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Innovation Talk: Government’s Tax Policies Are Discouraging Entrepreneurship

Monday, 07 October 2013   (0 Comments)
Posted by: Chris Horn
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Author: Chris Horn (The Irish Times)

‘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.

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