Ireland’s Tax Haven Economy Isn’t Delivering for Its People (2024)

In 2015, Ireland posted annual gross domestic product (GDP) growth of 24.5 percent. The claim that a Western European economy could grow by a quarter in one year was clearly outlandish, particularly as Ireland had only just exited a troika bailout program in 2013.

Writing in the New York Times, Paul Krugman coined the term “Leprechaun Economics” to define the wildly inflated growth statistics of the Irish state. The Irish ambassador to the United States immediately complained, but the Irish Statistics Office quietly acknowledged that Krugman was onto something when it created an entirely new measure for the Irish economy known as modified gross national income (GNI*).

In most states, GDP and national income are more or less interchangeable. This is true in most of the Organisation for Economic Co-operation and Development (OECD) countries, for example. In Ireland, on the other hand, the two diverged steadily during the 1990s before parting ways more quickly after 2015.

The reason for the discrepancy is that Ireland is currently one of the world’s major tax haven economies. This was a finding made by a US senate committee in 2013 when investigating Apple’s ability to declare billions of its non-US profits “stateless” for tax purposes. It was also the opinion of the European Commission in 2016, when it declared that Ireland had granted illegal state aid to Apple by allowing it to move vast profits through the state, virtually tax free.

Up to that point, a small number of US transnational corporations (TNCs) used Ireland as a conduit through which to move their non-US profits. To achieve this objective, TNCs established two companies in the Republic of Ireland while declaring only one liable for corporation taxes.

The Irish legal system allowed companies to pay their taxes overseas if their central decisions were made abroad. All the company had to do was funnel profits from the tax-compliant Irish business to the one registered overseas — usually in a state where corporate tax rates were close to zero. This so-called “Double Irish” maneuver was one of the world’s most successful tax avoidance schemes, sheltering up to a trillion dollars for major US TNCs.

But the big problem was the obvious fiction of registering Irish companies that often paid their taxes in the Caribbean. This proved difficult to defend once international scrutiny began to mount from 2013 onward. In response, the state shifted to an alternative tax avoidance strategy known as capital allowances for intangible assets (CAIA).

This had first been mooted in 2009 when Ireland was in the depths of recession. Foreign direct investment (FDI) dipped in the years immediately before the Great Recession, and this scheme — which focuses on the growing importance of intangible assets for global corporations — was the state’s response.

Instead of moving profits through Ireland, CAIA encourages companies to move their intellectual property (IP) into the country. The value of intangible assets is more difficult to measure than traditional investment, particularly as companies normally produce those assets in one arm of their business and sell them to another arm through a nonmarket (transfer) price.

The core advantage of this scheme is that it allows tax deductions against the cost of IP that is extremely difficult to evaluate correctly. Indeed, as the accounting firm KPMG told some of its investors in 2017, the benefits are almost limitless:

A hypothetical company with an equity market capitalisation of €1,000 million, but tangible assets of €100 million can argue that the gap of €900 million represents its intangible asset base, which can be legally created and appropriately located . . . Ireland’s Capital Allowances for Intangible Assets Programme enables these intangible assets to be turned into tax deductible charges.

The CAIA scheme allowed the Irish state to dispense with the obvious fiction of Irish-registered companies paying taxes abroad. It has also proven more lucrative than the Double Irish, as corporations pour vast profits into the Irish taxation system from their high-tech operations abroad.

Data from the Irish Revenue Commissioners reveals that corporation taxes have jumped by 442 percent in twelve years at a time when the real economy — as measured by gross national income per capita — grew by just 67 percent. The Revenue Commissioners also reveal an enormous increase in the deductions available for capital investment, with a near doubling of the allowances recorded from 2014 to 2015, and another surge in 2021 and 2022.

Capital allowances are currently ten times higher than they were just over a decade ago, despite Ireland lagging most other OECD countries in terms of its spending on research and development. There is also a very noticeable correlation between the rise in deductions for capital allowances and the rise in the taxes being paid by corporations.

Although the scheme was first used in 2015, its real benefit emerged in the postpandemic period as the IP owned by technology and pharmaceutical companies proved to be extremely lucrative — particularly as the cost-of-living crisis drove profits to record levels. The table below reveals the details.

Table 1: Profits Declared in the Irish State Since 2011

Apple was the first company to avail of the scheme when it moved roughly €300 billion into Ireland in 2015. This was the main factor behind the aforementioned 24.5 percent growth, as the depreciation of these assets is included in GDP but not in GNI*.

Moreover, this is the one big drawback of the scheme: distortions in the national statistics become more visible as they become more significant. On the basis of the state’s official GDP figures, Ireland is now one of the richest countries in the world, with each worker worth €190,000 in 2022 and every person worth €95,000. This gave Ireland a per-capita income 290 percent of the EU average, or 219 percent when purchasing power is standardized.

Of course, none of this is an accurate reflection of living standards in the state. To get a sense of the scale of the distortions, consider the gross value added (GVA) being claimed for workers in the foreign manufacturing sector.

According to the OECD, an average worker in an advanced economy creates $93,000 in gross value added each year — out of which comes their wages, interest, rent, and profits. In the Irish domestic economy, the figure never rose above €97,000 until 2021, and is still much lower in domestic services (€70,000) and domestic agriculture (€42,000).

Contrast this with foreign manufacturing, where the average for 2021 was €989,000 per employee, rising to €1,524,000 in the chemicals, pharmaceutical, electronic, computer, and optical products division. This claim means one of two things. Either these workers possess superhuman abilities, or the Irish state has been facilitating tax avoidance on an enormous scale.

Compelling evidence for the latter explanation comes from the enormous jump in GVA per employee from 2014 (€265,000) to 2015 (€615,000) — the year when Apple first used CAIA. Additional evidence flows from the fact that FDI accounts for 99.4 percent of GVA in the high -tech sectors, despite comprising only 3 percent of the firms.

What this data reveals overall, moreover, is that CAIA has transformed Ireland from a conduit through which profits flowed, into a final destination that shelters profits. This has proven incredibly lucrative for the Irish exchequer, but it has also created enormous distortions in the national accounts. These are captured by Table 2 below.

Table 2: The Gap Between GDP and GNI*

The success of CAIA is captured by the growing gap between GDP (which includes tax haven activity) and GNI* (which attempts to strip it out). But there has also been a genuine increase in FDI-led jobs and investment. The nature of these developments will be outlined below.

The Irish tax haven developed in a number of stages. The first important milestone was the state’s decision to pursue FDI in the 1950s, having failed to develop indigenous industry during the three previous decades.

From the start, attracting FDI involved offering tax advantages to foreign capital in return for jobs and investment. This created an initial pathway for US capital, which was significantly reinforced by two events during the 1980s.

The first was the signing of the Single European Act (SEA) in 1986, which meant that US firms now had a significant incentive to expand their European operations. The second was Margaret Thatcher’s deregulation of the City of London, part of the wider financialization of capitalism during the 1980s.

With its colonial past and existing links to US capital, Ireland was well placed to benefit from these events, particularly once the state established an International Financial Services Centre (IFSC) in 1987. Ireland began to attract significantly greater amounts of foreign investment, from a starting point of 2 percent of GDP in the early 1980s that peaked at around 20 percent of GDP annually at the height of the Celtic Tiger.

This process deepened the relationship between US capital and the Irish establishment, with both sides benefitting from the arrangement. For US capital, Ireland represented a low-cost economy at the center of Europe. It also provided an important launch pad into the single European market from a state offering pro-business regulations, industrial peace, and tax avoidance for non-US profits.

For the Irish state, attracting FDI was a chance to partner with representatives of the most powerful capitalist class in the world. It also represented real investment from high-tech companies paying salaries around 40 percent higher than the existing average.

In the initial phase of FDI expansion, 150,000 jobs were created in manufacturing and financial services. This helped to shore up the position of the Irish establishment by convincing large sections of the population that attracting FDI should be central to Ireland’s industrial strategy.

The downside was the opportunity cost associated with tailoring so much industrial policy around the needs of multinationals. Initially, state managers hoped that TNCs would lift the technological level of the entire domestic economy. For the most part, however, FDI had a negligible impact on Irish manufacturing or actually crowded out domestic competition. Instead of creating a general high-tech economy, Ireland now possessed a dualistic economic structure, with a high-tech international sector alongside relatively low-tech Irish businesses.

That said, two domestic industries did prosper through the presence of FDI — corporate services and construction. For the bankers and accountants, FDI created new opportunities in tax avoidance, transfer pricing, treasury management, and corporate lobbying. For developers, FDI afforded new opportunities in the construction of infrastructure and facilities, but it also encouraged capital into more sheltered parts of the economy away from competition from US multinationals.

Land and development became favored destinations thanks to the strong links between state regulation — around planning and zoning — and opportunities for profit-making. These developments were relatively unremarkable during the first phase of the Celtic Tiger, but two things then happened to propel banking and construction into the center of the Irish economy.

The first was the development of the European Monetary Union in 1999, as the pooling of sovereign risk supplied Irish banks with access to much cheaper loans than had hitherto been the case. The second development was a slowdown in FDI following a minirecession in the United States in the aftermath of the dot-com bust.

Although FDI continued to play an important role in the early 2000s, the economy became increasingly reliant on a property bubble fueled by cheap loans from foreign banks. When these loans dried up in September 2008, domestic banks failed, and the construction sector went into meltdown.

There is not enough space here to retell the entire story of the Irish economic collapse, but it is important to underline the fact that the period marked an important watershed for Irish elites. A considerable portion of their wealth was at risk of being destroyed through the collapse in property prices and banking assets.

Meanwhile, their relationship with European capital became strained as Irish banks owed hundreds of billions to their counterparts in Germany, France, and the UK. These relationships were essential to the wider tax haven model. Well before the European Central Bank chief Jean-Claude Trichet threatened that a “financial bomb” would go off in Dublin if the debt was not repaid, the Irish elites had devised a plan to protect domestic wealth, repair the state’s finances, and revive foreign investment. The core policies were as follows:

• A Blanket Bank Guarantee Scheme that socialized bank debt in return for stabilizing domestic banks and maintaining good relations with European capital
• A National Assets Management Agency (NAMA) that protected domestic capital concentrated in the property sector
• A fiscal austerity program, later cemented by the troika, to repair the state’s finances and regain the confidence of financial markets
• Wage moderation in the public and private sectors to drive competitiveness. This was deemed essential in the context of a monetary union
• Upgrading of the state’s offering to US capital to drive an export-led recovery

There was a unity to this strategy that reinforced its overall coherence. The Bank Guarantee Scheme cost taxpayers €46 billion in bondholder payouts, while NAMA also caused losses for the banks as it purchased loans for €31 billon when the face value was €74 billion. Both decisions widened the gap between the revenues and expenditures of the Irish state, particularly as unemployment rose and taxes from construction disappeared.

The state’s response was an extreme form of austerity, with almost all of the burden placed onto the working classes. Across seven austerity budgets, public spending was cut by €20 billion, while taxes were increased by €10 billion. Public servants faced average wage reductions of 15 percent, and the poorest households lost access to vital services and social welfare.

Meanwhile, the state maintained the lowest pay-related social payments in the EU alongside the lowest corporation taxes in the OECD. Reflecting on the distributional impact of these decisions, Niamh Hardiman and Aidan Regan noted that the bottom decile saw its net disposable income reduced by 25 percent, while the income of the top decile increased by 5 percent. Deprivation rates jumped from 14 percent in 2008 to 29 percent in 2014, while the proportion of those in consistent poverty rose from 4 percent in 2008 to 8 percent in 2014.

The state’s other major initiative involved the internationally traded sector. Drawing on relationships built over decades, the state tasked the Industrial Development Authority (IDA) with attracting US corporations in the core sectors of pharmaceuticals, information technology, and medical devices. The strategy was to encourage industry leaders that could underpin investment hubs through pro-business policies and some of the world’s most effective tax avoidance tools.

A second strategy related to the property sector. Using special purpose vehicles (SPVs) previously reserved for international securitization, the state began to offer Section 110 companies to asset management companies buying up land and distressed mortgages.

Companies with at least €10 million under management could use the legal distinction between their SPV and the parent corporation to avoid domestic Irish taxes. This was achieved using profit participation notes (PPNs) that charged the SPV interest on loans paid back (circuitously) to the parent itself.

Both policies had significant successes. The mix of underpriced assets and favorable tax arrangements proved extremely attractive as financial managers looked for assets with stable income streams in the wake of the Great Recession. According to one estimate, international investment funds bought €200 billion worth of distressed Irish debt, channeling a wall of cash into the sector that allowed activity to recover.

Meanwhile, the state also used the years of austerity to reboot Ireland’s high-tech sector. Within the space of ten years, the IDA secured investment from Twitter, Amazon, Dropbox, and LinkedIn, having previously attracted the European headquarters of Facebook and Google. This turned Dublin into a European digital hub that employed twenty-four thousand people, but it also spurred employment more generally, with 170,000 FDI jobs created from 2013 to 2023.

The Irish state currently hosts 1,600 foreign firms with total investment valued at €1.25 trillion. While this figure is grossly inflated by the values placed on intangible assets, the jobs are real, and they pay considerably more than the domestic economy.

According to the IDA, FDI companies currently employ three hundred thousand workers or 12 percent of the total workforce. These workers are paid an average of €75,000 — the domestic average is €45,000 — and the rates of pay are even higher in pharmaceuticals and information technology.

All of this reminds us that the tax haven is a genuine partnership between US capital and the Irish establishment. It is also an industrial strategy that underpins the Irish ruling class more generally, as three hundred thousand workers have a direct material interest in the presence of FDI, while many more assume that high-tech jobs are beneficial to the country overall.

The model has been successful precisely because the list of beneficiaries extends considerably beyond the ruling classes. However, it is also causing problems for the elites, as the entire population does not share in the benefits. Most people don’t hold Ireland’s industrial strategy responsible for the challenges they face, but they are living with the consequences of a tax haven model that is slowly undermining support for the traditional parties of government.

There are two mistaken approaches to the Irish economy that we need to avoid. The first is to assume that there is little substance to FDI beyond creative accounting. As we have seen, US companies have expanded their real operations in the state at the same time as they have ramped up profit-shifting through CAIA.

The second is to take the state’s propaganda at face value by accepting that FDI is good for everyone and that only an economy structured in this way has any chance of success. Although Ireland is currently among the five richest states in the world on a GDP-per-capita basis, this says more about its success in sheltering profits than it does about the living standards of ordinary people.

To assess these standards properly, two adjustments must be made. The first is to move from GDP per capita to GNI* per capita as our benchmark. When this is done, average incomes fall by more than half, to €46,000. The second is to measure overall household consumption using a figure known as actual individual consumption (AIC).

This captures a combination of household consumption and the consumption of social services by the state, such as housing and health care. Ireland made progress on this measure during the Celtic Tiger, moving from eleventh to sixth in Europe. But the severity of the crash, coupled with the decision to impose austerity, saw it fall back to fourteenth place by 2009, and it has only risen to twelfth in the years of recovery.

This is important, as it indicates that behind the record-breaking headline growth figures, Irish families have actually fallen behind their European counterparts. Indeed, on this measure, Ireland is now one of the four poorest Western European economies, with only the former Eastern bloc countries exhibiting a significantly lower standard of living.

One reason for Ireland’s poor performance is the relative poverty of its public services. The legacy of Ireland’s Catholic past, coupled with the influence of neoliberalism, meant that public services have always been relatively weak. Successive governments have favored cash transfers over direct services, with Ireland currently spending around 20 percent less than the European average on its public services.

The health care system is a good example. Although the state currently spends a relatively high amount on health care per person, decades of underinvestment meant that by 2019, Ireland was the only country in Western Europe without universal primary health care. The state also has one of the lowest numbers of hospital beds per head of population in the EU and was ranked worst in terms of access to health care in the most recent Health Consumer Index Report.

A second consequence of the tax haven model is unusually high levels of market inequality. Eurostat estimates that the top fifth of Irish earners took 15.5 times more market-based income in 2022 than those in the bottom fifth. This was considerably ahead of Lithuania in second place (with a ratio of 12.3) and Germany in third (11.1).

The major reason for this disparity is the high levels of income accruing to professionals in Ireland’s accountancy, corporate law, and financial firms, coupled with those in the high-tech FDI economy. According to the Revenue Commissioners, there are now more than 350,000 tax units with incomes above €100,000, at a time when the average figure is €46,000 and the median is just €33,500.

Assessing the impact of this inequality, Ciarán Nugent notes that “Irish professionals at the top of the earning scale . . . earn more per hour than their equivalents in any EU country” and can afford more goods and services than their counterparts in ten other high-income countries. Nugent contrasts this with the situation of those in the middle and the bottom of the income distribution, who “do not fare as well as most of their European peer-group” when we compare the purchasing power of hourly earnings.

Ireland moves closer to average levels of EU inequality when taxes and transfers are factored in, but even here there are a number of points that must be remembered. First of all, money transfers are less valuable than services in a high-cost economy, and progressive transfers have an opportunity cost in terms of services foregone.

We should also note that middle-income households often pay for their own transfers, and that the recent cost-of-living crisis had a disproportionate impact on families relying on market goods rather than nonmarket services. This combination of average incomes and poor public services is an important reason why many people struggle to live in tax haven Ireland.

Another reason is the housing crisis. As noted above, the Irish elites responded to the collapse in the construction sector by a securing a deluge of cash from foreign investors. This helped to revive the fortunes of the richest households, but it has also meant that Ireland now has some of the fastest-growing rent and mortgage costs across the EU.

Few people will make the connection between the high cost of housing and the tax haven economy, but the connection is there. After all, Irish policymakers initially attracted foreign investors through a combination of undervalued assets and tax-free profits. They also encouraged asset managers to monopolize tracts of land, safe in the knowledge that the state would not compete with them on public land.

Ireland’s housing crisis has been characterized by an enormous transfer from low and middle-income families to those with substantial land and property assets. It has resulted in prices that are now 192 percent of the European average as well as record levels of homelessness, record waiting lists, and record numbers struggling to pay rent and mortgages.

When these wider consequences are factored in, the supposedly miraculous recovery of Irish capitalism is nothing of the sort. Tax haven Ireland certainly delivers the goods for the Irish elites and a minority of well-paid workers. For the majority, however, it can only supply average wages, poor public services, inflated prices, and dysfunctional housing.