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« Sean Dunne, Prince Hans, the Gestapo and Hot Property Deals in Poznan | Main | Oh My God! The Heritage Foundation Says Nice Things about Ireland »

February 28, 2008

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Hugh Green

The effect of property speculation on commercial rents

Mick,

I know from my own experience that the rental price of commercial property is one of the decisive factors in setting up or continuing to run business services in Ireland. I wrote about it here:

http://hughgreen.wordpress.com/2008/01/17/1236/

James Lawless

Congrats on the polblog nomination - you're in good company!

Might see you there http://jameslawless.ie/2008/02/29/polbloggers-of-the-world-unite/

Michael

Hugh - thanks for pointing that out to readers. I had read it but didn't want to get in the details of commercial rent in this post which is why I didn't link it. But here's an idea (and if you want to run with it, go ahead): to propose to Irish business - in one of our posts - that we introduce commercial rent controls. In exchange, they'll have to give something back out of their savings to the workforce/economy (part of Lemass's Bargain). But do you think they'll go for it - the introduction of another layer of state bureacracy in order to bring down their rents? I'd say some would and we could both name those who won't. Divide and conquer.

Thanks, James, and good to put a face on the blog and blogger.

Pavement Trauma

You really need to get off this 'We're-all-being diddled-by-peculiarly rapacious-Irish-businessmen' kick, it is getting a bit silly.

Do you really believe that businesses outside of Ireland patriotically and voluntarily restrict their profit levels in order to keep their country competitive?

I can think of quite a few reasons for the higher levels of profits in business services here.

a) the lower corporate tax rates on profits b) we were - at least up until recently - in a booming, expanding economy where profits tend to be greater and (a tad more speculatively) c) the mix of business services here as opposed to the other countries.

In the period your figures cover, the German rate of tax on corporate profits was 39% - as opposed to 12% here. A German businessman is a lot more incentivised than his Irish counterpart to reduce his declared profits by charging 'business' expenses to the company - like the lease on a Mercedes 500SL - as it only costs them 61%.

It also means that multinationals station their shared services centres here to provide central / corporate services to their subsidiaries in the rest of Europe and - via a bit of transfer pricing jiggery pokery - earn profits in a low corporate tax environment.

It has also has an effect on the vast majority of companies in the business services sector - the ones that have 1-9 employees. The owner / principal of these can take their compensation as salary and pay both employee and employer PRSI on it or they can pay themselves a more modest salary, earn profits which are lightly taxed and take dividends instead - on which they only pay income tax.

Also, the business services sector covers a multitude - from cleaners to lawyers. Some sub-sectors are more profitable than others. Different mixes of those sectors will result in different profit levels. For example - proportionally speaking - we have a larger financial services sector than Germany with a resulting higher proportion of higher earning accountants, lawyers, IT consultants etc. that come in its wake.

This is not to say that certain sub-sectors are not ridiculously over priced - lawyers spring to mind. But that's what happens when you allow some people to rig the game.

Michael

Thanks for your comments, Pavement Trauma. Let me just clarify a couple of things regarding the EU KLEMS database which I linked.

First, it is based on gross profits. In other words, it doesn't measure profit after tax. If that were done the gap between Irish profits and other EU country profit levels would, of course, be bigger. So in relation to the data I presented, the references to tax levels - in Gemany or here or anywhere else the KLEMS database covers - are not relevant.

Further, these are business services - not financial services (which are primarily multi-national based and, therefore, susceptible to transfer-pricing manipulaitons). So the references to 'financial services' is not relevant here (just to let you know - profits in the financial services here in Ireland are ahead of EU profit levels by a major extent).

I take your point about the small enterprise owner taking their income through profits. I'm not familiar with tax law in other countries but we might see a similar effect - which would effictively cancel each other out. But even if that weren't the case - the small enterprise owner doesn't play much a role in this sector. Enterprises with a turnover of over €1 million a year - and they average 38 employees per enterprise - make up 80% of the turnover and 72% of employment. So the effect you mention would be marginal.

There is no doubt we need more statistical information on these and other sectors to find out what's going on. However, it would appear based on the information at hand, that something very strange is going. Irish business does not act the same way as it does in other countries. It's not about tax, or the financial sector, or the income strategies of small enterprise - which I have pointed out. And it's not about patriotism. What is it? It is not 'silly' to ask these pertinent questions. It would be 'silly' not to.

Pavement Trauma

Tax rates certainly are relevan because they influence how people people behave - if profits are more heavily taxed in Germany, then businesses there will try harder than those here to minimise their taxable profits. Hence the Merc 500SL.

The reference to the financial sector was a reference to the types of businesses that serve that sector - high earning business services like IT, accounting, legal advice. Their profits per employee are higher than for, say, cleaning companies. Proportionally we have more of them, hence the overall profit per employee figure is pushed up.

There are numerous corporate shared services centres here that provide inhouse business services to their international subsidiaries - and make lower taxed profits doing so, again contributing to higher profits per employee.

Lastly higher profits per employee is a good thing. It allows higher levels of employment, higher salary levels and higher levels of investment. If you think those profit levels are somehow 'excessive' then start an enterprise is that sector - like the 8,000 people who have done so.

N

Just to perhaps put the above discussions into a wider perspective, taxes are not higher in Germany in Ireland, if one specifically exclude Social Insurance Contributions. As these are mainly pension contributions, Irish taxes are higher and of course we have by far and away the poorest pensioners as private sector pensions do not work. Secondly the main reasons why profits are considerably below the Irish level are prices - a lot lower than Ireland and secondly reinvestment. Private sector R & D expenditure is high in Germany, though the other German speaking country Austria, has even higher levels. R & D expenditure in Ireland outside of the multi national & state funded university sectors is nearly non existent.

The entrenched tenant rights of most continental countries make property speculation an odd pursuit pursued by the Anglo Saxon english speakers. Those Irish people who have speculated throughout Europe are in the process of learning a very hard lesson at home and abroad.

Finally can I refer to the QNHS survey? It shows Ireland with foreigners making up nearly 16% of those working. Take away them and you have an Irish participation rate in the low 50s, There is something very wrong with the Irish economy and the hiding of 000s thousands of people of working age.

Can I suggest that if you are looking for comparisons for Ireland that you look at much smaller economies, say Denmark & Finland. Both are high tax and very efficient open economies.

Pavement Trauma

"Publishing of software" activities are included under the Business Services sector. That's the reason for any profit per employee disparity - the profits of Microsoft Ireland, Oracle Ireland et al are included in the figures Michael is using. For example Oracle Irish operations earned profits of €486M last year.

That is why all this businesses = cannibals nonsense is just plain silly.

N

Pavement Trauma the problem is that the klems index shows that all sectors of the Irish economy are making super normal profits. A trip to your local shop should raise very serious questions for you. For example, two litres of milk is selling at nearly 5 times the price the farmer is getting for it. Irish retailing is dominated by a very small number of players and very few people are in a position to visit five or more shops to compare prices.

Even taking out the sub group of computer software from business services, the figures stand out. Also Microsoft & Oracle pay much higher salaries, Microsoft's average in 2006 was approx. €100,000 per employee, pushing up employee average earnings also.

There is however a much wider issue - why is the native private sector, other than the subsidised food sector, dependent on public sector contracts? Despite local tax rates, grants etc. there are no Irish world class manufacturing companies. Compare this to Denmark or Finland..........

Pavement Trauma

I would agree with you that supermarkets in Ireland probably are gouging us (although this is not unique to Ireland - the same concerns arise in the UK and in France, where incidentally a litre of fresh milk in a Carrefour is €1.39). You correctly identify that Irish retailing is dominated by a small number players. It is disgraceful that there is no transparency into the supermarkets' accounts as they are private companies or subsidiaries.

The point is the article sought to establish - on the basis of comparing profit per employee figures with other countries - that the same sort of price gouging occurs in the Business Services sector. The gist of it was 'If only Irish businesses in the sector took the same level of profits as their German counterparts, prices in it would fall 8.3%'. No such conclusions can be drawn from the figures because they are completely distorted by the presence of multinational software companies like Microsoft and Oracle. Oracle's profits have been roughly 10% of the overall sector's for the past few years.

It is irrelevant what MS and Oracle pay their people, we're comparing profits.

I'll make the point again: we tax corporate profits very lightly. Hence, if they can, companies structure operations so as to declare more profits here. Hence comparing profits made by companies here (without stripping out these effects) with those abroad is pointless. Any conclusions based on such comparisons are, at best, deeply flawed.

Michael

Pavement Trauma - the analysis is not flawed if you're careful to examine sectors that don't have high penetration of MNCs. For instance, you mention Oracle in the software category of business services. I accept that - that is a category that is highly susceptible to profit manipulation. However, in the legal/accounting/marketing sector which the CSO shows is mostly indigenous we still find profits per employee increasing more than 100%. In fact that sector experienced a higher growth in profits per employee than the computer sub-sector.

So it's not so silly or deeply flawed.

Pavement Trauma

Your article drew its conclusions based on a comparison with German firms - that was flawed. Now you draw the same conclusions based on growth rates over some unspecified period, with no international comparison.

Would it be unfair to speculate you started with a premise and then strove to find some data to back it up?

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