Tax Breaks for Job Creators

Stephen Collins reports that ‘project champions’ and their teams will be given large tax breaks to incentivize them to come to Ireland to set up projects that entail ‘new product development’.

Is this a good idea? Anyone know of any empirical evidence on the effectiveness of these types of tax breaks (assuming that they exist elsewhere)?

38 thoughts on “Tax Breaks for Job Creators”

  1. Is it legal? Constitutional? In line with EU legislation? Didn’t Ireland have to standardise its corporate tax rate which used to be differentiated for similar reasons?

  2. @ Paul/Stephen

    its been used in Spain (foreign footballers availed of it for a while!) and Denmark for certain.

  3. Somewhat related the Netherland have a 30% tax free allowance for some hard to get staff. I think this may have been mainly to bring in technical workers – at least that’s where I heard it being used. Apparently results in a maximum effective tax rate of 36.4%.

    http://www.iamsterdam.com/en/living/official-matters/thirty-percent-ruling

    I’d guess something like the Dutch system would be more beneficial in the long term – than what I’d assume from a first glance is a dodgy financial industry booster. It’s common for a tech multinational to switch a project or just decide to not locate it here if there are problems getting the appropriately skilled staff locally.

    Right now when needing to hire from outside this country you’re really hoping that while the hire is smart they’re not so smart they’ve ran their proposed salary through one of the online tax calculators.

  4. Only Ireland with over 14% unemployment is giving out income tax incentives to attract high paid workers. Idiocy is the first word that comes to mind.

    Any material products developed will be made elsewhere and the IFSC has enough financial acronym junk to keep the gambling going for another century.

    Ireland is now stuck with the idee fixee that high pay equeals high quality output. The TDs’ are proof positive that it does not work, the more they were paid the worse the performance got.

    Ireland is overpriced and jobs will return when we become competitive and companies can actually make profits. Our vaunted low corporate taxes are not attracting companies because they cannot make a profit. They can profitably shuffle paper with little labour input.

  5. A quick search based on the info provided by Eoin Bond and jackh turned up this paper:

    http://elsa.berkeley.edu/~saez/kleven-landais-saez-schultz1_1_11denmark.pdf

    It’s an analysis of the Danish scheme, which allows highly paid foreigners to be taxed at a flat 25%. It finds a very high elasticity of migration with respect to the net of tax rate. In other words, the scheme is effective in the sense that it succeeds in attracting such workers. The authors express concern that schemes like this could become used more widely, leading to tax competition that would limit the capacity of governments to use progressive taxation.

    The paper doesn’t address the question of the extent of the spillovers – the effect on the economy of having the high-flyers there (although, tantalizingly, they do outline the methodology that they plan to use to assess this in future research).

  6. Why not cut the effective top rate of income tax if it deters inward migration of skilled workers? We could finance it with increases in proeprty tax, service charges and reductions in the premium paid to public service workers.

  7. An EU survey of more than 16,000 small and medium size companies <SMEs, < 250 employees) found that in Estonia, 23% of companies generated turnover from exports, Slovenia: 21%, Finland: 19%, Denmark: 17% and Ireland 11%. The proportion of SME revenue generated from exports in 2005 was Belgium: 15%, Estonia: 12%, Slovenia: 11%, Iceland: 10% and Ireland: 4.2%.

    Bank of Ireland reported on a survey by MORI Ireland in 2005, which
    found that only 3% of Irish SMEs are medium size with more than 50
    employees. This contrasts sharply with the UK where medium size
    enterprises, which employ 30% of the workforce, are the powerhouse of
    the economy.

    Michael Hennigan
    Finfacts  — http://www.finfacts.ie

    Will it work?

    We will likely never know.

    Why should we worry now when so little useful enterprise data is published? We don’t even know the survival rate of firms.

    Denmark is a higher taxed economy than Ireland (its social security costs are part of the income tax system). It is a knowledge economy and the low tax rate is geared towards researchers (Ireland has had an aspiration to be recognised as a ‘world class’ knowledge economy by 2013. No need to put the champagne on ice. On Tuesday when the EC declared Switzerland the top innovator in Europe, Minister Sherlock kept his tool box of superlatives locked and he had nothing to say.)

    Noonan and Bruton get advice from the same people who went along with the fairytale that Ireland could create the equivalent of a third of the high tech jobs in California, over a decade.

    Who they were to sell to, is another story.

    There maybe be more in the Finance Bill on incentives for selling in BRIC countries.

    This is another example of actionless action. It’s hard to sell to Chinese and much harder to Indians. Maybe we should try our luck with the French first.

  8. Another point on incentives like these is that the rules tend to be liberally interpreted.

    To ensure that a project is bagged, there will be a means of having many ‘project chmpions.’

    For example, call a new project a ‘centre of excellence’ and voilà it’s classified as an R&D project.

  9. This isn’t being done because of fancy-schmancy notions about a universal model that can be implemented in Ireland. It’s being done because Irish inward investment is taking it in the neck from high personal taxation of people who don’t have to come to Ireland to work. Our highly progressive income tax system comes at a big cost, and the government is trying to tackle that cost it without making the mainstream system less progressive.

    Ireland has a long history of doing this sort of thing more quietly and on a more tightly targeted basis. Right through the boom, Ireland had notably progressive taxation on income, and it was necessary to compensate for this for some overseas personnel. Now, our income taxation has become much more progressive, so the number of exceptions required for FDI to work properly has jumped.

    The chances are that the people making these decisions know what they are doing, because they have already been doing very similar stuff for a long time.

  10. A good way of considering whether this ‘incentive’ will work is how would it have worked in period 2002-2009.

    Any suggestions for a list of beneficiaries for that period?

    The other major issue that will arise is the relationship of the ‘project champion’ to actual jobs created on the ground. Will be project champion be simply a well paid employee that in reality had little or no influence over the decision to invest.

    It seems to me that some well favoured individuals are being lined up for sweetheart tax deals.
    Who knows. Maybe we might get a ‘Glass Bottle’ plant in Ringsend compliments of the projects champion and tax expert who owned a plant there as little as six year ago.
    http://www.finfacts.ie/irishfinancenews/article_1018415.shtml

    Some very well paid NTMA or RTE staff could start to get very inventive about their tax residency.

  11. @ Michael Hennigan
    You are not being cynical enough.

    “Top-earning executives have reportedly been less keen to locate here following increases in income taxes in recent years which have brought the marginal rate to 52 per cent for PAYE workers.”
    Any executive paying anything more than 30% effective rate in this country needs to hire an accountant.

    Is this the standard of balanced journalism former Irish Times Editors are trying to defend?

    Funny thing is that as I was reading down through the article I thought it was a scheme to lure the tax registration of highly paid London Bankers to Dublin under very favourable new terms but I was totally put at ease with the line “the Government says it is not designed to lure highly paid London bankers to Dublin.” Phew!
    No its designed to move their tax affairs only. They can stay in London and allow their chizlers to continue to attend Eaton

    This move is coming as a direct result of “the financial services industry has been lobbying for a low threshold so that it would apply to entire project teams and not just the most senior executives.”

    This looks very dodgy to me.
    It seems as though the bank employees further down the food chain are growing weary of paying the 50p tax in the UK.
    The Financial industry is said to have brought in 53 billion in Taxes for George Osborne last year according to Boris Johnston.

    Don’t expect him to be pleased however I am sure the same lobbyists are beavering away in or around the house of Commons putting the case forward.

    This would actually bring in more income tax for Ireland but I don’t think the UK will be overjoyed.

  12. @Ernie

    Job creation = PAYE taxes = money for Ernie’s salary = money trickles down from Ernie’s spending. Bingo!

  13. Will this apply to public sector or semi-state executives who, say, move around between companies?

    Will it apply to company directors?

    Will it apply to TDs?

  14. 2nd class citizens in your own country. Although there is some logic to this, it won’t play well.

  15. American executives are subject to tax on their worldwide income; as for others, as it’s easy to move funds from Ireland that are part of profitshifting, executives are often paid from different locations.

    ‘new product development’ is an open invitaion to avail of the scheme.

  16. Net job creation from the MNC sector has been nill since 2000. At no stage in the past 30 years have the MNC sector employed more than 130,000 people. That is less than 14 percent of the workforce. All research shows that tax breaks for the rich over the past ten years have been recycled into global money factories not productive investment. Irelands employment crisis is directly related to a collapse in construction and domestic demand. None of these people will be employed by either the finance or high-tech industries. So lets call a spade a spade, it is the government trying to intice financiers away from London and into the IFSC to massage the GDP figures of Irish output. It reflects a determination to never learn, an obsequiousness to power and the facilitation of gross injustice by allowing the state to be subverted to private corporate interests.

    But then again all fiscal and tax policies are just technical decisions aren’t they?

  17. Looking at text of Finance Bill for this section (Chapter 3, Section 14 pg 27 on) its quite tightly controlled and dififcult to see how useful it will actually be for attracting labour. Entry to programme expires in 2014. Individual must be in State for 1 year, must have worked for company previously for 1 year outside the State, and can’t have been tax resident in Ireland for previous 5 years

  18. Tax incentives for targeted groups work and have always worked. What about the nice little incentive for new tax residents in Portugal to exempt certain types of income including pension income from all Portuguese and home country income tax. Result: hundreds of high income pensioners from various countries (including Ireland) are relocating to Portugal for tax-free retirement in a beautiful sunny climate.

    The whole idea of tax incentives is to attract the marginal new business and investment which would otherwise have gone to another country. Ireland has used tax brilliantly during the past 40 years to raise the level of new investment followed by new skills,spin off investments and managerial capacity in a way that could never have happened if we tried to do it on our own.

    Its great to listen to our socialist brethern blather on about borrowing even more money for “infrastucture etc.” investment or go back a few years and listen to Dev talk about a self-sufficient Ireland of farmers and comely maidens. We can certainly go down that road but it will be at a fraction of the standard of living that we have today. Only way to maintain our current level is to provide goods and services to international customers at competitive prices.
    We can’t stay well off by trading with ourselves alone (Sinn Fein).

  19. @ Tom Paine

    The corporate welfare scheme just introduced for the private interest of financiers is the only type of socialism that exists in Ireland.

  20. @Aidan R

    Couldnt agree more. The banks should have been put into administration with guarantees only for deposits and all bond holders put to the back of the queue.

  21. John Bruton must be ‘delighted’ with this ‘initiative’. It will make his job so much easier. Too much to suggest that our John had a word with those that make these kind of decisions.

    No doubt we will see the cost -benefit analysis that has been completed.

  22. @Tom Paine

    “Tax incentives for targeted groups work and have always worked. ”

    The ‘Ocean Cove’ hotel in Kilkee, Co Clare built by the Lynch Group (former building company) a fine example of a tax incentive that ‘worked’. The hotel is one of the many throughout the country, built on tax incentives, that is now closed.

    @All

    Lets have this tax break with a simple criteria.
    Minimum ten jobs created and sustained over a ten year period per ‘incentivised’ individual not currently resident in the State and not currently having any business interests in the State. Tax to be refunded if criteria is not attained.

    Personally I think this has all the hallmarks of a racket. Another bonus free bonanza for the banking industry.

    No doubt the Tax committee that will adjudge on this will be as astute as that Tax Committee that considered Bertie’s book, a Work of Art.

    Ireland is not rotten to the core, it is rotten at the core.

  23. Every job in FDI supports at least one other job in the economy through their spending and taxes, and probably much more, so even FDI jobs that go to people from overseas contribute to tackling unemployment.

    Some of the jobs this initative supports may be in financial services, but the initiative is at least as important for other sectors that do development work, like internet services, software and medical devices.

    The prospects for domestic demand driving employment any time soon are very poor, which leaves us with FDI and Irish manufacturing and tradeable services. In both of these, job creation and destruction has been very roughly in balance since 2000, with some good times and some bad. Creating jobs through FDI is much tougher than it was in the 1990s, but we don’t need an order of magnitude change in job creation to get employment growth motoring. Doubling or trebling the rate of FDI job creation is in reach if we can sort out our problems with competitiveness. Even with a decent domestic economy multiplier on those jobs, its not enough to sort out our unemployment problems within 5 years, but it is enough to put us on the right track.

    The employment collapse we suffered was mainly driven by the collapse in construction employment, but that doesn’t mean most of our unemployment is among construction workers. We have plenty of unemployed and underemployed people suitable to take up almost any type of jobs that appear, and a decent slice of our unemployed construction workforce has had the initiative to go elsewhere for work.

  24. All you modest earners will also be delighted to know that the Government has rolled back on the taxation of high earners pension funds as well.

    “The section makes provision to mitigate the harsher impacts at
    retirement for certain individuals resulting from the significant
    reduction to €2.3 million in the maximum allowable pension fund at
    retirement for tax purposes (the Standard Fund Threshold or SFT)
    given effect to in Budget and Finance Act 2011.”

    On retiring all pensions funds in excess of the Standard Threshold Fund (STF), were to be taxed at 41%. Tax payable at the time of retirement.

    The money can now be taken ‘tax-free’ from the pension fund to pay the tax due. Just like if you own the revenue 10,000 and you reduce your before tax salary by 10,000 and pay it over. A saving from most people of at least 41% (not clear about USC).

    Fantastic Finance Bill for the wealthy.
    Who says Ireland is in crisis.

    http://www.finance.gov.ie/documents/publications/finance%20bill%202012/explmemo2012.pdf

  25. In a recession with unemployment and emigration you’d expect an effort to direct people into areas where skills were needed. The recent McKinsey Big Data report noted a huge loomed shortage of people with deep analytical skills. Yet the recent Forfas report on ICT skills did not contain the word Analytics or mention this field at all. People doing courses in this field are walking into jobs, yet everyone is lamenting that there are no jobs for young people! Why is the government disinterested in growing our own skills?

  26. Is this scheme the final though indirect acknowledgement that the indigenous third level led Smart Economy initiative is dead and buried?

    Between the universities and the institute of technology there are probably several thousand people earning around 100k and much more.

    Would giving them the tax discount above 75K save the day?

    Someone thinks otherwise, apparently.

    Blather in, blather out.

  27. Its disappointing to note the predominant animosity towards the tax holiday measure for high-calibre immigrants. It is an observable fact that a very select group of suitably experienced, networked, backed and trusted individuals actually build sustainable profitable businesses. The corollary is that the vast majority of their peers cannot and do not. People like this who are influential, highly rewarded and competed for go where they wish to not where they are told. This phenomenon of ‘special people’ and ‘winner takes all’ is evident and accepted by everyone in the football business, music business and in almost every business. Many such people are mobile and engage in tax jurisdiction shopping. I am delighted to see government accept the reality that taxing sustainable wealth creation in the state is stupid, transfer some tax burden to consumption and unproductive assets, and acknowledge that this depressed state must compete for the value created by the minority of ‘stars’ who actually make a difference economically.
    As mentioned the measure might be better ‘optically’ if it rewarded outcomes rather than activities. I predict that this measure will not primarily target more FDI operations whether product assembly, manufacturing, software localisation or financial services. It is more likely to attract successful mid to late career entrepreneurs, many of them returning US emigres and some of them financially independent, who in time will build business here because that is what they do. In job creation terms large businesses are starting to wane in the West and the shift is towards smaller, mobile, mini-multinational operations focused on creating intellectual property of various kinds. Ireland competes with the UK to host such people and the businesses and tax flows they create. Tax breaks such as this help compensate for the reality that for all its charms in Ireland has had negligible impact as a place to craft sustainable multinational businesses. Unlike Israel, Jersey, Guernsey, Finland, Iceland, Switzerland, China, India…

  28. @Michael Hennigan
    ‘Actionless action. Maybe we should try our luck with the French first.’

    @ Eamon Moran
    ‘… Michael. You are not being cynical enough’.

    According to Irish government statistics, France is ‘Ireland’s fourth largest export’ market. And an important market for burgeoning indigenous agri-food exports.

    Don’t have stats. to hand for the volume or value of mainly US, Irish-based company exports that end up in France, directly or through Belgium.

    However, total Irish exports of food and drinks, including whiskey marketed by Pernod Ricard which owns most Irish whiskey, and which will have, in total, amounted to just under €400 million in 2011, represent, in rounded up or down percentage terms, 0% of the French food and drinks market.

    So, I don’t agree that Michael is being cynical. Sceptical maybe!

  29. @Tony Owens

    Lets clarify a few things: This is not all about specialist foreign nationals involved in R&D. If it were it is defensible.
    There are (as I understand the memo) a number of areas.

    1. Section 8: The use of a company R&D credit by ‘key people’ in that company to reduce their personal tax.
    2. Section 14 : This Programme will exempt 30 per cent
    of income between €75,000 and €500,000 from income tax for
    employees who are assigned to work in the State for a minimum
    period of 12 months by companies located in States with which the
    State has a double taxation treaty, to work in the Irish-based
    operations of their employer. The relief will be available for a
    maximum period of 5 years.
    No Need to be ‘Non Irish’.
    No need to be in R&D.
    No need to be an expert in anything.

    3. Section 17: Tax break for the Judiciary and large earners on the ‘Pension Pots’. Again.
    No Need to be ‘Non Irish’.
    No need to be in R&D.
    No need to be an expert in anything.
    Approx a 50% reduction from the scheme as outlined at budget day.

    That is my humble understanding of the measures.
    Mr Noonan is generously gilding the lilly by using the ‘R&D’ banner when talking about the 30% relief.

  30. Surely the simplest explanation is always the one to be preferred by all scientists.

    The IFSC asked for this, and it got it.

  31. According to the paper I mentioned above, there is no proper research to date on whether schemes of the type proposed for Ireland (a) attract the kinds of individuals who create jobs and, crucially, (b) who wouldn’t otherwise have come. These are the questions we need to ask.

    I am instinctively sceptical about schemes that are introduced as a result of industry lobbying. I would be less worried if I were reading that it’s being proposed because the IDA identified an important tool that is missing from its incentives toolbox. On the other hand, given the employment crisis, I’m inclined to take a ‘try anything once’ approach.

    As Frances Ruane said at the Irish Economy conference, we need to build evaluation into scheme design. I would like to see evidence that Finance have designed an evaluation of this scheme; this would require identifying the desired outcomes (something along the lines suggested by @Joseph Ryan) and putting a data collection mechanism in place in advance of the scheme’s introduction. Only then will we be able to judge whether the costs in terms of taxes foregone and increased inequality are merited by the benefits.

  32. @Joseph Ryan
    “Lets clarify a few things: This is not all about specialist foreign nationals involved in R&D. If it were it is defensible.”

    Yep. There is a package of measures not just a tax holiday for high-calibre non-residents. If the measure is specifically targeted at R&D practitioners I would be disappointed as that is not a useful target audience. As a general rule R&D practitioners don’t build companies that are sustainable and grow beyond microbusinesses. Tech literate entrepreneurs with international experience would be closer to the correct target audience. Lets hope that this is understood.

  33. @ Tim O’Halloran

    “The IFSC asked for it and got it”…

    Spot on.

    It still amazes me that many commentators, academic economists and journalists (I am thinking of Dan O’Briens rant against the ‘poverty lobby’ last week in the IT) maintain the assumption that is the public sector and NGOs that are the biggest ‘vested interest’ in Ireland. Nonsense. It is and always has been big business. The release of Charlie McCreevys diary is clear indication of this.

    I mean tax breaks for foreign executives in a context of 14 percent domestic unemployment. You really couldn’t make it up.

  34. Making Ireland attractive by reducing tax instead of reducing cost of living.

    Is this proposal for real or is it an attempt to draw attention from what is happening (or not happening) with water-, electricity- and gas-networks?

  35. @ Aedín,

    I would be fairly sure that this is an IDA initiative and, from my study of the history of relations between the two, that the Dept of Finance would have been sceptical. You either have some degree of trust in the IDA’s judgement or you do not. I do. I doubt that this type of scheme is wholly amenable to rigorous analysis (at least until several decades have passed) so I didn’t get too agitatated by this one. The IDA and its sister agencies have come out of this catastrophe with their reputations largely unscathed.

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