Paschal Donohoe is worried about one of Ireland’s big multinationals closing down and taking billions of taxes with it.

One eighth of government revenue comes from the ten biggest companies, and one fifth of workers (many of them in the multinational sector) account for one third of income tax revenues. Between corporation tax and income tax, the Minister said in his speech yesterday that between eight and ten billion of tax revenue is at risk.

That’s partly why the Minister is putting €8 billion into a pension reserve fund. He’s worried about a scenario where he pumps up government spending, and a couple of technology firms pull out, and the government finances get wrecked.

Another solution would be to diversify Ireland’s industrial base. As we know, the economy is dependent on multinationals. Domestic companies are not at the races. A 2017 study by the OECD found Irish SME’s share of gross value added is the smallest of 28 countries studied by the OECD. And only 6.3 per cent of Irish domestic firms are exporters, compared with an average of 15.9 per cent in eight European countries.

Ireland’s industrial strategy is as follows. We tax company profits lightly, but we tax capital gains heavily and dividends very heavily. This has the effect of privileging foreign investment over domestic investment because foreign investors’ dividends are untouched by Irish tax.

Then, having taxed companies heavily, the government supports them  through a multitude of Enterprise Ireland schemes. 

But if the government is worried about over reliance on multinationals — to the extent of being unwilling to spend taxes derived from them — maybe we should get serious about boosting domestic industry? 

Lower the hurdles

One obvious thing that could be done is to make it worthwhile, as an Irish person, to invest in Irish businesses. Because as things stand, taxes are so high it’s hardly worth it. 

For an individual investor, I calculated that after dividend taxes, capital gains, and inflation, after 14 years, a €1,000 investment would be worth €1,021.95 in today’s money. Why even bother?

Taxes on investment aren’t like property or income taxes. Property and income taxes are hard to dodge. People have to work. They have to live somewhere.

Investment, on the other hand, is discretionary. An investment that doesn’t make financial sense will not happen. The would-be investor can always do up their kitchen instead.

Ireland taxes investment more heavily than other rich countries. Dividends are taxed at 51 per cent. That’s the second-highest in the OECD.

As for capital gains, Ireland ranks at about the top of the bottom third of OECD countries.

The problem with taxing investors is that you’re taxing investment. Less investment means fewer pub renovations, warehouses and software startups. It’s not hard to draw a line between Ireland’s weak domestic companies and high taxes on investment.

Last year, I calculated the impact of Ireland’s dividend and capital gains taxes on companies’ hurdle rates (the minimum required return needed for an investment to be worth making).

I found capital gains and dividend taxes almost doubled (from 5.2 to 10.2 per cent) the amount of profit a publicly-traded company would need to make for a given investment to go ahead. I found that for private companies, the required return went up from 15.1 per cent to 21.3 per cent. 

“So a pub renovation costing €100,000 would have to generate €21,300 in profit per year to go ahead; whereas without taxes, it would have to return €15,100 per year. This kind of calculation would apply to every investment decision by every business in the country.”

There doesn’t seem to be a clamour for lower taxes on investment in Ireland, which is odd. Maybe people don’t miss what they’ve never had.

A looking-glass economy

Let’s imagine Paschal Donohoe cuts taxes on dividends and CGT, and Irish domestic companies flourish, and 250,000 jobs are created. What might happen next?

Ireland is at close full employment, so the extra workers would have to be imported. 

The workers would need homes, and Ireland is unable to provide homes. So the extra workers would join the bidding war for Ireland’s existing homes. Rents would go up. People would be forced to emigrate. And the benefit of our flourishing domestic industry would go to landlords, rather than workers.

This is the looking-glass economy we’re in right now, where what’s good is bad. Better universities, help for renters, more foreign investment, more tourists, help for Ukraine — all get stuck on the bottleneck of housing supply. It’s perverse. And it’s a problem that can’t be solved by a Minister for Finance on budget day.