Is Ireland Really So Rich?! Not Really

To relax, some recommend exercise. Or meditation. I’ve found, however, that examining lists of countries by GDP per capita can be quite calming. Such lists are full of surprises, with one of the greatest being finding pesky little Ireland near the top! Yes, that North Atlantic nation is hanging out with the likes of Monaco, Luxembourg, and Singapore. But something seems suspicious. Is Ireland really so rich?

 

The American Impression

Americans, as I’ve mentioned many times, aren’t known for being the most worldly bunch. And when it comes to Ireland, we have a certain narrative in our mind.

It usually starts in the 19th century with a potato famine and mass exodus, one that helped populate a decent chunk of North America. Then came a messy independence from the United Kingdom in the early 20th century (no one really knows about this but play along).

Thanks to U2, we were exposed to the Troubles in Northern Ireland, the once predominantly Protestant portion of the island that stayed with the United Kingdom after independence, resulting in decades of unrest with the predominantly Catholic Ireland.

 

The Cranberries sang about the protracted conflict as well.

 

We know about the frequent rain and equate it with depression. Can you blame us when we had to endure this Sinead O’Connor song over and over?

 

Not to mention the Pulitzer Prize-winning Angela’s Ashes, a memoir about growing up dirt poor with an alcoholic father in Limerick.

Then there’s that poet W.B. Yeats who wrote the uplifting poem called “Death.” And James Joyce, the dude who wrote Ulysses, a book we’re told is really good but can’t understand.

That’s the Ireland we know, one we commiserate with yearly by getting wasted, wearing green, and doing a jig or two. But now we come to find out the country we’ve been feeling sorry for all these years is secretly really rich?!

 

The Numbers

Taking a look at nominal GDP per capita numbers, sitting atop the list are tiny countries like the aforementioned Monaco and Luxembourg, along with the always sneaky Liechtenstein. But while you might expect to then see Norway or Switzerland, it’s the Irish who actually show up next.

Surely, with an adjustment for something—say purchasing power parity—this anomaly goes away, right? Not exactly. That data shows Luxembourg, Liechtenstein, and Singapore sitting pretty, followed by…Ireland again.

In other words, drinking all that Guinness isn’t meant to mask depression—it’s meant to celebrate wealth.

But, of course, there’s a little more to the story.

 

The Explanation

That little something, it turns out, is called corporate tax rate. And Ireland’s is really low, for years hovering around 12.5 percent (compared to 21 percent in the US), with the effective tax rate often being even lower.

Although the corporate tax rate for large companies is set to increase, the impact of the Emerald Isle’s generosity has been striking, evidenced by the GDP rankings referenced above.

How exactly does this all work?

The first explanation is easier to understand. For years, multinational corporations looking to take advantage of what was essentially a tax haven—one that was geographically well-situated and had an educated English-speaking population— would merge with Irish companies, relocate headquarters to Ireland, and thereby benefit from the lower taxes. Such moves also bloated Irish GDP, and given the country’s population of only 5 million, GDP per capita. (A related measure that tracks income into and out of a country, Gross National Income (GNI), is less sensitive to this phenomenon as multinational companies using Ireland as their headquarters may still send earnings out of the country.)

Another explanation is more slippery, making it both harder to understand and more difficult to nip in the bud. It revolves around accounting practices that shift assets to Ireland, sometimes using corporate shells, allowing for such assets to be taxed far less than would have otherwise been the case. The assets don’t directly contribute to GDP, but asset depreciation (part of one formula used to calculate GDP) does. And unlike the first scenario, this type of thing also affects the GNI calculation.

Squeamish about what was termed by one economist as leprechaun economics, the Central Bank of Ireland devised its own metric called modified GNI—or GNI*—to correct for the massive statistical distortion created by multinational tax schemes. Such figures downgrade Ireland from cream of the crop to middle of the pack in the European Union (EU). Keeping in mind that being average in the EU is still relatively prosperous by global standards, Ireland is doing well—just not that well.

 

So no reason to fret. The Irish aren’t cruising around on their yachts while we’re over here taking pity on them. They’re still the down-to-earth, humble folks we’ve grown to love. Just ask the GNI*.