 3 per cent per annum in return. Using a simple CAGR (compound annual growth rate) formula in this over-simplified scenario, we could see that stake rise to €13.1 billion over the course of five years: that is, each year’s instalment of €2.4 billion plus reinvested 3 per cent yield each year.

Economic history tells us that the most creative, innovative regions prosper by creating wealth

Why not create a sovereign wealth fund, as Norway has done, but use it for a seed capital fund to finance people’s innovative business ideas? In this way we could nudge the country towards being a hub for enterprise, turning Ireland into a start-up nation, where innovation is fostered and people are encouraged to have a go.

Everyone would have an equal entitlement to their share of the fund. At €13 billion in 10 years, everyone would have wealth of more than €2,000, which could be used to seed small start-ups.

If you don’t want to start a business, that’s fine. Your pension would be added to, though at a lower level because we want to produce a new Ireland, an entrepreneurial state, where creativity is rewarded rather than penalised.

Within a decade we could improve Ireland’s commercial DNA using multinationals’ taxation to transform the possibilities for tens of thousands of people, creating a nation of sovereign individuals rather than dependent wage-takers.

Economic history tells us that the most creative, innovative regions prosper by creating wealth. So why not build on our past 30 years’ success and go a bit further using other people’s money?