Is Ireland's Economy for Real?

This is Ireland, a country with a real economy and a make-believe economy.

The make-believe economy looks like one of the richest in the world,

only falling behind Luxembourg and the IMS rankings of countries by GDP per capita,

and beating out economies like Switzerland, Norway, Singapore and the USA,

which are more often attributed with the kind of economic success

that would genuinely earn them their ranking.

For most of its history as an independent nation,

Ireland has suffered through severe poverty and multiple economic meltdowns.

But now, in just the last two decades,

it's become the richest major economy in the world,

or at least that's the fairytale.

As much as economists love a great turnaround story,

or at the very least a country that strikes a wealth of natural resources,

Ireland wasn't any of that.

The make-believe economy is really just the result of some very creative accounting

that has made the country a popular destination for multinational companies

to park their money and put off paying their taxes.

Now, tax havens are nothing new,

but Ireland is a little bit different,

because attached to these outlandish numbers is a real economy,

with real businesses, real working people and a real membership in the European Union.

The way the make-believe economy with its offshore trillions

and the real economy interact with one another

is a fascinating case study into the pros and cons

of being a safe haven for international business.

On one hand, the government and the big accounting firms

will argue that this industry creates high-value adding jobs,

makes the country a business centre like Singapore, Hong Kong or New York,

and still brings in significant tax revenues

because a tiny slice of a trillion dollars

is still more than a big slice of a few mere million.

On the other hand though, building an economy on what is

little more than an accounting trick is inherently unstable.

And while doing it, the country is potentially crowding out

real industries from developing,

all while honestly pissing off most of the rest of the world with their shenanigans.

So, how has Ireland used loopholes in international commerce

to become one of the richest economies in the world,

even if it is just on paper?

What does the real economy of Ireland look like today?

And most importantly,

does the fake economy provide any tangible benefits to real Irish citizens?

As we delve into Ireland's intriguing economic journey

from its portrayal as a global financial leader to its underlying realities,

it's a perfect reminder to make smart financial decisions in our own lives

to build wealth and secure our future.

History

In order to understand this country properly,

we first need to take a look at the state of Ireland

before the current fantasy.

For most of Ireland's history,

it was seen as a nation rife with disease, starvation,

and demanding output that left most of its citizens

in a perpetual hunger cycle.

Perhaps the most notable occurrence of this

was documented during the seven-year-long period

called the Great Hunger.

Pre-existing economic hardships paired with a deadly plant pathogen

resulted in the deaths of 1 million people,

most believing this made up 11% of the entire population.

In the early 20th century,

still reeling from decades of loss,

the people of Ireland lashed out against British hegemony,

resulting in the eventual partition

known as the Government of Ireland Act,

a decision under British law in 1922

that saw Northern Ireland remaining with the UK

and the rest earning independence.

Although the political victory was celebrated,

the Irish economy remained crippled for years

as the land possessed very little natural resources,

and the industrial revolution that propped up

most Western European states for the new era

was not a luxury afforded to the Irish citizenry.

Ongoing societal unrest,

in conjunction with ineffective policy,

made the island resemble an agrarian relic,

prompting many to refer to it as the sick man of Europe.

Widespread subsistence, farming,

and traditions that distributed land equally

made Ireland look much more like a bartering commune

than a legitimate participant

in the nearly industrializing global economy.

In fact, the conflict that won the country its independence

proved to only set back Irish economic growth even further,

add the ongoing tensions with its only neighbour,

and it was tragically a state

that was utterly incapable of standing on its own two feet

without begging for financial support.

The Great Depression, as one can only assume,

only made things worse.

At this point, the Irish began looking outward

for any solution to the ongoing crisis.

This is when they started to study the newly founded

Soviet Union, a nation whose isolationist policies

insulated it from the external pressures

of its European neighbours.

It must be recognised that during the early years of the USSR,

the Union made huge industrial leaps.

Of course, it had other more pressing internal problems,

but their industry at this time was very impressive.

Taking this lesson, the Irish government

swiftly took control of all industries

and cut most trade and investment ties,

only to discover this was like putting a band-aid

on the punctured hull of a battleship.

See, the only reason the Soviet Union was able

to sustain such a model for as long as it did

is due to its resources and massive population.

Having neither of these traits in the Irish state arsenal,

as well as making a decision that left them

out of the post-World War II economic revival,

Ireland simply shot itself in the foot once more.

In 1958, Ireland realised that every decision

made thus far led them to ruin.

In truth, they were worse off than they were

at the start of their independence.

Something had to change and it needed to change fast,

and this is how Ireland finally started to move the needle.

Using economic development policy first established

by Prime Minister Sean Lamass and economist TK Whitaker,

Ireland privatised industries encouraging foreign investment

and opened up to trade with the industrialised world.

Privatising worked, and if something's worth doing,

it's perhaps worth overdoing.

Today, at least on paper, the International Monetary Fund,

or IMF, puts Ireland's per capita GDP at $145,000,

one of the highest in the world

Economy

and almost three times out of the UK.

Again, on paper.

Its economic growth is also far greater

than any of its European counterparts at 12.2% in 2022.

The growth was so strong that the small island managed

to pull up the entire EU out of a seemingly inevitable recession.

So, how did they manage to do this?

After all, Ireland has never had a reputation

for being a monolith in the realm of finance,

yet notable statistics have transformed Ireland

from being seen as the sick man of Europe

to being dubbed the Celtic Tiger.

It's a development that nobody had predicted,

and with that comes a fair share of scepticism,

prompting every analyst to take a look at the numbers,

and the numbers never lie.

For starters, Ireland's decision

to join the European Economic Community in the 1970s

was now producing long-term benefits.

The network covers 4 million square kilometres

with a consumer base of almost half a billion people.

In 2018, the GDP of the EU27 represented 18.6%

of the world's total GDP.

That's all well and good, but how does this benefit Ireland?

Well, it begins with a country's incredibly low corporate tax rate.

In the mid-1990s, independent Ireland

softened its stance significantly,

lowering its rate to 12.5%,

even lower than its UK neighbour at 19%,

a country that was famous to have been very business-forward

at least at the time.

This tandem strategy means international companies

can set themselves up there

and get access to the market through a member country

that is very accommodating of them.

Now, those companies also learned

to add another layer to the country's method,

one that is in major part responsible

for the GDP illusion that we see today.

It's mockingly called the Double Irish Tax Strategy,

an avoidance technique employed by major global companies

turning Ireland into the most profitable European haven

in modern history.

But simply imagine there's a guy named Mike

who owns a company selling cookies called Choco Munch.

It's been incredibly successful

and it's started to wipe out all regional competitors.

Everything is going well for Mike,

but one of his shops sells a painted batch

making a customer very sick

and the victim has a direct line

to his primary company's money.

To add insult to injury,

the IRS is breathing down his back to pay his taxes.

This scares Mike to the point

where he starts to look for ways

to protect himself from total bankruptcy.

On a call with a specialist,

Mike learns about a small country

that will stand in as a base

for holding his intellectual property,

his logos, his patents, his formulas,

and stuff like that.

Protecting the heart of the business

or the parent company from going belly up

if he faces any more fiascos in the future,

but that's not even the best part for the business.

This new base holding the IP

also has a much lower tax rate

solving the entire problem with the IRS.

So Mike has enough money

to start expanding his cookie company

and placing his stores all over the world

and while adding a layer of protection

between his parent company and his product.

Although this can seem quite complicated,

here's what it boils down to.

If any litigation falls onto the laps

of any of Mike's many distributors,

there are now several company titles

standing between him and any customer

with a deadly case of salmonella.

Once all of his businesses

have made their money in markets around the world,

he can charge them a fee from his company in Ireland

for the intellectual property

they have used to make their cookies.

That fee can conveniently be equal

to exactly what their profit is,

meaning they avoid corporate income taxes locally

and the whole organization instead

pays taxes in Ireland.

And with some other adjustments,

that tax rate could effectively be made zero.

But here comes the big question.

Why would the small country holding the IP

go through all of this trouble to help Mike?

Well, as a result, the small country

that acts as a holding base for Mike's cookie company

is looking filthy rich.

Its participation in the supply chain

technically counts as a services export

for acting as a middleman,

something that is added to the nation's GDP

when it claims to be responsible for output,

which it can do because it holds the IP,

even though the country in question

didn't really do anything.

That's the double Irish.

That's what made the country's growth

look so good on paper.

This is exactly what drives companies

like Google, Apple, Amazon and Pfizer

to do business with Ireland

by transferring their intellectual property,

or IP, overseas to Ireland.

The country acts as a shelter for these companies,

shielding them from their native corporate taxes,

as well as some litigation as an added bonus.

Or at least it used to be this way at its peak.

Apple

The best real world explanation

can be found in the 2013 congressional hearing

with Apple CEO Tim Cook,

who had been and still is,

using Irish tax codes

to avoid the United States' 35% corporate tax rate.

After explaining that the company

technically pays its taxes all over the world,

it keeps its foreign income in its Irish subsidiary,

Apple Operations International.

As it's not a tax resident in the US,

Cook and his colleagues argue

that they abided by all regulations.

The main problem with this is that adjusted operating income,

or AOI, is not a tax resident in Ireland either,

because it doesn't meet residency requirements

in Irish law.

The short answer for this is that Apple

was still been operated from abroad

by a management company in the Netherlands.

This, as well as a number of other complications,

led to the end of the double Irish tax method in 2015.

The scheme had only been around for a decade,

but the European Commission

was eager to put an end to the game once and for all.

This sparked a chain of events

where the EU began suing

all companies involved in the alleged scheme.

Now, on the face of it,

this would seem like a big win for the Irish government,

who stood to receive billions of dollars

in alleged unpaid taxes.

But the nation and its government

were highly resistant to taking this money.

And this is where things get really interesting.

See, under normal circumstances,

any government in the world would welcome some easy money,

especially when 26 other nations are cheering them on.

But as we addressed earlier,

Ireland, the Celtic Tiger,

isn't your typical European country.

It never has been.

Having recently experienced a housing price crash

in an economic depression,

Ireland seemed like the perfect candidate

for a much needed cash infusion.

But outside it's fair to take a number of factors into account.

The factor of the matter is,

out of the top 50 companies on Irish soil,

25 of them belonged to US multinationals.

This means that if Ireland chose to take the easy money,

80% of their corporate tax income would disappear overnight.

Aviation Supremacy

In other words, don't bite the hand that feeds you.

Additionally, if Ireland decided to take that proverbial bite,

there is a good chance their employment rate

would drop by staggering 10%,

the second they signed the papers.

Additionally, keeping in mind

this hospitality has helped Ireland recover

over the last decades,

it makes sense that the Irish government

was in no position to take matters into its own hands.

Instead, they've chosen to use their national sovereignty

as leverage, doing everything in their power

to avoid finding any businesses

using the country to house their IP.

But this isn't the only trick Ireland uses

to inflate their value on the world stage.

Perhaps the most notable advantage they possess,

one that doesn't garner as much attention,

is the nation's hold on the global airline industry.

This all started when Ireland established

the Shannon Airport's Free Zone,

a park for industries that held off taxing manufactured goods

until they left their designated territory.

It was catnip for many powers at the time

as high tariffs had become commonplace

in many countries in the western world.

This decision, although not fully understood at the time,

would lay the groundwork for modern aviation supremacy.

To better understand this,

we have to take a look at the recent story of Bonser Airlines,

a promising new budget airline from my home here in Australia.

The marketing campaign was incredibly effective,

boasting casual uniforms and lower rates

for flights to regional cities.

Everything was set to kick off

as large numbers of paying customers

lined up for a much-needed holiday in the post-pandemic world.

This was until many arrived to see

that all Bonser flights had been cancelled.

The media quickly round the story,

reporting the disappointment many felt

when they learned their trips were no longer a possibility,

just 10 minutes before boarding,

leaving many stranded without any way to return home or vice versa.

It was here that the public discovered

that Bonser went into voluntary administration.

As a result, the planes were picked up

and shipped over to Polish airlines.

This has been a common occurrence

for many small-budget carriers,

but how is this connected to Ireland?

Again, quite simply,

the company that actually owned those planes

was a Dublin-based firm called AIP Capital,

a leasing company that as an alternative investment manager

focused on opportunities in commercial aviation

with 51 major assets

and a site reported $2.4 billion fleet value.

AIP takes advantage of the aforementioned free zone,

but they're not the only ones.

Planes cost a lot of money.

They are so pricey

that most low-budget airlines

don't actually own the planes

they use to transport their customers,

and because of this,

they're forced to lease them

from nondescript airline leasing firms

like AIP to stay competitive.

As one might already expect,

majority of these firms are located in Ireland

because the country has special airports called freeports

where planes can be registered without paying tax.

Just like accommodating special tax structures

for international tech companies

like Apple with their desire

to have a distant base to house their IP,

this structure has accommodated

a large handful of companies

that invest in airplanes

in the same way that a landlord

would invest into apartments

and lease them out.

It's for this reason

that most countries of witness budget airlines

popping up with promising ads to topple monopolies,

only for them to leave as quickly as they arrive.

So we've tackled the tax game with corporations

and the airline leasing haven

that has given Ireland

a notorious Celtic tiger moniker,

but what does the country really look like

without the richest players on the board

funneling money through the Emerald Isle?

Well, when we look up from the endless paper trail,

the Irish situation is fairly bleak.

The Future

In truth, beyond the aforementioned employment benefits,

there's really no net domestic benefit

for foreign involvement,

at least not currently.

To try and curb this,

Ireland has recently been making efforts

to turn this on paper value

into something more tangible.

One of these efforts is the Future Ireland Fund,

a sovereign wealth fund

that can theoretically rise to 100 billion euros by 2035.

In a statement, Irish Minister of Finance Michael McGrath said

the government will feed the fund

with 0.8% of GDP generated

from excess corporate tax receipts

starting in 2024.

This, when taken at face value,

seems like a wonderful idea,

but this is a decision

that directly follows the EU's attempts

to make Ireland accept the tax windfall,

one that would punish Ireland's

major corporate alliances.

Knowing this, it's reasonable to assume

that the sovereign wealth fund

would be perceived as a slap

in the face of the European Commission

and would undoubtedly isolate

the small island even further.

Now, nobody can predict the future,

least of all economists,

but if Ireland were to follow through on this,

there's a good chance

it could strain relationships with the EU

to the point where more real,

immediate projects

that could help Irish people

would be shunned.

This is just one of the many variables

included in Ireland's

tense interactions

with the rest of Europe.

Another situation unfolding

is the global effort

to eliminate Ireland's

legendary 12.5% tax rate

mentioned earlier in this video.

In 2021,

the Organisation for Economic Corporation and Development

proposed a mandatory

15% global minimum corporate tax rate

in a move that was not so subtly directed

at Ireland's holding company strategy

and theoretically

force corporations to pay taxes

they are avoiding

with the Celtic Tigers many loopholes.

In their defence,

Ireland has agreed to this effort

of a global minimum tax rate,

although it remains unclear

how much pressure they'll run

from other countries.

As previously stated,

this system has been around

for about a decade

and Ireland seems to be caught

between a rock and a hard place,

continuing to encourage foreign investment

while challenging the authority

of most Western governments

to the point where they're making

a number of economic enemies.

A key participant in this game,

the United States,

has been making a number of efforts

against the Celtic Tiger as well

by just making many of the

once prominent tricks illegal.

Perhaps the most notable

is the US Tax Cuts and Jobs Act of 2017.

This piece of legislation

was almost directly aimed

at the Shanagans taking place in Ireland.

It basically said to companies,

bring your money back to the USA

and you can get away

with a lower tax rate than normal,

effectively playing the same game as Ireland.

But it still has one big problem.

These battles attempting to incentivise

a corporate exodus

from one nation to another

highlight a major issue

with the way that we

consistently handle geopolitics.

The race to lower taxation

in this sense is a race to the bottom,

really only benefiting those

cheating the progressively problematic game.

In short,

none of these shiny GDP bells and whistles

have much of an effect on the Irish people

as more than 90% of the reported wealth

flowing through the country

doesn't land in the pockets of its citizenry.

Today, Ireland has come a long way

from the sick man of Europe,

but it's still a long way

from the fabulous wealth

its economic figures would suggest.

It's a regular European country

with many of the same challenges as its peers,

just with a new luxurious foreign veneer

covering its otherwise soft underbelly.

For now, the tiger that we see

is one made of paper,

whether it likes to admit it or not,

this illusion doesn't put food on the table,

improve school systems,

or strengthen crumbling infrastructure.

Now, we recently made a video on the Netherlands,

which is in many ways Ireland's partner in tax.

Well, you can't call them crimes,

so let's just say you should be able