Writing in the Business Post, Tom Maguire quotes a Nobel prize-winning economist:
‘Success is achieved when the tax rules subsidise activities that benefit society as a whole more than they benefit the individuals engaging in the activities.’
Fair enough. He also writes that we need to encourage and incentivise a thriving domestic entrepreneurial economy. Again, fair enough. We need new and better enterprises driving innovation, incomes, environmental sustainability and progressive working conditions. Poorly performing, low-road businesses drag all of us down.
However, there are two issues here. First, would expanding tax reliefs (which Maguire calls for) actually promote entrepreneurship?
The ESRI’s recent report - ‘Options for Raising Tax Revenue in Ireland’ – touches on some of these issues. The authors - Theano Kakoulidou and Barra Roantree – specifically look at the Entrepreneur Relief which cuts the Capital Gains Tax from 33 percent to 10 percent under certain conditions. This is a substantial relief. It cost the Exchequer €92 million with 875 beneficiaries - an average of a €106,000 tax break per recipient.
The ESRI study states:
‘The justification for applying lower tax rates to people who own their own business n is far from clear. Preferential capital gains rates are often defended as essential to reward difficult and risky entrepreneurial activity . . . Evidence from the UK shows that few entrepreneurs who availed of a similar relief there knew of its existence when starting their business, and even fewer reported it having influenced the timing or nature of their disposal. This suggests that the relief is more likely to generate efforts to avoid tax on retirement than its intended purpose of spurring entrepreneurship or investment.’
That’s pretty provocative – entrepreneurial reliefs can lead to tax avoidance rather than generating new business activity. Demands for more reliefs (i.e. cash subsides) need to provide concrete evidence that they are working. If the ESRI analysis holds, the evidence is thin.
But Maguire cuts to an even more fundamental issue than tax efficiency. What the heck is entrepreneurship? There is a tendency in the public debate to mythologise or reify the ‘entrepreneur’ and, so, individualise what is actually a complex social activity. Maguire states:
‘In essence, entrepreneurial activity is about founders getting in, staying in, and then passing the business on at the appropriate time.’
This individualised entrepreneur makes for interesting rags to riches stories, people who navigate the banks, investors and bureaucracies to bring their idea to commercial fruition. But it is largely a myth. Cyrine Ben-Hafaïedh notes that the hunt for the single, heroic entrepreneur was like ‘hunting the Heffalump’:
‘ . . . even when it was proven that this quest was vain, entrepreneurship scholars continued to embody entrepreneurship in a single person, a lone and heroic entrepreneur. But . . . the 'entrepreneur' in entrepreneurship is more likely to be plural, rather than singular’.
Entrepreneurship, driving progressive business activity and innovation, is a social and collective process. It is achieved through the cooperation between a range of people in supportive activities, both within and outside the company. The development of new goods and services, new processes of production, emerges out of a social dynamic.
The literature is full of studies to show that enterprise activity improves as more democracy is introduced into the workplace (here is one example from Finnish local authorities). From consultation and information, to collective bargaining, employee participation, worker autonomy, co-determination and works councils, co-management - all the way to labour-managed enterprises: greater democracy and participation - leads to improved enterprise performance and innovation. Centralised or individualised models of enterprise risk the opposite as this study shows within SMEs:
‘. . . centralized decision-making, which was found to have direct negative impact on innovation, was found to have negative impact on collaboration and communication.’
In this study, similar results showed for larger enterprises:
‘ . . . decentralization [is] positively connected to employee involvement, absorptive capacity, and firm's innovation performance. Moreover, the results show that employee involvement positively influences innovation performance . . . The results also suggest that firm's innovation performance positively influence firm's business performance’.
If we want a ‘thriving domestic entrepreneurial economy’ we need a structural transformation that increases democratic participation within enterprises. This transformation will vary with businesses and sectors. But a starting point is employees’ right to collective bargaining which the OECD shows improves firm performance. The more workers are involved, the better it is for innovation and productivity.
But it’s not just about the re-organisation of enterprises along a stakeholder model. There are two other key elements which are briefly mentioned here:
Education: when economists refer to the entrepreneurial skills of the labour force, they are referring to the entire population which grows business activity and value. Education is the foundation. Investment in education at all levels, including return to education and re-training in adult years, boosts entrepreneurship. However, Ireland is a major education underfunder.
We’d have to spend an additional €1.8 billion per year to reach the average of our EU peer group – other high-income EU countries. How much entrepreneurial activity are we suppressing by under-funding education?
Second, we need new enterprise models. Private sector business activity is only one type of activity. We need to expand the range of models to fit the needs and preferences of entrepreneurial engagement. Public sector models – especially local public enterprise, civil society models, certified B companies (which are legally required to consider all stakeholders, not just shareholders), labour-managed enterprises, networks of own-account workers (self-employed), etc. This calls for a pluralist approach to business models.
This provides a different perspective and set of demands running into Budget 2022 and beyond. What support can we provide ‘entrepreneurs’?
- Increase democracy in the workplace, starting with collective bargaining and incentivising democratic activities and structures (e.g. employee participation, works councils, co-determination, etc.)
- Increase education expenditure through a social and industrial consensus on how to best allocate that increase
- Develop new enterprise models and provide specific supports (e.g. Local Enterprise Offices to target local public enterprises, labour-managed enterprises, etc.)
This could be the start of a renewed entrepreneurial drive based on democracy, education and pluralism.
Business in Ireland is everyone’s business. Literally.
Comments