Tuesday, 30 August 2016

Ireland's Tax Policy: The Rotten Core of the Apple

Today's announcement by European Competition Commissioner Margrethe Vestager that Ireland broke EU state aid rules by providing selective tax treatment to two Irish-registered subsidiaries of IT giant Apple Inc. has sent a predictable tremor through officialdom. So it should. For the best part of thirty years, Ireland has adopted an economic strategy of combining the 12.5% corporation tax with access to the EU's Byzantine framework of tax treaties and internal market rules to craft nifty arbitrages which have allowed the country to plug the revenue streams of foreign multinationals and high net worths through Irish platforms. Some have been designed to achieve (uncontroversial) tax neutrality in the operation of platforms which pool the monies of investors in multiple jurisdictions (like Irish registered investment funds and debt issuance vehicles) while others have (much more controversially) sought to shoehorn streams of profit that could easily have been taxed elsewhere into an Irish residency, thereby allowing them to be taxed in Ireland (needless to say, at a rate below that of our competitors).

For many years, it worked well. Ireland's clubby business community was given a mechanism for making money that didn't involve inconvenient Anglo-American-type conflict with governments and organised labour. Our unwaveringly statist trade unions and civil service got easy tax revenues and GDP growth which allowed them to indulge their passion for shackling the Irish economy with burdensome regulations without catalysing an Irish Tea Party. Ireland's notoriously conflict-averse political class was able to keep everyone happy by mollifying the business community whilst requiring the public sector to swallow only some minor ideological heterodoxy. The effect of the policy has always seemed benign (and in many ways still does) but it conceals the fact that beneath the glitzy surface of our 12.5% rate of tax, Ireland's accretion of numerous EU-required and home-grown regulations makes the country into a less than ideal place to build from the ground up a profit stream to take advantage of the 12.5% rate in the first place. How do you start a small business in Ireland? Start off with a big business.

Today's decision is significant. The EU has used the State Aid rules as a mechanism for intervening in our tax policy. For now, they make the understandable argument that we cannot have special tax rates negotiated between the tax authorities and individual companies (to use a clothing analogy, tax rates must be an off-the rack product, not bespoke). But this is almost certainly the camel's nose in the tent. We are only two or three logical steps away from the EU declaring that the 12.5% rate itself somehow constitutes a form of state aid. And then what? The answer, it would appear, is that the Irish economy will be much like Samson shorn of his hair. For this reason, Michael Noonan has had no choice but to forcefully defend Ireland's position. However, something in his comments on RTE this morning was reminiscent of the old adage about stable doors and horses:

"As far as I'm concerned there is no economic basis for this decision. It is bizarre and it's an exercise in politics by the Competition Commission. They don't have responsibility for taxes and they are opening a backdoor through state aid to influence tax policy in European countries when the European treaty says that tax policy is a matter for sovereign governments, not any aspect of the commission."

This is a discussion that it might have been fruitful to have before we passed the Single European Act, Maastricht, Amsterdam, Nice, Lisbon and the Fiscal Treaty. Of course, having proper debates on these matters would have had the potential to kick the sleeping dogs whose docility remains the principal guarantor of our somnolent political consensus. Whatever, the result of this episode, however, there is no future for an Irish economic strategy based on a social democratic domestic tax and regulatory system combined with a Caymanian or Bermudan style system of offshore tax arbitrage.

Ten or fifteen years ago, an event like this would have resulted in a huge majority supporting Mr. Noonan's defence of our tax rate, with only a marginal leftist minority opposing Ireland's right to act in her own national interest. No longer. In the grim post-crash economy, there are two Irelands. There is a white collar Ireland, which engages in design, programming, financing, consulting and professional services. This Ireland, based primarily in Dublin and the surrounding counties, and which is in rude health, regards our corporate tax system as a crucial feature of the economy. However, there is now a blue collar Ireland, which still engages in manufacturing, building, growing and extracting things (or what's left of those activities) and has economic prospects which are dim and getting dimmer. To this Ireland, the economics of our tax system revolve around brass plates on buildings in Fitzwilliam Square, fees for lawyers,accountants and other professionals and little else. This Ireland has little emotionally invested in our corporate tax system and is willing to listen to left wing fantasists who will doubtless bandy about numbers like €13 billion, as if they represented money which could otherwise have been taxed and spent by the government, like the pot of gold at the end of Larry the Leprechaun's rainbow. It's nonsense, of course, but white collar Ireland would do well not to scoff with contempt: its own economic ignorance may be different but it's just as egregious.

The abiding picture of Ireland in the wake of the Commission's decision is one of a deer in the headlights. The establishment parties, led by Fine Gael, are torn between their fealty to the EU (and its role in their economic strategies) and the ability that that institution has to crush Ireland's economic model like a paper cup. Meanwhile, the only significant oppositional forces consist of students' union retreads who believe that Ireland will somehow be rewarded for helping the insincere crony capitalists in Brussels to get Europe's tax authorities a bigger slice of the pie. With no constituency in Ireland for economic realism, we are left with an unenviable choice between the warmed-over corporatism of the centre parties or narcotic ravings of Ireland's innumerate left.  Not an inspiring choice...

Monday, 22 August 2016

The Pat Hickey Affair: Fiddling while Rio burns

Minor controversies of a largely or partially confected nature serve the age-old function of distracting the citizenry from the true crimes and follies of its rulers. The Brazilian authorities have arrested Pat Hickey of the Irish Olympic Council on the basis of a "crime against the popular economy". You might ask what such a Stalinist sounding offence might entail and if you imagined that it might have something to do with Petrobras, Brazil's state-owned oil monopoly running a slush fund which it spent years using to bribe members of the ruling PT party - a scandal which resulted in the recent impeachment of President Dilma Rousseff - you'd be wrong. Perhaps you might have thought it had something to do with the colossal administrative and policing corruption of the City and State of Rio de Janeiro and the consequent lawlessness and poverty in which the foregoing results. You'd be wrong on that too. No, Mr. Hickey has been arrested for ticket touting: a process of secondary market arbitrage whereby a person who believes that tickets for an event are being sold at an undervalue buys them in bulk and attempts to sell them to end-users at a profit. Forgive me for feeling that there are somewhat more pressing uses of Brazilian taxpayers' money than criminalising activity that is simply a form of routine financial speculation, especially when their country is a cesspit of official incompetence and corruption. 

This is not to minimise what Mr. Hickey has been accused of doing. Unlike an ordinary decent tout who buys tickets on his own dime, Mr. Hickey is accused of using his privileged access to tickets via his role as Irish Olympic supremo (a largely taxpayer funded role) and personally profiting from it. The IOC is publicly funded, so it is very much our business. Even if it wasn't, the IOC is not Mr. Hickey's piggy bank, so this scandal is very much its business. I'm not going to prejudge the issue but if the case against him is proven, Mr. Hickey should be sacked, sued, made to pay compensation to the IOC/taxpayer and be disgorged of all profits made as a result of his activities (and the same goes for any accomplices). His affairs should be investigated by forensic accountants for whatever period deemed reasonable by the government and any and every scam should be exposed. None of this has any effect on the hard-pressed people of Brazil, nor does any of it justify the gut wrenching spectacle of a 71 year old man being held in a jail so dirty that his head has had to be shaved to ward off fleas. Mr. Hickey, if he is guilty, belongs in the poor house, not the big house. 

As usual though, the real crime and folly is missed. The Brazilians have the opportunity to sanctimoniously admonish what is, at worst, a petty spiv, as a means of protecting the prestige of their dysfunctional institutions. In Ireland and the western world, by contrast, we engage in the hypocritical bullshittery of attacking Mr. Hickey for acting entirely in the spirit of the Olympic Games and international sport more generally: socialised costs and privatised profits. The Olympic Games are a quadrennial orgy in government subsidised pseudo-entertainment beloved of corrupt and totalitarian regimes which can use paid gladiators to simulate the achievements that their incompetent and/or despotic systems can't generate. The Soviet Union and its Warsaw Pact allies routinely used the games as a mechanism for concealing the economic, social and political failure of their fetid political system and while fraudsters on their level are thankfully a thing of the past, the Olympics are still a mechanism whereby basket cases like Jamaica can affect superiority to serious-tech savvy India  - which has the good sense not to waste resources on shallow circuses like the recent Rio spectacle.

The Games are, in reality, symptomatic of the disease-ridden intersection between money and politics. Every four years, cities and national governments blow vast amounts of money on subsidising the event, which largely involves the provision of resources to second-division sports like running and beach volleyball that can't compete with sports like football and rugby which make for genuine televisual spectacles. The aforementioned subsidies are sold to the population of the city and country in which the event takes place as a tourism and PR booster. However, all that happens is that the inhabitants of low or middle income cities like Athens and Rio see resources diverted to investment which is designed to facilitate a one-off event which will last a few weeks, while the opportunity costs of the spending will be amortised over years and indeed decades into the future in higher taxes, fewer services and unsuitable and  malinvested infrastructure. An event that otherwise couldn't possibly be run at a profit takes place and the advertisers, sponsors, contractors, sports bureaucrats and (in the case of an elite few) participants take all of the phony profits that the Games generate.

Of course, back home, an analogous process is taking place, whereunder national governments compete to spend money on athletic development which will have the effect of enriching a few bureaucrats like Mr. Hickey and a few hundred of the aforementioned paid gladiators and the citizen receives nothing more in return for the expense than being able to brag about how many medals his country won. If there's a lesson in Hickey's alleged conduct, it's that all he's done (if he has indeed done it) is to do illegally what everyone else in sports administration has been doing legally for years: sucking up taxpayer juice and giving us nothing in return but ephemeral national pride. The incomparably eloquent Dr. Theodore Dalrymple sums my own thoughts up nicely in his recent Takimag piece:

"Once again the only country of any size that, as far as I can see, emerges from the Olympic Games with any credit is India. Accounting for something like a sixth of the world’s population, it had not—the last time I looked at the table—won a single medal in any event. This proves that, at least in this regard, it has its priorities right. It has steadfastly refused to measure itself by the number of medals it wins at the Olympics and does nothing whatever to encourage its citizens to devote their lives to trying to jump a quarter of a centimeter longer or higher than anyone else in human history.

Bravo India, bravo!!!

Thursday, 18 August 2016

The Danny Healy Rae Affair: Hot Air Everywhere

It is now nearly two decades since Healy Rae became a household name in Ireland and it's fair to say that the further one lives from the clan's home base of Killorglin, the more mystifying the eponymous phenomenon has been. In my own East Coast patch, the reaction to the late Jackie and to his sons has ranged from mild amusement to deep embarrassment. Back in the happier days of 1997, when those living outside suburban Dublin were more contented than subsequent economic shocks have rendered them, the family and the phenomenon they represented were regarded by sophisticates as being somewhat akin to the then popular Father Ted sitcom: a harmless if somewhat anachronistic tourist attraction. My vague memory of the period is that we were all in on the joke and laughed along. As the national mood progressively soured and the bust and subsequent recovery widened the gap between the prosperous East on the one hand and the West and the rest on the other, Healy-Rae-ism has begun to harden into the beginnings of a coherent worldview and the booming franchise which now has two TDs in the same constituency has come to be regarded as a national embarrassment and a danger to the country.

There's no great mystery to what the phenomenon represents. In 2008, Ireland rowed in behind the global bailout consensus and played dutifully along with the international elite's penchant for supranationalism and nodded obediently when Europe's emerging empress Angela Merkel announced that a global problem which had been aggravated and amplified by a jaw-droppingly ill-conceived European currency required "more Europe not less". The global QE-funded bailout has, predictably, levitated asset prices, rescued insolvent gambling houses, funded equally insolvent public sectors and done nothing for real wealth-creating private sector activity. The bailout's Irish franchise brought us NAMA and vast cash infusions into our Zombie banking sector. The result has been a windfall for investment property owners and professional services providers in the Dublin suburbs whose effect starts to peter out as soon as one hits the commuter belt. Meanwhile, the South Docklands and IFSC became the disproportionate beneficiaries of the Central Banks' successful inflation of new bubbles in tech and finance. The February General Election told a tale. Fine Gael won two seats out of three in Dun Laoghaire and none from five in Tipperary.

Back in Killorglin, the fast moving world of bubblevision might as well be a different planet. In 2007 and 2011, Kerry backed the establishment parties, whether they sold continuity in 2007 or austere prudence in 2011. By 2016, however, Kerry and its many neighbours outside the metropolis had given up. To them, NAMA and bailouts had looked after the donor class and, to a lesser extent, the regions in which it lived. Meanwhile, nothing the government did post-2011 did much for the regions. I'm deeply sceptical as to whether the people of Kerry would have actually chosen to vote for a deliverable agenda that might have brought them growth and jobs (it would have involved putting thousands of pages of regulation of land use, manufacturing, fisheries, agribusiness and the labour markets into the proverbial shredder). However, they're not wrong to believe that the political establishment is intellectually bankrupt and offers nothing more than warmed over corporatism for an urban and suburban cast of professionals, executives and pseudo-entrepreneurs. In the absence of a complex and well-thought-out programme of rational sacrifice calibrated towards a beneficial endgame, the Healy-Rae worldview is not irrational (even if it is destructive). It can be summed up in the immortal words of Dick Cheney: "Go fuck yourself!!!". As philosophies go, it certainly lacks sophistication, but the alternative on offer appears to be nothing (Fianna Fail, Fine Gael, Labour, the Social Democrats, the Greens) or worse than nothing (Sinn Fein and the hard left). The Healy-Raes are not remarkable for what they are (unsophisticated pork barrelers) so much as what they are not (the establishment or the anti-austerity pseudo-opposition that provides the establishment with a foil).

Without a positive message of coherence, the true nature of the "Go fuck yourself!!!" doctrine is inchoate and shall so remain until a new recession (whenever that occurs) makes the prosperous suburbs wake up from their fantasy world and grasp the nettle of painful reform. In the meantime, it does little but generate the occasional controversy of academic interest. Danny Healy Rae, having recently turned himself into a laughing stock by attributing climate change to God rather than anthropogenic global warming, has compounded his situation with a media interview in which he raises Noah's Ark as evidence of the protean nature of climate. The derision has been predictable and not unearned. Indeed, Mr. Healy-Rae's indubitable electoral shrewdness suggests to me that metropolitan ridicule may, in fact, be the entire object of the exercise: "We're not going to let a bunch of arrogant Jackeens tell us what to think!!!! Are we?!?!". The entire professional class together with its auxiliary division of wannabes ("I have the same opinions as smart people so that means I'm smart.") will laugh until the next media phenomenon crowds this one out. It shouldn't. Danny Healy-Rae is not a very powerful person. His stupidities are not very important. Not so those who do exercise power. The powerful believe in stupid things too. These things matter a great deal more.

We live in an epoch of error. The Grecian prefixes of "cis" and "trans" are all the rage at the moment. Assert a different "identity" and it seems that the once anodyne question of what toilet to use in a public building becomes very complicated indeed. In a historic cycle characterised by intellectual error, the elites become (to adopt the nomenclature of the bathroom wars) "Trans-rational": i.e. They believe in profoundly and manifestly crazy things but "identify" as rational, logical and empirical in their thinking (Stephen Colbert's quip that "[t]he facts have a liberal bias" is fairly typical of the oeuvre). Nothing demonstrates this more than the ideology of anthropogenic global warming catastrophism. Start from a logical position, it seems, and all subsequent illogic becomes irrelevant. To wit, I don't know whether Mr. Healy-Rae doubts the veracity of the Greenhouse effect (i.e., the notion that anthropogenic emissions of gases such as CO2 result in heat being trapped in the Ozone layer causing global temperatures to rise). I most assuredly don't - though, having little expertise in the area, I'll stop short of claiming to know it is real. Suffice it to say that I believe it to be so. However, from this point onwards, moral certainty eludes me.

Is the planet actually heating up? When anthropogenic emissions are set off against and aggregated with other phenomena such as soot or CFC emissions (which would tend to reduce global temperatures), what is the net effect? I don't know.

If it is heating up, are the net effects likely to be positive or negative? Will the loss of certain tropical, or equatorial landmasses and worsening flooding of coastal cities be compensated by, for example, boosts to agricultural productivity caused by higher CO2 content in the air? I don't know.

If negative, will the effects be catastrophic or will they be amenable to some reasonable degree of adaptation? In other words, is this just another of those trade-off moments that has periodically occurred through human history as our ingenious but highly predatory race has wiped out whole species and deforested entire continental landmasses? I don't know.

Regardless of its effects, if the scourge is potentially preventable, does prevention represent a better use of resources than adaptation? Again, I don't know.

I have no doubt that if you put these specific questions to Mr. Healy-Rae, his answers would be the same as mine. However, regardless of whether one is scientifically qualified or not and regardless of whether one is a believer or a sceptic, I think that nobody, if they were being entirely honest (a rare virtue, I know), could answer all of them and I'm certain that the overwhelming majority, like me, couldn't answer any. Of science, I am a man of little erudition. However, I can say with confidence that there is no experimental testbed big enough to determine any of these climatic theories, putting practitioners of so-called "climate science" at a distinct disadvantage relative to other scientific peers.

Those who loudly assert that anthropogenic global warming is (a) real; (b) catastrophic; (c) in desperate need of preventive measures; and (d) actually preventable, will loudly assail Mr. Healy-Rae for having spoken without qualifications or knowledge. Fair enough. But how many of these people are, themselves, possessed of the requisite knowledge and expertise that they condemn Mr. Healy-Rae for not acquiring before venturing his opinion? The answer is: vanishingly few. Enda Kenny, David Cameron, Al Gore, Fintan O'Toole and Paul Krugman are just five names I just picked off the top of my head of public figures with no scientific qualifications who have answered questions (a)-(d) above in the affirmative. Should they be condemned for having opined without the appropriate credentials? Personally, I think not. However, if the supposed umbrage at lay people contradicting experts were genuine, would one not occasionally hear someone like Rajendra Pachauri or George Monbiot tell Al Gore or Paul Krugman to button it? "Guys, if we don't apply the rules to our friends, we can't complain when our enemies flout them". Funnily enough, nobody seems to object to Al Gore (holder of degrees in humanities and law) contradicting the views of sceptical meteorologists like Richard Lindzen and Piers Corbyn. What this tells me is that the umbrage is selective and more or less entirely insincere.

In truth, a metropolitan sociologist, newspaper columnist or environmental lawyer who holds forth on climate change is, as a rule, no more materially knowledgeable about climate science than Mr. Healy-Rae. In saying that "climate change is the transcendent issue of our age", he or she is making three powerful statements that have nothing to do with his or her scientific knowledge.

1. "I trust people who hold formal academic qualifications more than I do people who do not."

2. "I trust people who work in the public sector, the liberal professions and new economy industries like IT more than I do people who make their money from industries that are hot, noisy or smelly."

3. "I am loyal to a tribe. I believe that the better educated are more trustworthy than the less well educated. I believe that those who are smarter are always and everywhere wiser. I believe in a status system founded on brains and credentials and that those with few of the former and none of the latter should do (and think) as they're told."

In saying what he says, Mr. Healy-Rae is saying the reverse of those three things, namely (a) that he doesn't trust those more impressively credentialed than him or his constituents to act in the interests of society at large; (b) that he believes that people with jobs in the creative economy are demanding sacrifices that those toiling in the fields, factories and mines will be asked to make; and (c) that he is loyal to his own, more humble tribe and that the expert ought to be a servant and not a master of society's destiny.

So it would appear that what is really happening here is classic Orwellian doublethink: condemnation in others of behaviour in which one habitually engages oneself.

That said, the real issue is not one of science but of economics and public policy. Yes. The question of what the reality and consequences of anthropogenic global warming are is one for the scientists, as is the question of what would need to be done to prevent the phenomenon and its consequences from unfolding as they are predicted to do. However, the world is replete with examples of lay people having the ultimate say on an area of abstruse expertise. If we are to accede to the notion that only the scientifically credentialed can make the call on climate change, we must accept that judges and arbitrators cannot make decisions on matters of architecture or civil engineering in a building negligence case. We must also accept that only panels of doctors can make pronouncements on medical negligence issues. Moreover, how many consumer choices involving lay people using experience, logic and preferences to choose between competing products and services whose ultimate qualities lie in complex matters of uncommon producer-side knowledge? In the same way as a judge or a consumer must decide whether he believes a self-interested expert to be correct, it ultimately will fall to a lay polity elected by a lay electorate to decide whether the theories emanating from bodies like the IPCC are correct. Therefore, if the purveyors of conventional wisdom wish to convince the masses of their hypothesis, it would behove them to show some humility.

However, what happens after history's jury returns a verdict? What on earth can the global political system do to reduce greenhouse gas emissions? The answer is that it must globally cap the use of carbon emitting resources. However, to do so would require the biggest and most universal cartel in human history. The reduction in CO2 emissions will ultimately have to come down to using fewer natural resources. However, if even one substantial sized country (e.g. China) refuses to join in the effort, the price of raw materials and energy will fall and the dissenters will say the proverbial "thank you very much" and buy and use the resources themselves. Without an ecologically catastrophic series of wars to secure global compliance, the cartel would collapse within months or a short span of years. The likelihood, therefore, is that any attempt to prevent anthropogenic global warming would almost certainly fall at the first hurdle.

However, even if the alarmists managed to build the biggest cartel in human history and successfully launch the biggest policing operation in human history to enforce it, their real problems would only just be beginning. Whether one seeks to cap emissions and trade unused permits or to cap raw material use and extraction and trade in the attenuated secondary markets in commodities, the inevitable result will be a resource competition which the world's richest countries and people would win. How politically acceptable will it be for Haitians and Chadians to starve because they were outbid for resources by Learjet owning plutocrats or patio heater using suburbanites? Within months of the ensuing famines, the authorities will be forced to set minimum carbon or resource quotas for vital production such as that of food and medicine. Pretty soon, this would require the global planning of resource allocation for every industry in the world, with annual, monthly or perhaps weekly quotas being set by giant planning agencies. Of course, planning the allocation of commodity resources to individual industries would require the global planning of production, distribution and exchange of all goods and services. What the world would soon end up with is Soviet-style socialism - only this time, on a global scale. All market pricing mechanisms would gradually atrophy as more and more production would have to be micromanaged by a gigantic equivalent of the Soviet GOSPLAN. Of course, that experiment, which was veritable childsplay compared to the monumental task of globalised economic planning failed - and failed miserably. Nothing has changed since the early 1990s that is going to make Bolshevism work any better than it did last time.

Bluntly, while the questions of whether the world is warming, what the consequences are and how they might be prevented are scientific, the question of whether the proposed solution (planning lower emissions) can work is one of economic and public policy - and it is a matter of very straightforward economics that every possible variant of the only possible solution is unworkable as a matter of practicality. For this reason, the conclusion seems inescapable that whatever the findings of present and future research, our chances of preventing whatever is to come are precisely nil. The only questions that remain are (a) what is going to happen; and (b) how we can adapt. The notion that we can marshall what the research teaches us into preventative action is the quasi-narcotic fantasy of a feverish child. The fact that those who occupy positions of power and influence purport to believe in such fairy tales indicates that we are being led by, at best, knaves and, at worst fools.

This brings me back to Mr. Healy-Rae. My sense of him (and of other parish pump localists like Mattie McGrath) is that, on some visceral level, he has looked at the global warming agenda and he sees a scam. If so, I agree with him. However, the manner in which he expresses his concerns (and, to be honest, his motivations for expressing them) do not inspire confidence. Mr. Healy-Rae is an avatar of a corrupt and irrational system. My advice to him would be to stick to steering pork into his constituency and to stop undermining the positions of those of us with justified misgivings about the alarmist agenda by acting as an inarticulate and embarrassing spokesman for an important and rational worldview.