Monday, December 08, 2014

Is Maintaining Museums more important than maintaining the corporation tax rate

It is often said that the only reason foreign companies are in Ireland is because of the 12.5% corporation tax rate. That if we increased this rate these companies would go and never return. You may be surprised to learn the 12.5% rate wasn’t something concocted by Sean Lemass in the 60s or something created in the depths of the depression of the 80s to save the good ship LE Ireland from doom. No. In fact the 12.5% corporation tax rate was introduced by Charlie McCreevy in 2003 during the height of the boom.

The belief that this rate and this rate alone is why the companies are here doesn’t stack up to much consideration. If it is all about the corporation tax rate why are all Facebook’s software engineers not just based in the Caymen Islands or the Isle of Mann? In 2013 Facebook paid €2.3 million euro in tax on profits of around €7 million in Ireland. Going by the logic that corporation tax is the be all and end all, a doubling  of the corporation tax rate in Ireland and thus a bill of an extra €2.3 million would cause them to leave. So that then poses the question. If €2.3 million extra is enough to get them to leave Ireland, how come €10.49 million yearly rent is not enough to get them to leave the city center of Dublin for say the cheaper office space of Longford?

The profits that Facebook made in 2013 were on the back of revenues of €2.9 billion so an astute observer might point out. What the relevant aspect of the Irish taxation system is not the 12.5% rate but the double Dutch Irish sandwich and that is why these companies are here. And indeed it is true,  there are many companies that are based in Ireland for these reasons. Many of them are in the IFSC and consist of no more than a single office and a letter box. So then the question becomes. Why if Facebook etc’s purpose here is purely for the tax regime, would they go to the expense and bother of hiring 1000s of people and spending millions on rent, when they could achieve the same effect with a small office in the IFSC?

The location of companies are not arbitrary (something politicians and governments seem unable to grasp when they keep promising to get some multinational to move to a provincial town). At the start of the industrial revolution in Britain, factories were formed in very precise places, beside water. They needed streams and rivers to provide the power to run their looms and mills, it was the key resource. Without water their factories didn’t function. Later on in the industrial revolution and with the invention of steam power, companies were no longer tied to rivers, what they were tied to was their most vital resource, coal. And thus the great factories of the Victorian era were built near coal fields, making the towns of Birmingham and Manchester, cities. Today, companies are still restricted to locate near their most valuable resource, however that resource is now talent instead of the water and coal of yesteryear.

Google, Facebook, Twitter all require talented individuals to make them their billions. They need for want of a better word nerds. So how do you get nerds? Well first of all you have to pay them a salary but anyone can do that and not all nerds are motivated purely by money. Want to know where the best paid university academic positions in the world are? Saudi Arabia. Why? Because no nerds want to live in Riyadh where its 52 degrees in the shade and you have a religious police. Neither do they want to live on the Caymen islands and sit on the beach drinking cocktails with umbrellas all day. Nerds want to live in cities preferably English speaking because that is the international language and also if in Europe in the EU to allow ease of movement. But it is not just any cities. Look at America, nerds live in San Francisco, Boston, Seattle, not Detroit, Miami, or Las Vegas. They want cities with character, history and culture. They don’t want sprawling suburbs they want town centers.

They want theatres, coffee shops, cosy pubs, music, restaurants, art galleries, museums. and this is why the recent news about the impending closure of museums in Dublin is so serious. Dublin can attract nerds to live there because it can offer them the type of life they want, It is big but still small enough compared to say a London to retain a community feel to it, it offers restaurants, coffee shops, theatres and other cultural outlets that a small town like Longford (or indeed the Isle of Mann) just can’t compete with. And because it has these things, it attracts and retains nerds. And because it does, it attracts and retains Facebook, Google etc. Once it does this it attracts even more nerds which attracts even more companies chasing the talent already in big companies.

Museums are an integral part of a city's cultural life. If the cultural life of the city is not treated with respect and supported by the government, if Galleries, theatres, museums are shut, Dublin will become a far duller place to live, and the young mobile nerds that Facebook and similar depends on might think twice about living in Dublin. And if they up and leave, well Facebook isn’t going to stay. For Facebook an inability to recruit the best of the best is going to have them out of the country far quicker than an extra €2.3 million in tax will ever have.