Irish Innovation/ Entrepreneurship needs more focus than tax
Last week we wrote that tax breaks remain the main Irish policy tool: they are easy to implement; without having to worry about evidence, they can intuitively seem wise and in accord with the conventional wisdom, and they are always welcomed by vested interests. The palliative for the Dublin housing crisis are more tax incentives not tackling a system that makes development land scare in a country with the lowest density in the EU, and in recent times there has been a chorus of calls for more tax breaks for innovation and entrepreneurship.
If low taxes are such a magic elixir for Irish business — zero tax on export profits from the mid-1950s, 10% from the early 1980s and 12.5% from two decades later — why is the economy still dependent on foreign exporting firms and has a very low number of indigenous exporters? — see here and here.
Coupled with the lowest corporate tax rate in Western Europe, employer social security costs (PRSI-pay related social insurance) are also at the lowest level in Europe. No business firm in Ireland is required to provide employees with an occupational pension and most don't.
Data from the Organisation for Economic Cooperation and Development (OECD) show that Ireland is a low-tax country and separate OECD data show that Ireland has the second-highest percentage of the workforce on low pay among its mainly developed 34 member countries.
On Monday in the Irish Times, Chris Horn, a co-founder of IONA Technologies, raised two issues in his monthly column in the newspaper 1) the aspiration of Enda Kenny, taoiseach, that by 2016, Ireland would be "The best small country in the world to do business” 2) the view that in the years ahead "Ireland is unlikely ever to have a competitive tax system for entrepreneurs."
On the first issue, the 2016 target will not be met and even if a legal services bill will be passed in coming months, real reform may happen or not years ahead as key changes are subject to "further consultation" — a display of cowardice from a government with a huge parliamentary majority.
Doing Business 2016: Singapore on top; Ireland slips to 17 ranking — the World Bank's flagship assessment of the ease of doing business in 189 economies.
Chris Horn wrote:
Competitive improvements to capital gains taxation (CGT), share options and indirect taxes were all overlooked [in the Budget] as an opportunity to showcase Ireland as an internationally attractive location for entrepreneurs. No doubt this will all be aired by several Irish delegates this week at the Dublin Web Summit.
Michael Noonan, finance minister, did announce a lower 20% rate of CGT up to a lifetime maximum of €1m. This compares with a rate of 10% in the UK and has a lifetime ceiling of €10m.
This is likely to persuade people to stay as an employee or put off entrepreneurs coming to Ireland to establish a business?
An Irish-based firm can hire from overseas and where pay exceeds €75,000 annually, 30% of the excess without limit including taxable benefits, is tax free.
We reported last month that in a survey of 150 founders in the US, low tax rates and business-friendly regulations were mentioned only a handful of times in the surveys and interviews. "In fact, words related to specific quality of life factors, such as 'park' and 'restaurants' were discussed more frequently than terms related to taxes and regulations."
80% of entrepreneurs had lived in their city for at least two years before founding their company. Close to half of respondents cited their current residence as a factor in deciding where to launch their company.
Neither is venture capital key to success:
Entrepreneurs, even more than employees, tend to locate in regions in which they have deep roots (‘home’ regions) according to a 2011 paper on research in Denmark.
Simply arriving in a country with a suitcase and maybe a family in tow with few or no local connections or a returning expatriate who has to try and renew old connections is not a great backdrop to launching a startup.
There are several more important issues and challenges than levels of some taxes.
Any young Irish high tech startup with potential is inevitably acquired by an overseas firm and more than 300 millionaires were created in 15 years but no scaleups.
Elan, IONA Technologies, Parthus Technologies, and a number of other firms from the 1990s and prior, were once bright stars of the indigenous sector but no more.
In the 10 years 2005-2014, enterprise agency assisted Irish indigenous firms in Information, Communication & Computer Services, added 8,000 jobs to total 24,000 — including 11,000 in consultancy.
Total indigenous employment in exporting firms grew by 2,000.
Chris Horn was a member of the 28-strong Innovation Taskforce which reported in 2010 and saw "the potential to contribute to net job creation in high-tech firms of the order of between 117,000 and 215,000 between now and 2020."
The biggest impediment for indigenous high tech is that there is a tiny local market or none and to become successful in export markets domestic selling experience is a big plus.
On innovation, more than a decade of the 25% self-assessed Research & Development tax credit has not improved Ireland's innovation capacity.
In a 2013 study of 30 countries, Ireland ranked last for business support of university research.
More than half IDA Ireland client firms do not engage in R&D while 13% of the foreign-owned firms (107 firms), each spending over €2m, accounted for 88% of R&D spending in the foreign-owned sector in 2012.
Startup Ireland: Evidence-based revolution to make a difference — Policy needs to be evidence-based not based on hunches and the myths of conventional wisdom.