Tuesday, 12 July 2016

Soaring Profits almost equals the Total Wages Bill in Ireland.

Paul Sweeney: The news that Ireland saw GDP growth of over 26.3% in one year in 2015 at first appears remarkable. However, it had little impact on jobs or citizens’ welfare. It was the work of “magicians” working for multinationals in the tax avoidance industry.

It really illustrates is how multinational corporations and their servicing agents in the big four accounting firms and legal firms are using Ireland to avoid tax internationally with major profit-shifting, base erosion and other financial shenanigans. 

Normally - in the past in developed countries - the wage share was around 75 per cent of national income. It has been in decline because of globalisation, the decline of union power, reduced taxes on companies, productivity gains going to capital etc.

A remarkable figure is the 44% growth in profits in 2015 over 2014. This is in stark contrast to some growth in aggregate wages of 5.6% (mostly because there were more workers employed) and indeed a small rise in the earnings of the self-employed.

What is also interesting is that the share of profits almost equalled total aggregate wages in the economy in 2015. The labour share of national income – all the workers (wages and social contributions) and self-employed versus a relatively small number of owners of capital.

The labour share in Ireland in 2009 was around 55 per cent which was 5th from the bottom, with 25 countries with higher rates, I found in a paper on the decline in labour’s share of national income. It was much lower than in most countries where it is around 65%. Wages and self employed income made up just 51.3% of national income in 2015, which is not much more than total profits. 

Total profits had been around 25% of national income in most developed countries, but in recent years it has been around 35%.

Ireland is well above this but it is not all bad news because we know much of the figure is inflated with profits shifted here from other states. What is worrying is that Ireland will have to pay more to the EU because that annual payment is based on this inflated and unreal GDP figure.  

Of course this is gross distortion of statistical data by the accounting firms in the creation of the accounts of the dominant multinationals here. But is there no limit to what these companies can earn and what their servicing accountants and legal tax advisors will do?

The last 40 years has seen a major decline in labour’s share of national income in most developed countries, while that of capital has grown. This decline has major implications for future economic growth because the owners of capital and very rich people are less able/willing to spend money and thus total demand is down. This can bee seen with the share buy-backs, the vast sums on the balance sheets of many MNCs and the sea of capital scouring the globe looking for some tiny return. 

The decline in the labour share of national income has huge implications for social cohesion and economics because it is a key driver in the growth in inequality.

The main areas of policy for reform must be:- 
1. Rebalance labour market institutions, 
2. Address taxation progressivity, evasion and avoidance, 
3. Radical reform of corporate governance and company laws, 
4. Improve labour market activation, social welfare and education. 

Paul Sweeney is Chair of TASC Economists’ Networ

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