11 Comments:

 Karola said...

Ireland also recently overtook Luxembourg to have the lowest unemployment rate in the EU.

11:02 AM

 

 Dody G. said...

Is Luxembourg a real country?

11:29 AM

 

 Tom Gara said...

I think a lot of the money that is counted as Irish GDP, and therefore GDP per capita, comes from the European "franchises" of multinational companies with head offices in Ireland, exporting their profits back to Ireland in the form of "franchise fees", to be taxed at Ireland's super low tax rate. This way companies like Dell and Pfizer pay virtually no capital gains taxes anywhere in Europe, except in Ireland, where they pay a ridiculously low rate. AndEven in this case, many of the big US companies have deals to not pay tax for many many years.

So, a lot of the Irish GDP comes and leaves Ireland barely touching the Irish economy. It certainly isnt paid out to Irish employees, vendors or shareholders - and is predominantly just expatriated back to America.

Ireland is indeed a well off place now, and a credit to a historically much shafted people - but it is certainly not truly the richest country in Europe. A quick look at the infrastructure, cost of living versus average salary, and general standard of living, would show this quite easily. Ireland is, in my opinion, a persect example of how un-representative GDP can be of the actual wealth of a nation.

12:21 PM

 

 Dody G. said...

Tom,

I would doubt that the money is expatriated back to America.

There is a corporate law in America to allow multi national US companies not to pay any corporate income taxes on any of their earned income abroad as long as that profit isn't brought home (United States taxes corporation on worldwide basis rather than teritorial).

3:52 PM

 

 Dody G. said...

And Tom, I don't think GDP calculation includes income transfers from production output in another teritory.

GDP only counts final goods and services produced by both Irish and Foreign owned business in Ireland. So I'm questioning the assertion that "a lot of Irish GDP comes and leaves Ireland barely touching the Irish economy".

4:04 PM

 

 Tom Gara said...

I could be wrong here - somebody call an economist! - but I think that because GDP would include income earned by foreign owned companies in Ireland - and much of this income is fees paid in return for franchise/head office "services" ran out of Ireland, then plenty of the Irish GDP would consist of this kind of income.

GNP in Ireland is much lower than GDP, because it doesnt include these distortionary payments. And these payments certainly do flow to the owners and shareholders of these companies, who are very rarely Irish.

Last I remember, GNP per capita in Ireland is about $8,000 lower than GDP, which is a pretty amazing figure.

6:14 PM

 

 T-rent said...

This is involves transfer pricing, which was a job I really wanted to get with PWC (but didnt). So this is my take:

Essentially, companies want to maximize their profits, right? So there are a couple ways to do this: True they wont expatriate the funds right away, what typically happens is that the capital is kept in Ireland until a "tax vacation" (like in 2003) happens in the US, where it is highly cost effective to distribute dividends to shareholders. So, companies will often keep large cash balances in foriegn countries and wait for favorable tax conditions to occur back in the home country.

They may also wait for favorable exchange rates. Right now, it is better, or has been better to keep Euros as they were (are?) appreicating compared to the dollar. If the dollar begins to pick up momentum, they may take a tax hit to expatriate that capital.

Since the US has a much higher tax rate than Ireland, most of the tax income ends up eventually benefiting the US government (In the US, If the international taxes paid by the domestic company are less than the US tax rate, the US will tax the company such that the company is taxed at the US rate [US tax rate - Foriegn tax rate = Tax rate paid to the US, so if Ireland is near 0% and the US is around 35%, the US will get something like 35% of those profits]).

There are a few positive consequences: Ireland probably had a relatively low cost of capital compated to the rest of the EU (International fianncial markets are pretty open, but there probably is some positive effect). Also, the unemployment rate will lower, simply because these offcies do create real jobs in the service industry. However, that positive effect will cause prices to increase (shifting the demand curve up). A professional employee at Google or Microsoft will make a lot more money than, say, a small business owner. The business owner will feel the price inflation as more larger companies compete with them for resources (since the big companies can pay more, prices increase, hurting the smaller business).

The goal, though, if there are no positive income projects in the EU, is to get that money back to the shareholders in the US stockmarket or to other divisions around the world that can use that capital. So, one year that income may be counted as GDP, but the next year that part of the GDP may come back to the US.

9:16 PM

 

 T-rent said...

Oh, one more thing for brevity, if the US branch is currently under performing, and they report losses, they can take profits in from abroad free of charge.

9:20 PM

 

 Dody G. said...

"The business owner will feel the price inflation as more larger companies compete with them for resources (since the big companies can pay more, prices increase, hurting the smaller business)."

Which is true only for market that's in limited supply, which is land/rent. Raw resources depends on global supply/demand.

The low unemployement definately create a tight labour market and can drive the cost of employement which can be alleviated by a flexible temporary immigration policy.

Concerning the impact of transfer pricing on GDP calculation is that it usually distorts the shares of services output over goods production (higher services proporpotion to lesser goods) but it doesn't inflates the GDP because GDP only counts final goods and services.

GDP = private consumption + government expenditure + investment + net exports

(net exports = export - import)

(http://www.answers.com/topic/gross-domestic-product?method=6)

Now because GDP concerns only measure economic output activity in a certain period , you still can have high GDP and crappy infrastructure, etc. However the overal condition in the country will gradually improve as GDP stays high from year to year.

The weaknesses of GDP per Capita is that it is suspectible to distortion due to extraordinary shares of output by a small section of population.

The gap between GNP and GDP simply shows that Ireland receives a huge number of foreign investments and they aren't many multinational Irish company. Although the majority of the shareholders of these companies are not Irish, their economic activities in country still benefit Ireland.

Anyway, I bet Thomas, our resident economist, will chime in and share his knowledge on this.

11:06 PM

 

 Jennifer said...

Nerds - you are all NERDS.

12:00 AM

 

 Dody G. said...

ok then. Let's return to our conversation about ass and bobbies..where were we again?

8:46 PM

 

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