The curious business of taxation

Wages have stagnated, corporations contribute less to Treasury coffers as their profits grow ever va

Something very odd has happened to the world economy in the past decade or so. With the march of globalisation, real wages have more-or-less stagnated in the developed world, yet returns to capital have shot up.

Moreover, as the benefits of growth have started to accrue more to capital-holders than to workers, the share of government revenue from corporate taxation has fallen.

Across the world, governments have found it more and more difficult to tax corporations, and so the tax burden has instead fallen squarely and heavily onto the shoulders of individuals.

Making sense of how and why this has happened is fairly straightforward. With the emergence of industrial capitalism in the late 19th and early 20th Centuries, governments in the developed world realized a balance had to be struck between the demands of the market and the demands of the broader society in which markets were located.

This realization came sooner in some places – as with Bismarck’s development of the welfare state in Germany in the 1880s.

In Britain, the process of taming the market started perhaps a little later, beginning with Lloyd George’s radical reforms as Chancellor in the early years of the last century, and reaching its zenith in the post-war settlement created by the Attlee Government of 1945-51.

What marked out this earlier stage of the relationship between markets and societies was that it all happened under the roof of one particular state.

A balance could be struck, therefore, between the demands of economic growth and of social protection, because the nation state was in a powerful position to impose whatever regulation it saw as necessary on corporations.

Now globalisation has shattered that balance.

Capital can move jurisdiction at will. The mechanisms of taxation and regulation that can be used by the state have grown useless and atrophied.

States cannot set the terms of operation for corporations that are free to relocate to more benign host countries.

The balance of power has slipped from democratic governments to globally mobile corporations, with states reduced to adopting beggar-my-neighbour policies of tax competition.

It is unsurprising, given this reallocation of political power, that the benefits of the world economy accrue increasingly to the owners of capital rather than to the providers of labour, and that the tax burden in countries like the UK falls disproportionately on individuals rather than corporations.

These problems were illustrated starkly last week, in the Guardian’s investigation into the economics of the world banana industry.

Del Monte, Chiquita and Dole sold over £400 million worth of bananas in Britain last year. Yet these three corporations between them paid only £128,000 tax in the UK.

To put things into perspective, the annual income to the UK Exchequer from taxation of banana companies is less than the income tax paid in a three month period by the Liverpool footballer John Arne Riise (if the copy of his wage slip that has been circulating on the internet is to be believed).

How do these companies manage to pay so little tax? Well, primarily, through the operation of complex webs of financial transactions known as ‘transfer pricing’, whereby semi-imaginary deals between different subsidiaries of the same company are used to move profits from one jurisdiction to another.

As the Guardian article illustrated, the tax avoiding behaviour of UK banana sellers are so Byzantine and complicated that, on its way from Latin America to our supermarket shelves, a bunch of bananas will have passed through virtual balance sheets in the Isle of Man, Ireland, Bermuda, Jersey and the Cayman Islands.

The combination of tax havens and transfer pricing allows large multinational corporations to set their tax rates more or less at will.

As things stand, of course, none of this is actually illegal. Traditionally, the distinction has been drawn between tax evasion, which is the illegal activity of evading one’s full tax liabilities, and tax avoidance, which is the legal activity of arranging an individual’s or corporation’s affairs, within the letter of the law, so as to minimise one’s tax exposure.

Unsurprisingly, it is hard to hold a clear line between the two, and many schemes of tax avoidance shade over towards the borders of tax evasion. Indeed, some writers on tax have coined the term ‘avoision’ to refer to those schemes which fall somewhere in the disputed borderlands.

Large corporations are concerned to avoid downright illegality, and so tend not to practice tax evasion.

But, as the banana example shows, large corporations have no need to get into straightforward illegality when their interests can be served so fully by avoidance strategies using transfer pricing and tax havens.

Tax avoidance is a despicable practice, for a number of reasons. Firstly, it is deeply anti-democratic. It frustrates the legislative intentions embodied in tax legislation, in favour of allowing the distribution of ownership in the economy to be determined by the machinations of tax avoiders themselves.

Secondly, tax avoidance ignores basic standards of fairness. Corporations can make money because they have access to our markets, and make use of our workforce, legal system and transport system. Basic fairness surely dictates that corporations therefore have responsibilities to society, and the very minimum of meeting those responsibilities should be meeting the full expectation of a corporation’s tax contribution?

Tax avoidance enables corporate tax avoiders to fail to live up to their side of the ‘social contract’.

As Richard Murphy, Director of Tax Research LLC, succinctly puts it: "Tax is not a cost to a company. It is a distribution out of profits. That puts tax in the same category as a dividend - it is a return to the stakeholders in the enterprise.

"This reflects the fact that companies do not make profit merely by using investors’ capital. They also use the societies in which they operate, whether that is the physical infrastructure provided by the state, the people the state has educated, or the legal infrastructure that allows companies to protect their property rights. Tax is the return due on this investment by society from which companies benefit." (‘Havens and have-nots’, The Guardian 7.11.2007)

Corporations earn their “social license to operate” insofar as they contribute to the general good of the societies in which they exist.

They can only do this when they contribute both towards the economic health of that society and to the democratic aims of that country’s government, through providing revenue to the state that can be used to pursue valuable social policies.

A corporation which shirks its minimal commitment to uphold the basic rules of society, including its taxation rules, fails to earn its justification for existing, and is in need of urgent reform.

I’ve said that the explanation of why corporations contribute so little to society is straightforward.

What is much more difficult is to understand how this situation can be changed. Once markets are global, the individual state has little room for manoeuvre in its efforts to grab social value from internationally mobile capital.

Indeed, it would seem that tax avoidance is the inevitable result of a co-ordination problem among competing firms. If your competitor is avoiding tax, then you will have to do so as well, if you are not to suffer a sizeable commercial disadvantage by comparison. Moreover, tax avoidance is incredibly wasteful: it consumes the efforts of thousands of high-energy, talented, imaginative people; and it does so for a destructive social end.

If tax avoidance could be structurally outlawed, then the enormous energy and imagination that goes into pursuing it could be redeployed to more genuinely productive occupations, and directed towards technical and managerial innovation, instead of just ‘cooking the books’.

There is, so to speak, something of a Prisoner’s Dilemma in operation. We would all be better off if this practice of tax avoidance could be eliminated, but it is individually rational for each corporation to engage in such practices. The questions to be faced, therefore, are why it might be that such practices are currently legally permissible, and how we might bring it about that such practices could be stopped.

This, it seems to me, is one of the most pressing political issues of our day. How can we re-empower our collective institutions, given their powerlessness in the face of globally mobile capital?

From the problems of tax avoidance to the problems of the ‘sub-prime’ mortgage market, what we see everywhere is a failure of regulatory power by states when facing rampant corporate and financial interests that value quick profits over social progress or even long-run economic stability.

When society and the market are no longer “under one roof” these sorts of problems emerge. There are two ways in which they could be brought back under the same roof. One is a retrograde policy of closed-borders and protectionism, which would attempt to re-localize markets. This approach is likely to throw away the material gains of globalization along with its problems of capital mobility.

The forward-looking approach is instead to look for transnational regulatory mechanisms, operating at an EU level (in the first instance) or eventually perhaps even at a global level. Through this approach, we might hope to keep the material benefits of globalization, whilst rebalancing the relationship between corporate power and the power of democratic governments and our collective institutions.

Politicians of all parties should be addressing this agenda with much more energy than we have seen.

Moreover, shifting the tax burden away from individual income from work, and towards the owners of capital, is a policy that could be highly popular, and surprisingly easy to sell.

People could be brought around to an agenda of clamping down on corporate tax avoidance if they were told that it meant that they could pay less personal tax if only corporate scroungers and tax-cheats paid their fair share.

In the long run, we need a better global financial architecture. In the shorter term, a raft of specific policies could be pursued, hopefully in co-operation with other nations. Firstly, we need better public information.

Companies should be required by law to publish in full their tax payments in every jurisdiction in which they operate, so that individual citizens and voters can see whether those companies are good corporate citizens or scrounging cheats.

Secondly, we need to clamp down on tax havens, especially those in our own back yard, like Jersey and the Isle of Man. If need be, consideration should be given to refusing legal recognition to corporate entities based in tax havens.

Thirdly, we need to move towards international accounting practices that rule out the most shameless examples of financial hocus-pocus such as ‘transfer pricing’.

Moreover, we need to clamp down very hard indeed on accounting firms that market the more exotic forms of tax avoidance schemes, by subjecting them to much tougher regulatory legislation. (If a softer approach does not work, then perhaps we should consider legislative measures that could lead to a few senior accounting partners being banged-up for a few years, pour encourager les autres.)

Most of all, democratic states need to take the power back before things it's too late.

What this will involve is the reorientation of tax laws so that they take more account of where real economic activity takes place, rather than being too bamboozled by the formal paper structures of imaginary subsidiaries and bogus holding companies.

More aggressive regulation, pursued at a European level, could provide more government income whilst reducing individual tax burdens.

Best of all, perhaps, all those clever and ingenious corporate accountants who spend their working days devising ever more complex ways of defrauding their fellow citizens could instead expend all that ingenuity and intelligence on doing something more productive instead.

Martin O’Neill is a political philosopher, based at the Centre for Political Theory in the Department of Politics at the University of Manchester. He has previously taught at Cambridge and Harvard, and is writing a book on Corporations and Social Justice.
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Divided Britain: how the EU referendum exposed Britain’s new culture war

The EU referendum exposed a gaping fault line in our society – and it’s not between left and right.

There are streets in Hampstead, the wealthy northern suburb of London, where the pro-EU posters outnumber cars. A red “Vote Remain” in one. A “Green Yes” in another. The red, white and blue flag of the official campaign sits happily next to a poster from the left-wing campaign Another Europe Is Possible proclaiming that the world already has too many borders.

If you were looking for an equivalent street in Hull, in the north of England, you would look for a long time. In the city centre when I visited one recent morning, the only outward evidence that there was a referendum going on was the special edition of Wetherspoon News plastered on the walls of the William Wilberforce pub in Trinity Wharf. Most of the customers agreed with the message from the chain’s founder, Tim Martin: Britain was better off outside the European Union.

“Far too much Hampstead and not enough Hull” – that was the accusation levelled at the Remain campaign by Andy Burnham in the final weeks of the campaign. He wasn’t talking about geography; Remain’s voice is persuasive to residents of Newland Avenue in Hull, where I drank a latte as I eavesdropped on a couple who were fretting that “racists” would vote to take Britain out of the EU.

Rather, Burnham was talking about an idea, the “Hampstead” that occupies a special place in right-wing demonology as a haven of wealthy liberals who have the temerity to vote in the interests of the poor. The playwright and novelist Michael Frayn, in his 1963 essay on the Festival of Britain, called them “the Herbivores”:

“. . . the radical middle classes, the do-gooders; the readers of the News Chronicle, the Guardian, and the Observer; the signers of petitions; the backbone of the BBC . . . who look out from the lush pastures which are their natural station in life with eyes full of sorrow for less fortunate creatures, guiltily conscious of their advantages, though not usually ceasing to eat the grass.”

For Hampstead then, read swaths of Islington, Hackney, Brighton, Bristol, Cambridge, Edinburgh and Oxford today – all areas that were most strongly in favour of Remain and where Jeremy Corbyn is popular. But Remain never found a tone that won over the other half of Labour England; the campaign struck as duff a note among the diminishing band of pensioners on Hampstead’s remaining council estates as it did on Hull’s Orchard Park Estate.

The rift between “Hampstead and Hull”, in the sense that Andy Burnham meant it, is one that has stealthily divided Britain for years, but it has been brought into sharp focus by the debate over Europe.

Academics use various kinds of shorthand for it: the beer drinkers v the wine drinkers, or the cosmopolitans v the “left behind”. “It’s not just that [Britain] is div­ided between people who buy organic and people who buy own-brand,” says Philip Cowley, a professor of politics at Queen Mary University of London, “but between people who wouldn’t understand how anyone could buy own-brand and people who wouldn’t buy organic if you put a gun to their head.” Equating political preferences with shopping habits might sound flippant, but on 21 June the retail research company Verdict estimated that “half of Waitrose shoppers backed a Remain vote, against just over a third of Morrisons customers”.

The referendum has shown that there is another chasm in British politics, beyond left and right, beyond social conservatism v liberalism, and beyond arguments about the size of the state. The new culture war is about class, and income, and education, but also about culture, race, nationalism and optimism about the future (or lack of it). This divide explains why Ukip’s message has been seductive to former Labour voters and to Tories, and why Boris Johnson, an Old Etonian, led a campaign that purported to despise “elites” and “experts” and spoke of “wanting our country back”.

***

At the start of the campaign, the question that most accurately predicted whether you would back Remain or Leave was consistently: “Are you a graduate?” (Those who answered yes were much more likely to vote in favour of staying in the EU.) Stronger In never found a way to change that and win over those who left education at 18 or earlier. Pollsters also suggested that the much-vaunted Euroscepticism of older voters reflects generations where only one in ten people went to university.

This fissure has been growing for the best part of a decade and a half, but Britain’s first-past-the-post system, which deters newcomers and maintains entrenched parties, has provided a degree of insulation to Labour that its European cousins have lacked. Yet even here in the UK the mid-Noughties brought the brief rise of the British National Party, powered by voter defections from Labour in its strongholds in east London and Yorkshire, as well as the election of the Greens’ first MP on the back of progressive disillusionment with the governments of Tony Blair and Gordon Brown.

In office, both Blair and Brown calculated, wrongly, that Labour’s core vote had “nowhere else to go”. In opposition under Ed Miliband, the party calculated, again wrongly, that discontent with immigration, and the rise of Ukip powered by that discontent, was a problem for the Conservative Party alone.

In a 2014 pamphlet for the Fabian Society, ­Revolt on the Left, the activist Marcus Roberts, the academic Rob Ford and the analyst Ian Warren warned that Labour had “few reasons to cheer about the Ukip insurgency and plenty to worry about”. When the votes were cast in the general election the following year, that prediction turned out to be dispiritingly accurate. Defections from Labour to Ukip led to Labour losing seats to the Conservatives in Gower, Southampton Itchen, Telford and Plymouth Moor View.

For the most part, however, first-past-the-post papered over the cracks in Labour’s broad coalition: cracks that, in the harsh light of the EU referendum, have become obvious. The divide isn’t simply one of class, or income. The social profile and culture of voters in Cumbria are no different from that of voters on the other side of the border – but Scots in the Borders backed a Remain vote while their English peers in the border areas opted for Brexit. Inhospitality towards Brexit proved a stronger indication of city status than a mere cathedral: Vote Leave generally found Britain’s great cities more difficult terrain than the surrounding towns and countryside.

The problem of the fracturing vote is particularly acute for the Labour Party, which for much of the 20th century was able to rely on the Herbivores. In concert with Frayn’s “less fortunate creatures”, they have been enough to guarantee Labour close to 250 seats in the House of Commons and roughly one-third of the popular vote, even in difficult years. But Britain’s EU referendum placed Hampstead and Hull on opposing sides for the first time in modern British political history.

It was Tony Blair who, in his final speech to the Trades Union Congress as Labour leader in September 2006, said that the new debate in politics was not left against right, but “open v closed” – openness to immigration, to diversity, to the idea of Europe. Driven by their commitment to openness, Blair’s outriders dreamed of reshaping Labour as a mirror of the US Democrats – though, ironically, it was Ed Miliband, who repudiated much of Blair’s approach and politics, who achieved this.

At the 2015 election Labour’s coalition was drawn from the young, ethnic minorities and the well educated: the groups that powered Barack Obama’s two election wins in 2008 and 2012. The party was repudiated in the Midlands, went backwards in Wales and was all but wiped out in the east of England. (Scotland was another matter altogether.) Its best results came in Britain’s big cities and university towns.

The Remain campaign gave Labour a glimpse of how Miliband’s manifesto might have fared without the reassuring imprimatur of a red rosette. Britain Stronger In Europe has been rejected in the Midlands and struggled in the east of England. But it also failed to inspire passion in Sunderland, Oldham and Hull – all areas that, for now, return Labour MPs.

***

In appearance, Hull’s city centre is built on blood and sandstone, dotted with memorials to a lost empire and postwar replacements for bombed buildings, all ringed by suburban housing built by the private sector in the 1930s and the state in the 1950s and 1960s. It could be Bristol without the excessive hills, or a smaller Glasgow with a different accent. Unlike in Glasgow or Bristol, however, the residents of Hull are largely hostile to the European Union. Unlike Glasgow and Bristol, Hull is a post-imperial city that has yet to experience a post-colonial second act.

The William Wilberforce is named after a native son who helped destroy the British slave trade, the engine of Hull’s prosperity in the 18th century. The destruction of another local industry – fishing – drives resentment among the pub’s ageing clientele, who were there for breakfast and a bit of company when I visited. They blame its demise squarely on the EU.

Although the Labour Party now has only one MP in Scotland, the back rooms of the labour movement host an outsized Scottish contingent. For that reason – and the continuing threat that the loss of Labour’s seats in Scotland poses to the party’s chances of winning a majority at Westminster – the Scottish independence referendum of 2014 loomed large for Labour throughout the EU campaign.

From the outset, Britain Stronger In struggled to replicate the success of the Scottish No campaign, in part because the price of victory was one that Labour regarded as too high to pay a second time. In Glasgow, in the week before the Scottish referendum, everyone knew where Labour stood on independence – consequently, many voters were already planning to take revenge. The proprietor of one café told me that Labour was “finished in this city, for ever”.

Predictions of this sort were thin on the ground in Hull. Alan Johnson, the head of Labour’s EU campaign, is one of the three Labour MPs whom Hull sent to Westminster in 2015. But even late in the campaign, in his own constituency, I found uncertainty about the party’s official position on the referendum. For that reason, if nothing else, it didn’t have the feeling of a city preparing to break with a half-century-plus of Labour rule, as Glasgow did in 2014. In Scotland, most people I spoke to believed that they were on the brink of independence, which made the eventual result a big blow.

Only among Hull’s pro-European minority could I find any conviction that Britain might actually leave the EU. In September 2014 Kenneth Clarke remarked that Ukip’s supporters were “largely . . . the disappointed elderly, the grumpy old men, people who’ve had a bit of a hard time in life”. To listen to Hull’s Leave voters is to hear tales of the same frustrated potential: they feel that politicians of all stripes have lives entirely removed from theirs. In their defence, they are right – just 4 per cent of MPs in 2010 were from working-class backgrounds.

As for Ken Clarke, he has carved out a second career as every left-winger’s favourite Tory, but that tone of indifference towards the “disappointed lives” of globalisation’s casualties recalls his younger days as a rising star of Margaret Thatcher’s government.

Hull’s residents have been dismissed, first as the regrettable but inevitable consequence of Thatcherite economics, and now as small-minded opponents of social progress and racial diversity. Unsurprisingly, people who feel that their wishes have been ignored and in some cases actively squashed by successive governments of left and right did not expect to wake up on the morning of 24 June to discover that this time, their votes really had changed something.

Equally unsurprisingly, the Remain campaign’s warnings of economic collapse lacked force for people for whom the world’s end had been and gone.

In Glasgow in 2014 Scottish independence was a question of identity in itself, whereas in Hull, hostility towards Europe is the by-product of other identities that feel beleaguered or under threat: fishing, Englishness and whiteness, for the most part.

In Hampstead, a vote for Remain feels more like a statement about the world as you see it. One woman, who walks off before I can probe further, tells me: “Of course I’m voting to stay In. I buy Fairtrade.”

***

Immigration, not the European Union, is the issue that moves voters in Hull. “Britain is full” was the most frequent explanation they gave for an Out vote. Knowing that immigration, rather than the abstract question of sovereignty, would be crucial to winning the contest, Vote Leave tried from the beginning to make it a referendum on border control. Leave’s main theme: the threat of Turkey joining the European Union and, with it, the prospect of all 75 million Turks gaining the right to live and work in Britain.

Although Turkey’s chances of joining the EU are somewhere only just north of its hopes of launching a manned mission to Mars, the tactic worked: according to an ­Ipsos MORI poll released on the morning of 16 June, 45 per cent of Britons believed that Turkey will be fast-tracked into the Union.

That same morning, Nigel Farage posed in front of a poster showing refugees – mostly from Syria and most of them non-white – on the border between Croatia and Slovenia, with a slogan warning that uncontrolled immigration was leaving Britain at “breaking point”. But the row over the poster came to an unpleasant halt just a few hours later as news began to break that Jo Cox, the Labour MP for Batley and Spen, had been shot and stabbed on her way out of a constituency surgery. She died of her injuries a little over an hour later. On 19 June Thomas Mair, who was arrested in connection with the killing, gave his name at Westminster Magistrates’ Court as “Death to traitors, freedom for Britain”.

The circumstances of the killing felt familiar. A little after midnight on 5 June 1968, Robert Kennedy was returning to the Ambassador Hotel in Los Angeles in high spirits. He had just won a crucial victory in the California primary and was well placed to secure the Democratic nomination to run in that year’s presidential election. Going through the kitchen in order to avoid cheering crowds and get straight to his press conference, he was ambushed by a man called Sirhan Sirhan, who fired six shots from a revolver. Kennedy was rushed to hospital, where he died early the following morning.

Five months later Richard Nixon was elected president. The American right held on to the White House for 20 years out of the next 25. Jo Cox’s killing, amid the nativist howling from Farage et al, felt like the beginning of a similar chapter of right-wing advance in the UK.

Labour’s problem, and that of its social-democratic cousins throughout Europe, is the same as the American left’s was in the 1960s. Its founding coalition – of trade unions, the socially concerned middle classes and minorities, ethnic and cultural – is united (barely) on economic issues but irrevocably split on questions of identity. Outside crisis-stricken Greece and Spain, the left looks trapped in permanent opposition, with no politician able to reconsolidate its old base and take power again.

***

When I arrive in Hull, preparations are under way for a vigil in Jo Cox’s honour, but it is the nation of Turkey that is weighing on the minds of undecided voters. On Park Street, residents are divided. Those who have exercised their right to buy and are concerned about their mortgages are flirting with an Out vote but are terrified about negative equity. Those who remain in social housing or the private rented sector are untouched by stories of soaring mortgages. To many residents, the Treasury’s dire warnings seem to be the concerns of people from a different planet, not merely another part of the country. As Rachel, a woman in her mid-fifties who lives alone, puts it: “They say I’d lose four grand a month. I don’t know who they think is earning four grand a month but it certainly isn’t me.”

As Vote Leave knew, the promise that an Out vote will allow people to “take control” always had a particular appeal for those with precious little control – of their rent, of next week’s shift, of whether or not they will be able to afford to turn the heating on next week. Never mind that the control envisaged by Vote Leave would be exercised by the conservative right: the campaign found a message that was able to resonate across class and region, at least to an extent that could yet create a force to be reckoned with under first-past-the-post in Britain.

Four grand a month isn’t a bad salary, even in leafy Hampstead, but in that prosperous corner of north London fears of an Out vote, and what will come after, gained a tight purchase. The worry was coupled with resentment, too, over what would come, should the Outers triumph.

The great risk for the left is that herbivorous resentment is already curdling into contempt towards the people of Hull and the other bastions of Brexitism. That contempt threatens the commodity on which Labour has always relied to get Hull and Hampstead to vote and work together – solidarity. The referendum leaves the Conservatives divided at Westminster. That will give little comfort to Labour if the long-term outcome of the vote is to leave its own ranks divided outside it.

 

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics. 

This article first appeared in the 23 June 2016 issue of the New Statesman, Divided Britain