Multinationals distort our ability to assess the economy’s health

It’s not been a great week to be part of the global elite, the 10 per cent of every society who own the means of production and get paid most of the rents, the people who live from inherited wealth, and those who have attained that wealth through innovation and industry.

I’m sure there’s a tiny lake of tiny tears being cried by tiny violinists playing even tinier violins for the rich and famous who have had their attempts to avoid taxes and unwelcome scrutiny foiled by the Panama papers leak. The decision to halt Pfizer’s $160 billion merger with Allergan has also dammed the river of fees that mergers and acquisitions specialists were looking forward to.

On the face of it, almost nothing has changed, except those in the other 90 per cent get a sense, I think, of the sheer scale of these morally ambiguous corporate endeavours, the industrial quantities of shell companies created by the Panamanian law firm Mossack Fonseca — only the fourth largest in its industry — and the merger of pharmaceutical companies whose combined turnover is larger than the gross domestic product of the poorest 80 countries in the world.

A US-based multinational making a decision to try to pay less of its taxes where it earns the money to pay those taxes. The rules change to make this decision much harder, and they stop trying to pay less tax that way. Somehow this decision has the acting government in Ireland answering some awkward questions asked it by the Irish media.

What does that say about our approach to multinationals, and about Ireland’s tax policy?

I believe the decision to halt Pfizer’s $160 billion merger with Allergan creates a moment for us to acknowledge what a problem the presence of multinationals causes for us in Ireland.

It comes as the European Commission is continuing to ask fresh questions of Ireland on its approach to Apple, whose Irish subsidiary accounted for 64 per cent of Apple’s overall 2011 pre-tax income of $34 billion.

The amount of tax paid by Apple in Ireland in 2011 was between €2 million and €20 million. We don’t know the exact figure, and a report written for the Department of Finance by the pre-eminent scholar in this field, UCC’s Seamus Coffey, doesn’t get the figures much clearer than that.

Why don’t we know with certainty what these figures are?

In the remarkable book, Seeing Like a State, James Scott makes the important point that states developed through standardisation and regular collection of information. Here I’m not just talking about macroeconomic statistics like GDP or inflation, I’m talking about standardising surnames, planning cities, changing work habits and living patterns, connecting water systems, censuses and health programmes.

As the sociologist Lawrence Busch argues, if standards are the means by which we construct our realities, and the state controls the standard, then the state can mould reality.

Why do you think we’re always talking about GDP and hospital waiting lists and our ageing population? Because we have numbers and measurements for them. If you want the issue you care about to matter, you need to measure it first.

Multinationals and their practices in Ireland distort how our state sees itself. Of course, multinationals are important in terms of the domestic employment they provide and their contribution to Ireland’s economic output, but they also conduct very large financial transactions related to any overall corporate group’s international financing, and especially relative to the size of our tiny economy.

The Central Bank’s Dr Mary Cussen has been working to pull apart the distorting influence of multinationals on our official statistics.

Dr Cussen found that five of the 11 indicators used by the European Commission in its Alert Mechanism Report to assess the health of the Irish economy are “materially distorted by financial and non-financial multinational activities”.

She found the presence of multinationals overestimated the imbalances we see in the private sector credit statistics, underestimated how much work the financial sector has done to get rid of its debt, and underestimated our current account imbalances.

The state’s view of itself via its statistics has been compromised.

This has been a long time coming. In an online piece written for this newspaper last Friday, Senator Sean Barrett, himself a noted economist, made the important point that Ireland’s industrial policy since the 1950s has courted foreign direct investment. In the 1950s, the largely agrarian domestic economy was unable to generate enough demand for goods and services to create employment for all its citizens of working age. Barrett traced the evolution of this sensible policy in the 1950s to the current situation, where today, Ireland “does have a reputation for advertising itself as a place where tax deals are easily made and financial rules are pliable”.

Our industrial policy since the 1950s is why a US-based multinational making a decision to try to pay less of its taxes where it earns the money to pay those taxes becomes Ireland’s problem.

The logical outcome of seeking international investment for productive purposes such as obtaining investment to build factories to create products which could be exported is not one where our taxation system is used to bolster the profits of the largest companies in the history of the world.

And yet that is where we are. In 2012, I wrote that US president Barack Obama was a threat to Ireland’s prosperity. Then running for re-election, Obama’s campaign promises to root out tax avoidance by US firms have partially been fulfilled.

The result of Obama doing what he said he’d do is the wobble in the share prices of two pharma giants, and our Minister for Jobs explaining why Ireland isn’t a tax haven and why Ireland has no interest in facilitating corporate inversion deals. As plainly as he could, the minister simply said: “We do not market Ireland as a location for inversions.”

But the inversions are here and further murky deals are likely to occur in the future. We make the rules and we can stop this repetitional damage from happening. The global elite will always do what it thinks is in its best interests, and if that means salting money away through Panamanian shell companies, or putting brass plates up in Dublin, they will.

The rest of us should think carefully about what is in our best interests in 2016. It is high time we reconsider the export-led growth model of the 1950s.