Irish tax break addiction and failed entrepreneurship
When Irish tax breaks and taxpayer support has failed over 60 years to trigger the development of a significant indigenous sector in Ireland engaged in international trade, why would more tax breaks provide the magic to promote entrepreneurship?
We have said in the past that if you are thinking of becoming an entrepreneur and if you are worried about the capital gains tax rate say five years later when you expect to make a killing, then you should stay in your 9 to 5 job.
Less than 4% of UK startups have 10 or more employees 10 years after their creation according to a report on scaling-up companies that was commissioned by the British government. More than 300 millionaires were created through sales of Irish startups or young firms in 15 years but there have been no significant scaleups.
Fast-growing firms are in several sectors despite the word "startup" being commonly linked with tech firms, most of which remain micro with less than 10 employees.
If the Patrick and John Collison, natives of County Limerick, had founded Stripe, their online payments service in Ireland in 2010 rather than San Francisco, it would likely be now part of a bigger multinational firm — companies like Google (it has acquired over 200 startups since 2004) and Apple depend on acquiring startups for key innovations and this is the typical route for an Irish tech startup with high growth potential and reliant on local venture capital for funding.
As with the impact of further tax breaks being a myth, most successful tech startups in the US and elsewhere are not funded by venture capital. See:
High-tech sectors not big job creators in Europe and US — only 25% of innovation success depends on the investments in ICT (information and communications technology) and related technologies.
The Export Profits Tax Relief (EPTR) - the forerunner of Ireland's low corporation tax regime with a headline rate of 12.5% — was introduced by Gerard Sweetman, Fine Gael finance minister, in the Finance Bill of 1956. It provided for a 50% tax remission on profits earned from increased export sales and in 1958 the relief was raised to 100%. Today Ireland is more dependent on foreign direct investment than any other developed country — ignore fanciful claims that US investment in Ireland has doubled since 2007. Wonder why $115bn can support 613,000 jobs in US firms in Germany and $311bn supports 108,000 jobs in Ireland? Hint: data distorted by massive tax avoidance!
Indigenous exports (including tourism and transport) were valued at €32bn or 12% of the total headline value of Ireland's exports of €261bn in 2015 — excluding fake services exports of €60bn (Double Irish tax dodges) and another €60bn in tax-avoidance-related overseas "contract manufacturing" coupled with excess transfer prices, a more reliable ratio would put the indigenous export ratio at 23%.
Ireland simply has a very low number of exporting firms compared with for example Denmark and the idea that this could be rectified by more tax breaks is risible.
Besides low corporate taxes, Irish companies also have payroll taxes which are among the lowest in the developed world — only 40% of workers in the private sector have occupational pension coverage — it's not a political issue as lawmakers and senior civil servants have one of the world's best pension schemes.
On 3 June, The Irish Times published a report on the Collison brothers and Stripe, and reported in respect of Ireland:
Patrick believes the push for a low-tax rate for entrepreneurs is over-rated, coming from people not involved in entrepreneurship who think low taxes are what entrepreneurs want. He suspects some dress up requests for more favourable tax treatment as support for entrepreneurs.
"John and I have made a full-time job of talking to startups and it is incredibly rare that anything tax rate-related comes up. Tax complexity comes up all the time but as to the total absolute rate of taxes, it is not a problem,” he says.
Patrick refers to the famous quote from Picasso about when art critics come together they talk about form and structure, while artists talk about where to buy cheap turpentine.
Brian Caulfield, chairman of the Irish Venture Capital Association (IVCA), and head of the Dublin office of Draper Esprit, a venture capital firm, responded to the Collison brothers in Tuesday's Irish Times:
Firstly, their reasoning is based on having made “a full-time job of talking to entrepreneurs” and noting that it’s rare to hear tax rates raised as an issue.
That’s not my experience, and I also have a full-time job of talking to entrepreneurs as a venture capital investor. But the real problem is that they are talking to the wrong people. To understand the impact of taxation on entrepreneurship, you also have to talk to those who are not entrepreneurs because the risk-reward ratio simply doesn’t make sense to them.
You have to talk to those who were entrepreneurs and who gave up because they tired of the financial sacrifices that you frequently have to make. In talking to current entrepreneurs you are talking only to those who are doing it anyway, in spite of everything. Quite rightly, they focus their attention on the problems that are within their control and those that will directly impact their business in the short term.
Secondly, the Collisons live, work and pay their taxes in the US. The US has a much more favourable regime from the perspective of entrepreneurs and those who work in startups than Ireland does. Indeed, I seriously doubt that the Collisons are really that familiar with the details of the Irish taxation system and how it actively discriminates against entrepreneurs.
Michael Noonan, finance minister, in Budget 2016 last October proposed a lower 20% rate of CGT (capital gains tax) up to a lifetime maximum gain value of €1m. This compares with a rate of 10% in the UK and a lifetime ceiling of €10m.
Is this change 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.
Endeavor is a global entrepreneurship movement and in a report published in 2014 on a survey of 150 founders, it found that "two factors that are often discussed by policymakers and business leaders — low tax rates and business-friendly regulations — were mentioned only a handful of times in our 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."
1. 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;
2. We believe that the magic formula for attracting and retaining the best entrepreneurs is this: a great place to live plus a talented pool of potential employees, and excellent access to customers and suppliers. According to the entrepreneurs in our study, cities that offer these resources are more likely to benefit from fast-growing companies that create jobs and increase prosperity in their communities;
3. Access to talent was not the only business-related resource mentioned by the entrepreneurs in our study. Nineteen percent of the respondents also cited access to markets, in the form of clients or suppliers, as a factor in their decision to locate their company in the specific city where they did so. This response was most common among entrepreneurs leading companies that sell to other businesses, rather than individual consumers.
Other research confirms the importance of having existing connections in a city. This is relevant for the Irish Government's efforts to attract overseas residents who have not lived in Dublin or Ireland to launch startups there.
The Irish Government is also a provider of capital to venture capital funds but the VC model with its incentive for an exit when a startup with potential gets a buyout offer, contributes to the lack of scaleups in Ireland.
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.
Despite the low tax regime in Ireland, the lobbyists will continue to demand more business tax breaks without having to present credible evidence, and eventually the politicians will relent because they have access to policymakers.
Pic on top: Patrick and John Collison ©Stripe