12/6/19: Irish Self-Employment Data: What It Says About the Entrepreneurial Nation

Official Ireland is quick to promote Irish indigenous entrepreneurship as evidence of a diversified economy, with domestic risk-takers bent on capturing international markets with new, innovation-intensive and modern goods and services. The reality, of course, is somewhat different. In 2017, based on the IMF estimate, sales of iPhones (not physically manufactured in Ireland at all) accounted for 25% of the state's GDP growth. And, on the other side, domestic self-employment, the cradle of entrepreneurship, has been on a decline.

Here are the latest statistics and trends:

Share of Irish labour force participants in employment that were engaged in self-employment has declined, on trend, from the late 1990, as did the share of those in self-employment with employees has been down-trending since around 2000-2001.  Some might think that the trend is driven by the self-employed construction workers, but that is not the case, since they bump in share of all self-employed run below the trend line in 2003-2006, and many of these workers exited employment in the crisis.

What about self-employed as the share of overall relevant (age 15 and older) population? Similar trends:

Current total self-employment share in overall population is on-trend, and that trend is down, not up. Self employment with employees trend is similar.

So about that entrepreneurship, and about the claims that the younger generations are becoming even more entrepreneurial, and about all those universities and ITs offering vast arrays of entrepreneurship programs, and about the preaching of entrepreneurial ethos and values... ahem...

14/10/15: There isn't Ireland without MNC Inc.: Budget 2016

Budget 2016 went in like a circus convoy entering a sleepy town: all pomp and all the excitement with little substance of change in tow.

Budget 2016 is a political budget and not an economic one. The point of all the smaller taxation measures in it, relating to people working for living, is simple: get those voters, vulnerable to swing Left to stay Centre. Sinn Fein got punched, few independents too; Labor got cookies to hand out. But even on this count, Budget 2016 was a fizzle of a firecracker with mostly smoke to show in the end:

1. Much lauded idea of exempting from USC all earners
2. Virtually all net gains for low income earners from this Budget do not accrue from Michael Noonan spending tax revenue or Government cash, but from minimum wage increase. Just how exactly does minimum wage hike (a mandated cost imposed onto employers - rightly or wrongly is not the point here) qualify as a fiscal policy measure (aka, Government fiscal management of the economy) beats me. Proper economics have no room on fiscal policy side for the scenarios where Government spends not its own money on stimulating its own votes. Note: Employer PRSI change is virtually immaterial, costed by the Department of Finance at only EUR7 million over full year. Where this might help somewhat is in alleviating pressure on employers to cut working hours.

Besides the above aberrations, the Budget was a net positive for current consumption spending, and was a net zilch for investment. Now, here the Government logic is completely off the charts. We are borrowing money to fund the Budget 2016 measures. And we are channeling this borrowed cash into activities that are not expected to generate a return, since these are non-investment activities. Multipliers for current consumption are miserable - most of the stuff we will be buying with the few quid we got in Budget 2016 is stuff made elsewhere and all we can collect in this economy from it is a small gross payout on labour in the retail and logistics sector. Whatever the social imperatives can be for such a 'stimulus' (and they are quite sound in some cases), it is poor economics and poor strategy.

When it comes to economics: Budget 2016 continues with a well-established theme of doing everything possible to demolish productive entrepreneurship spirit in the country. This time around, it is doing it with a flavour of simultaneously pretending that we are pro-entrepreneurs. 

Take the following post-Budget 2016 numbers:

1. Income tax: What maters here from entrepreneurship and modern economy activity is the upper marginal tax rate, not the base rate. Why? Because people do not choose to become entrepreneurs to earn EUR34,000 a year. It is that, brutally, simple. So in Ireland post-Budget 2016 we have a 40% upper rate kicking in at EUR33,800. Across the pond, in the UK, this happens at EUR59,900. Get it? Forget entrepreneurs, we are talking about school teachers being high earners according to our tax codes.
2. Dividends taxation: You get dividends on your investments (rare, but happens in normal economies). Your upper tax on these is 55% here in Ireland, whilst in the UK it is 38%. Darn, those rich retail investors who carefully select better quality long-term non-speculative shares (majority of which pay dividends). Whack them hard, shall we?
3. Capital gains Tax: We are a basket case. We have general rate of CGT of 33% which is higher than UK's 28%. We have now a new measure that allows for some reduced CGT on the first EUR1 million at 20%. Minister Noonan thinks that is a great way to reward successful entrepreneurs. In the UK, they think a reward should involve 10% CGT for such investors. For investment returns of up to EUR13 million 'entrepreneurship Island' reserves an effective (reduced by Budget 2016) rate of 32%. In the UK it is 10%. There is no CGT exemptions for qualifying investors and no CGT rollover for reinvestment in Ireland, whilst both measures are available in the UK. Case closed.
4. Capital gains structural incentives: For years Irish policymakers and Enterprise Ireland have been struggling with the fact that majority of Irish entrepreneurs opt for early exits from companies - in other words, instead of building large Multinational Enterprises, our entrepreneurs too often opt for a sale of company early on. It has been an explicit objective for Irish development agencies to stimulate growth of companies beyond certain thresholds in size in the past. And Budget 2016 just created an added (albeit small) incentive to exit earlier, rather than later (the cap on preferential rate being set at EUR1 million). Classic example of incentives contradicting objectives.
5. VAT: in Ireland, post-Budget 2016, this stays 23% and the crazy situation of charging VAT on services provided to non-VATable entities remains in place. In the UK, VAT is 20%. Thresholds: in Ireland VAT accrues for traders with revenue of >EUR37,500, but in the UK the threshold is Stg82,000. Get that, all of you self-employed and sole traders.

Of course, there is one, just one, area where Irish Government continues to impress the world: Multinationals-linked Tax Optimisation schemes. Ireland now has a Knowledge Development Box bestowing 6.25% corporate tax rate on... err... we don't quite know what. Promise is - it will apply to 'certain' patents and software copyrights. Which is just a tiny sub-set of actual business innovation and knowledge acquisition. And it is the subset that MNCs dominate. The Department of Finance estimate this measure to cost the Exchequer EUR50 million. Which really tells you just how much real activity this Knowledge Development Box is going to generate (answer is: very little) as opposed to how much of the old tax optimisation loopholes it is expected to absorb (answer is: plenty).

NY Times headline from yesterday says it all, really:

Our Knowledge Development Box is 'boxier' than that of the UK - our 6.25% tax beats their's 10% one. Case closed: MNCs win, and there is no economy beyond that which matters.

Anyone noticing that the world around us and the world inside Ireland is shifting toward supporting human capital-centric growth (yes, not labour or PAYE or specific sector, but Human Capital-centric)? Well, over 40 submissions from various bodies and individual analysts to Budget 2016 did. They also spelled out that this shift entails two key things:

• The need to recognise the risks assumed by workers and entrepreneurs working in this New Economy; and
• The need to recognise the fact that human capital-endowed workers are higher earners (not the rich, but well above the average).

People like myself have been drumming this beat for ages now. Still, Budget 2016 does nothing to resolve discriminatory taxation of human capital under the USC system, discriminatory taxation of human capital in self-employment under the USC system and broader income tax system, and it has done nothing in terms of even considering asymmetric risk loadings that entrepreneurs and self-employed carry compared to PAYEs. The Budget does help by introducing Earned Income Tax Credit to offset, partially (by 1/3rd) the glaring discrimination against self-employed inherent in the PAYE tex credit system. But this is hardly a measure to fully address the problem of the taxation system vastly out of tune with realities of modern economy.

Time to ask that pesky question, thus: Does this Government understand modern economy or do we still have leadership that thinks in terms of early 20th century proletarian world?

The sop of the 'entrepreneurship' measures unveiled in Budget 2016 is illustrative to the above question:

• Corporation tax exemption for start ups for the period of 3 years has been extended. The measure 'costs' the Exchequer EUR2 million per annum (per Budget 2016 estimates) same as the estimate for the measure in Budget 2015. Apparently, even by Department own figures, there is zero growth in uptake of this measure year on year. 
• The Knowledge Development Box - which is for all intents and purposes is about useful for entrepreneurs and start ups as the Beats by Dre headphones are to the donkey.
• The EIIS scheme to incentivise investment into start ups has been 'fixed' (by increasing company limit from EUR5 million to EUR15 million). Except, the fix addresses non-existent problem and the real problems remain not tackled. You see, you gotta be a fabled unicorn (in Irish market terms) to raise EUR15 million as a start up. Majority of entrepreneurs need far less capital than EUR5 million. So the old ceiling was not a barrier in EIIS scheme. However, EIIS is excruciatingly  bureaucratic and difficult to navigate, which it remains such after Budget 2016. And EIIS is not suitable for raising small funding that majority of start ups really need up front - EUR100,000-200,000. Which, once again, Budget 2016 left unaddressed.

And that's it. Entrepreneurs and the self-employed, high Human Capital-endowed workers, start ups, their directors and advisers, as well as their key employees - all can now send their 'Thank You' cards to the Minister for all the love and support extended to them yesterday. Or they can continue to send their business to the UK and Northern Ireland, where quietly, without labelling themselves to be the 'Best ... Country to Do Business In' the fiscal powers are trying to run a more benign environment for investors, entrepreneurs and start ups.

1/8/15: Ireland: No Country for Entrepreneurs?

Ah, the heady days of campaigning and promising are about to befall Ireland once again… soon… In the mean time, let us recall our Dear Leader's Enda "Business Dynamo" Kenny promise of the recent past:

On January 27, 2011, our pro-business Leader uttered the following: “I will seek the trust of the Irish people to implement Fine Gael’s plan to get Ireland working again… I firmly believe that by 2016, Ireland can become the best small country in the world in which to do business, the best country in which to raise a family and the best country in which to grow old with dignity and respect.”

Let's leave the family and old dignity bits to the softer side of the Coalition and focus on the first promise, squarely relating to economics.

On October 8, 2011, Mr Kenny repeated the said promise: "Since coming into office 7 months ago I have told nearly all audiences that by 2016 I intend to make Ireland the best small country in the world in which to do business…"

And then again, on February 28, 2013 the "Dynamo" spun again: "Those of you from Ireland will have heard me say many times that my ambition is for Ireland to become the best small country in the world for business by 2016. It is an ambition I believe we will achieve. The scale of reform and action across Government to improve our competitiveness is unyielding until we reach our goals."

There are many things going on here, perhaps unbeknownst to Mr. Kenny. But one thing is pretty darn clear - Ireland is nowhere near being a half-decent place to become an entrepreneur. Why? Read this: "The reality is that there is no incentive tax-wise for Irish entrepreneurs" http://www.independent.ie/business/the-reality-is-that-there-is-no-incentive-taxwise-for-irish-entrepreneurs-31396747.html. Authored by an entrepreneur and an investor.

Those of you who follow my work have known for ages that I advocate complete reform of our tax codes in relation to:

1. Employee share ownership plans and options; 
2. Capital gains taxation, especially linked to subsequent reinvestment of business sale proceeds; 
3. Self-employment taxation system; and
4. Employees, directors and owners system of reimbursement, with a direct link to their investments in business.

Those of you who are entrepreneurs in Ireland known that none (in contrast to Mr Kenny's assertions) of these (and other) key areas of Ireland's competitiveness have been reformed or improved by the current Government. I repeat: none.

Instead of creating a culture of real enterprise and entrepreneurship, Mr. Kenny is confusing pro-business (incumbent MNCs) agenda for real enterprise agenda. Thus, he continues to pile mile high various investment schemes, grants, incentives that create political subsidies to favoured entrepreneurs and companies at the expense of normal entrepreneurs and companies, that distort rates of return on investment, and incentivise rent seeking. Meanwhile, real entrepreneurs are faced with huge tax demands, tax uncertainty and legal bills to plan for these.

4/11/2014: Prosperity Index 2014: Ireland's Reforms Failing to Produce Strong Socio-Economic Results

Today, Prosperity.com (http://www.prosperity.com/#!/) are publishing the 2014 Legatum Prosperity Index which offers cross-countries' comparable data on how economic, social and governance conditions define socio-economic prosperity around the world.

According to the index methodology, "traditionally, a nation’s prosperity has been based solely on macroeconomic indicators such as a country’s income, represented either by GDP or by average income per person (GDP per capita). However, most people would agree that prosperity is more than just the accumulation of material wealth, it is also the joy of everyday life and the prospect of being able to build an even better life in the future. The Prosperity Index is distinctive in that it is the only global measurement of prosperity based on both income and wellbeing."

This post covers my analysis of the Legatum data for Ireland compared to our European peers, covering two peer groups:

• Advanced and highly competitive small open economies within the euro area, including Austria, Belgium, Netherlands, Luxembourg and Slovak Republic (SOE EA) and
• Advanced and highly competitive small open economies outside the euro area, including Switzerland, Denmark, Iceland and Norway (SOE ex-EA).
• Both peer groups are represented by the simple average ranks achieved in 2012-2014 period.

Overall, 2014 Prosperity Index ranks Ireland as 12th most prosperous nation in the world and 8th in the European region (combining 40 countries). This means that Irish rankings remained unchanged on 2013 levels both globally and within Europe. Over 2013-2014, Ireland's rankings deteriorated by 2 place worldwide.

This is an impressive ranking for Ireland placing us 5 ranks ahead of other small open economies in the euro area countries, SOE (EA), but lagging the average ranking of the ex-euro area small open economies (SOE ex-euro) by 7 places. Significantly, while similarly to Ireland's average ranking for SOE (EA) economies has deteriorated over 2012-2014, the average ranking of SOE ex-Euro group has improved. The gap between Ireland's rank in 2014 and the average rank for non-euro area SOE has widened to 7 points compared to 3 points in 2012 and 6 points in 2013.

Very similar dynamics in Ireland's performance are also evident in almost all of the eight sub-categories of the rankings.

While Irish global ranking in the economy sub-category improved from 33rd in 2013 to 29th this year, the latest ranking remains significantly worse than 2012 Index position (25th). For our peers within euro area, average rankings in 2012-2014 were 21st, 28th and 27th, respectively - a slightly better performance than Ireland's. Meanwhile, our peers' average rankings for SOE ex-euro area have consistently improved from 21st in 2012 to 17th in 2013 to 14th in 2014. Despite the officially-registered booming GDP and GNP growth, Ireland still lags behind both the advanced euro area small open economies average and ex-euro area economies average.

The gap between Ireland's rankings (2012-213 at 14th place, 2014 at 16th place worldwide) in Entrepreneurship and Opportunities sub-category and the performance of the ex-euro area SOE group (average rank of 5th in every year between 2012 and 2014) is getting wider. Significantly, after several years of talking up targeted entrepreneurship policies reforms, Ireland is showing deteriorating performance in this sub-index, with our world wide position falling from better than euro area average 14th place in 2013 to 16th (matching the exact average for the SOE euro area economies) in 2014.

Another area targeted by numerous structural policies in recent years is institutional and governance reforms. 2014 Legatum Prosperity Index ranks Ireland 14the in the world in quality of governance - with no change in the rank on 2012 and 2013 levels. Despite much of an effort to clean up and improve Irish institutional systems, our rankings show identical dynamics as that of our euro area peers. Meanwhile, our non-euro area peers' performance has improved from the average 9th rank in 2012 and 2013 to the average 7th rank in 2014. While slightly outperforming the SOE euro area average ranks (16th), Ireland's gap to non-euro area SOEs has widened from 5 places in 2012-2013 to 7 places in 2014.

In terms of core public services, such as health and education, the picture is more mixed. In education sub-category of the 2014 Legatum Prosperity Index, Ireland ranks respectable 8th, which represents an improvement on 2013 and 2012 positions (11th and 14th respectively). Here we outperform our euro are and non-euro area peers, although the gap in favour of Ireland to non-euro area peers group is closing, falling from 5 places in 2013 to 2 places in 2014 rankings. In contrast, in health services, Ireland's performance is rapidly deteriorating in absolute and relative terms. In 2012-2014, our euro area peers average rank stayed stable at 12th. Ditto for our non-euro area peers, whose average rank remains steady at the 9th place worldwide. Ireland's global rankings slipped significantly, from 11th place in 2013 to 15th in 2013 and 17th in 2014. If in 2012 we outperformed our euro area peers' average by 1 place, in 2014 Ireland showed an underperformance relative to this group of 8 ranks.

2014 Legatum Prosperity Index covers three sub-categories of social performance parameters: Personal Freedom, Social Capital, and Safety and Security. In all of these, with exception of Safety and Security sub-category, Ireland's performance has deteriorated over 2012-2014 horizon in absolute terms, and relative to non-euro area small open economies. On a positive side, our performance relative to the euro area peers remains robust.

While Legatum Prosperity Index rankings are not comparable across 2009-2011 and 2012-2014 years, actual index scores offer some indication of our performance in absolute terms in 2014 period compared to 2009-2011. Chart below shows changes in the index and sub-categories in 2014 compared to peak performance in 2009-2011.

All sub-scores that form the overall Prosperity Index are showing poorer performance in 2014 compared to their peak performance in 2009-2011 period. Index scores are reflective of country own performance, as opposed to country ranks which show relative performance compared to other countries covered in the surveys. As the chart above clearly indicates, in all sub-categories of the Legatum Prosperity Index, Ireland performs poorer today than in 2009-2011. Aside from the economic performance deterioration, Ireland's scores suffered significant declines in health, personal freedom, governance and education - all areas targeted by public sector reforms enacted by the current Coalition.

To summarise: while overall rankings for Ireland present a rather positive picture of our socio-economic institutions and environment compared to other euro area small open economies, two major concerns warrant significant attention of our policymakers:

1. Ireland remains relative under performer compared the non-euro area small open economies with our gap to this peer group average ranks and scores widening in 2014 compared to 2013 and 2012.
2. Ireland's reforms are not appearing to yield positive returns compared to 2009-2011 performance across all sub-categories of the index.

Reforms, including structural reforms, enacted from 2012 to-date have broadly failed to significantly alter the our socio-economic competitiveness compared to our core peers.