Innovation Talk: Government’s tax policies are discouraging entrepreneurship

'The best small country for business, by 2016." The Taoiseach Enda Kenny has sonorously intoned the Government's goals for the revitalisation of the Irish economy in several recent speeches.

Since the formation of the Government in March 2011, Ireland has done extremely well not only to retain but also to further attract foreign direct investment (FDI), and at a high level. The IDA 2012 annual report records a 10 per cent increase in expenditure (to €18.8 billion) by overseas companies on payroll and procurement into the Irish economy over the prior year. By last July, 70 foreign companies had committed to further investment projects in Ireland since the start of 2013, compared to 61 at the same point last year.

Competing jurisdictions are envious of our FDI momentum. It has increased despite the collapse of our economy, the subsequent bailout, and all the consequential negative commentary that resulted across the international business media. The IDA has continued to do Ireland proud.

But, in consequence, there has been considerable pressure on Enda Kenny and his senior team to dramatically revise Irish taxation structures so as reduce Ireland's competitive advantages for FDI. Ireland's moral position has been weakened by disclosures of the relatively small actual taxes paid across Europe by several of the multinationals operating here. It is thus all the more remarkable that Ireland has not only maintained, but actually increased FDI under Kenny's leadership.

On the other hand: "Ireland is a terrible place to be an entrepreneur." So surmised Brian Caulfield, the Irish partner for the US venture capital firm DFJ Esprit, in commenting on the philosophy of last year's national budget. As part of its strategy to revitalise the Irish economy, the Government has courted DFJ Esprit, and other international risk capital firms, into Ireland to catalyze the indigenous high tech start-up sector. It is frankly perverse that Kenny and his colleagues have done so much with taxation policies to encourage FDI, yet simultaneously done so much with taxation policies to proactively discourage entrepreneurship.

Capital Gains Tax for entrepreneurs has been increased by a factor of two-thirds by the Kenny administration, as compared with the prior Cowen administration. In Ireland, capital gains by entrepreneurs are now taxed at 33 per cent. In the United States, entrepreneurs' capital gains are taxed at just 20 per cent. In the United Kingdom, entrepreneurs' gains are taxed at just 10 per cent.

Irish entrepreneurs thus suffer over three times more capital gains tax compared to that paid by neighbouring entrepreneurs in Northern Ireland.

Poorly conceived taxation policies actively discourage economic growth. By contrast, attractive capital gains taxation policies encourage entrepreneurs to build new businesses and grow employment. They also encourage private investors to put wealth back into the productive economy, by seeding additional start-ups and providing capital to further entrepreneurs.

Taxation policies conceived for established companies with operating profits in general do not cultivate entrepreneurial high growth start-ups. High growth start-up companies rarely have high profits (and thus, nor dividend payouts). The majority of start-up founders re-invest any spare capital from their businesses straight back into further growth. More staff are hired as the company seeks to expand its operations. Ultimately, such entrepreneurs seek to create companies that will be attractive for either a stock market floatation (IPO) or strategic acquisition by even larger companies. Entrepreneurs – and their investors – who start high growth companies expect to finish the race.

High-tech hubs
Under international pressure, Ireland may be unable to exploit competitive corporation tax to attract and retain multinationals.

A positive alternative could be a dynamic pool of indigenous high growth companies, similar to those of the high technology hubs already established in Silicon Valley and elsewhere. Such hubs attract multinationals seeking new ideas, talent, and pace. These hubs clearly show that the wealth created by capital gains not only benefits the local host economies by higher rates of purchase of goods and services, but also nurtures yet further waves of start-ups by fresh investment. Indeed, wealth creation and thus capital re-investment are at the core of the business model of risk capital firms such as DFJ Esprit.

"It's not where you start, but where you finish." These words, alongside a photograph of Eddie Jordan – entrepreneur, and former F1 team boss – are on posters around the country advertising the business services of one of our phone companies. Entrepreneurs do not just start, but also aim to finish, and so take their experience on to enter the next race. Enda Kenny and the Government are currently penalising each successful finish by any entrepreneur in Ireland. In turn, the incentive to even consider starting is diminished, as is the decision to re-invest taxed gains into any new wave of start-ups.

Paddy Cosgrove, entrepreneur and organiser of the Dublin Web Summit, expects at least 199 start-ups – who have collectively raised $5.9 billion – to visit Ireland at the end of this month.

Unless the taxation policy for entrepreneurs operating in Ireland is rapidly reconsidered, Enda Kenny and his colleagues will clearly be discouraging these – as well as our own – entrepreneurs to stay.