Monday 6th October 2014
In today’s edition of the Irish Times, economist and columnist Chris Johns gave a clear analysis of how SME’s are discriminated against by our tax code.
Headlined “Focus on multinationals stacks deck against SMEs” Johns writes,
“Some 99.8 per cent of Irish firms are SMEs. And 69 per cent of private-sector employees work for an SME. We are not out of line with most other developed economies, nor is the associated conclusion: growth in employment will be dependent on growth of smaller businesses. The current employment boom in the UK, for example, has its roots in people becoming self-employed, starting businesses and, more broadly, the growth of SMEs. Ireland reveals its antipathy towards small business via the tax system. While we bend over backwards to accommodate the tax preferences of larger, non-Irish companies, we have tailored domestic taxes to penalise the self-employed. Most obviously, there is the fact that the top marginal tax rate is 55 per cent, rather than the 52 per cent for PAYE workers. There is no rationale for this difference: I’ve tried to find one, but it seems to amount to a belief that the self-employed are usually availing themselves of tax breaks not open to PAYE workers. Such logic doesn’t bear scrutiny and amounts to arguing that many or most of the self-employed are, indeed, chancers. A second flaw arises via discrimination against low-income entrepreneurs, which stems from the tax credit given to PAYE workers but not the self-employed. This has the bizarre effect of penalising, in particular, the low paid self-employed worker. The self-employed are unwitting combatants in the war currently waged over who pays the most tax – and who should pay more in tax. Some commentators and left-wing think tanks persist in claiming that “the rich” don’t pay very high rates of tax. They then use the gross incomes of the self-employed, rather than net income (or profits), to compile spurious statistics on effective rates of tax. Apple, a topical example, paid roughly $13 billion of tax in 2013, globally, on $50 billion of pre-tax profits. It had $170 billion in sales. Its effective tax rate, properly measured, is 26 per cent. If it were a self-employed Irish entrepreneur, our left-wing army of tax experts would, via a claim that the sales figure is also the income figure, say its effective tax rate was 7 per cent. And should, therefore, be hiked. The tax system is where we can most obviously signal a change in our attitudes towards the self-employed. But there is little official appetite to do anything. There aren’t many votes because there aren’t many self-employed. That’s the problem, in more ways than one. Just as effective as a cut in taxes, and cost-free, would be a drastic simplification of the tax code. We don’t have much policy sovereignty left, but this is one area where we have huge scope to act.”
Well put Mr. Johns.