Friday, November 26, 2010

Simon Johnson on Ireland's ghost economy

For those who have already read our blog on secrecy jurisdictions, contagion and Greece, please note that we have just updated it.

On a similar subject, we are intrigued to receive this by the acclaimed Simon Johnson (hat tip: Tax Research). First, on a question of measurement:
"Ireland owes a huge amount of money to the outside world. In the best scenario, Ireland’s government debt is likely to stabilize at more than 100 percent of gross national product, or G.N.P.; in the worst scenario, with greater real estate losses and a deeper recession, this level could reach 150 percent.

That’s a higher number than you see in many news reports, in part because officials are still focused on gross domestic product, a misleading statistic in the Irish case, as Peter Boone and I have been arguing in this space for some time."
And he notes something else, which we've also blogged before:
"At least 20 percent of Ireland’s G.D.P. is from “ghost corporations” that have little or no real activity in Ireland. Corporate taxes are set at 12.5 percent, but leading global corporations are able to construct complicated schemes involving other offshore tax havens that reduce their effective tax rates to the low single digits.

The Irish insist that raising the corporate tax rate would not generate additional revenue – effectively acknowledging the point that this part of the economy cannot be taxed as part of the anti-crisis policy mix. You will know that reality has finally set in when all the relevant numbers are presented relative to G.N.P., not G.D.P."
Some bits of the economy, then, can't be taxed - because it's so hard to break the offshore part of the economy - and that means the rest of the economy is even smaller in relation to the mountains of debt that afflict Ireland than most people think. The offshore system helped cause the problem (by puffing up the financial centre) - and it helped disguise the problem (by puffing up G.D.P. artificially) and now it won't pay for the problem (which should be measured against the smaller GNP, rather than GDP.) It kind of makes you sick, really.


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