Focus on multinationals stacks the deck against SMEs

Ireland reveals its antipathy towards small business via the tax system

Apple’s effective tax rate, properly measured, is 26 per cent rather than the 52 per cent for PAYE workers. Photograph: Andrey Rudakov/Bloomberg

Apple’s effective tax rate, properly measured, is 26 per cent rather than the 52 per cent for PAYE workers. Photograph: Andrey Rudakov/Bloomberg

 

Has the significance of inward investment been exaggerated, even to the detriment to the growth of indigenous businesses? The jobs provided by multinationals are, of course, vital. But the stark fact is that employment in foreign-owned companies assisted by agencies such as the IDA is only a touch above where it was 10 years ago – and is actually below where it was in 2000.

Profitability data illustrate the divide while also referencing that tax debate. On one measure at least, CSO numbers show that Ireland has the most profitable companies in the EU. But we slip towards the bottom of that league table once foreign-owned enterprises are excluded. In fact, apart from Lithuania and France, we have the least profitable firms in Europe.

Some 99.8 per cent of Irish firms are SMEs. And 69 per cent of private-sector employees work for an SME. We are not out of line with most other developed economies, nor is the associated conclusion: growth in employment will be dependent on growth of smaller businesses. The current employment boom in the UK, for example, has its roots in people becoming self-employed, starting businesses and, more broadly, the growth of SMEs.

Governments everywhere say they are focused on policies that help SMEs. Do they mean it? In the first instance, there is an old debate about culture: do we really like business, do we encourage, respect and admire the entrepreneur?

Cultural biasses are always hard to prove one way or the other, but it is uncontroversial to argue that Irish attitudes towards business are not the same as, say, American ones. We still admire chancers rather than risk takers and condemn those who fail by sending them to apartments in Swansea rather than encouraging fresh starts.

How we change this, assuming that we want to, obviously won’t be easy. It has to start with the education system. Yong Zhao, a US academic, recently argued that “traditional schooling aims to prepare employees, rather than entrepreneurs . . . the more successful traditional schooling is . . . the more it stifles creativity and the entrepreneurial spirit.’ I wonder what he would make of the Leaving Certificate.

 

Setting up the self-employed

Ireland reveals its antipathy towards small business via the tax system. While we bend over backwards to accommodate the tax preferences of larger, non-Irish companies, we have tailored domestic taxes to penalise the self-employed. Most obviously, there is the fact that the top marginal rate is 55 per cent, rather than the 52 per cent for PAYE workers.

There is no rationale for this difference: I’ve tried to find one, but it seems to amount to a belief that the self-employed are usually availing themselves of tax breaks not open to PAYE workers. Such logic doesn’t bear scrutiny and amounts to arguing that many or most of the self-employed are, indeed, chancers.

A second flaw arises via discrimination against low-income entrepreneurs, which stems from the tax credit given to PAYE workers but not the self-employed. This has the bizarre effect of penalising, in particular, the low paid self-employed worker.

The self-employed are unwitting combatants in the war currently waged over who pays the most tax – and who should pay more in tax. Some commentators and left-wing think tanks persist in claiming that “the rich” don’t pay very high rates of tax. They then use the gross incomes of the self-employed, rather than net income (or profits), to compile spurious statistics on effective rates of tax.

Apple, a topical example, paid roughly $13 billion of tax in 2013, globally, on $50 billion of pre-tax profits. It had $170 billion in sales. Its effective tax rate, properly measured, is 26 per cent. If it were a self-employed Irish entrepreneur, our left-wing army of tax experts would, via a claim that the sales figure is also the income figure, say its effective tax rate was 7 per cent. And should, therefore, be hiked.

The tax system is where we can most obviously signal a change in our attitudes towards the self-employed. But there is little official appetite to do anything. There aren’t many votes because there aren’t many self-employed. That’s the problem, in more ways than one.

Just as effective as a cut in taxes, and cost-free, would be a drastic simplification of the tax code. We don’t have much policy sovereignty left, but this is one area where we have huge scope to act.

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