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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Why Jeremy Corbyn is a new leader for the New Times

In an inspired election campaign, he confounded his detractors and showed that he was – more than any other leader – in tune with the times.

There have been two great political turning points in postwar Britain. The first was in 1945 with the election of the Attlee government. Driven by a popular wave of determination that peacetime Britain would look very different from the mass unemployment of the 1930s, and built on the foundations of the solidaristic spirit of the war, the Labour government ushered in full employment, the welfare state (including the NHS) and nationalisation of the basic industries, notably coal and the railways. It was a reforming government the like of which Britain had not previously experienced in the first half of the 20th century. The popular support enjoyed by the reforms was such that the ensuing social-democratic consensus was to last until the end of the 1970s, with Tory as well as Labour governments broadly operating within its framework.

During the 1970s, however, opposition to the social-democratic consensus grew steadily, led by the rise of the radical right, which culminated in 1979 in the election of Margaret Thatcher’s first government. In the process, the Thatcherites redefined the political debate, broadening it beyond the rather institutionalised and truncated forms that it had previously taken: they conducted a highly populist campaign that was for individualism and against collectivism; for the market and against the state; for liberty and against trade unionism; for law and order and against crime.

These ideas were dismissed by the left as just an extreme version of the same old Toryism, entirely failing to recognise their novelty and therefore the kind of threat they posed. The 1979 election, followed by Ronald Reagan’s US victory in 1980, began the neoliberal era, which remained hegemonic in Britain, and more widely in the West, for three decades. Tory and Labour governments alike operated within the terms and by the logic of neoliberalism. The only thing new about New Labour was its acquiescence in neoliberalism; even in this sense, it was not new but derivative of Thatcherism.

The financial crisis of 2007-2008 marked the beginning of the end of neoliberalism. Unlike the social-democratic consensus, which was undermined by the ideological challenge posed by Thatcherism, neoliberalism was brought to its knees not by any ideological alternative – such was the hegemonic sway of neoliberalism – but by the biggest financial crisis since 1931. This was the consequence of the fragility of a financial sector left to its own devices as a result of sweeping deregulation, and the corrupt and extreme practices that this encouraged.

The origin of the crisis lay not in the Labour government – complicit though it was in the neoliberal indulgence of the financial sector – but in the deregulation of the banking sector on both sides of the Atlantic in the 1980s. Neoliberalism limped on in the period after 2007-2008 but as real wages stagnated, recovery proved a mirage, and, with the behaviour of the bankers exposed, a deep disillusionment spread across society. During 2015-16, a populist wave of opposition to the establishment engulfed much of Europe and the United States.

Except at the extremes – Greece perhaps being the most notable example – the left was not a beneficiary: on the contrary it, too, was punished by the people in the same manner as the parties of the mainstream right were. The reason was straightforward enough. The left was tarnished with the same brush as the right: almost everywhere social-democratic parties, albeit to varying degrees, had pursued neoliberal policies. Bill Clinton and Tony Blair became – and presented themselves as – leaders of neoliberalism and as enthusiastic advocates of a strategy of hyper-globalisation, which resulted in growing inequality. In this fundamental respect these parties were more or less ­indistinguishable from the right.

***

The first signs of open revolt against New Labour – the representatives and evangelists of neoliberal ideas in the Labour Party – came in the aftermath of the 2015 ­election and the entirely unpredicted and overwhelming victory of Jeremy Corbyn in the leadership election. Something was happening. Yet much of the left, along with the media, summarily dismissed it as a revival of far-left entryism; that these were for the most part no more than a bunch of Trots. There is a powerful, often overwhelming, tendency to see new phenomena in terms of the past. The new and unfamiliar is much more difficult to understand than the old and familiar: it requires serious intellectual effort and an open and inquiring mind. The left is not alone in this syndrome. The right condemned the 2017 Labour Party manifesto as a replica of Labour’s 1983 manifesto. They couldn’t have been more wrong.

That Corbyn had been a veteran of the far left for so long lent credence to the idea that he was merely a retread of a failed past: there was nothing new about him. In a brilliant election campaign, Corbyn not only gave the lie to this but also demonstrated that he, far more than any of the other party leaders, was in tune with the times, the candidate of modernity.

Crises, great turning points, new conjunctures, new forms of consciousness are by definition incubators of the new. That is one of the great sources of their fascination. We can now see the line of linkage between the thousands of young people who gave Corbyn his overwhelming victory in the leadership election in 2015 and the millions of young people who were enthused by his general election campaign in 2017. It is no accident that it was the young rather than the middle-aged or the seniors who were in the vanguard: the young are the bearers and products of the new, they are the lightning conductors of change. Their elders, by contrast, are steeped in old ways of thinking and doing, having lived through and internalised the values and norms of neoliberalism for more than 30 years.

Yet there is another, rather more important aspect to how we identify the new, namely the way we see politics and how politics is conceived. Electoral politics is a highly institutionalised and tribal activity. There have been, as I argued earlier, two great turning points in postwar politics: the social-democratic era ushered in by the 1945 Labour government and the neoliberal era launched by the Tory government in 1979.

The average Tory MP or activist, no doubt, would interpret history primarily in terms of Tory and Labour governments; Labour MPs and activists would do similarly. But this is a superficial reading of politics based on party labels which ignores the deeper forces that shape different eras, generate crises and result in new paradigms.

Alas, most political journalists and columnists are afflicted with the same inability to distinguish the wood (an understanding of the deeper historical forces at work) from the trees (the day-to-day manoeuvring of parties and politicians). In normal times, this may not be so important, because life continues for the most part as before, but at moments of great paradigmatic change it is absolutely critical.

If the political journalists, and indeed the PLP, had understood the deeper forces and profound changes now at work, they would never have failed en masse to rise above the banal and predictable in their assessment of Corbyn. Something deep, indeed, is happening. A historical era – namely, that of neoliberalism – is in its death throes. All the old assumptions can no longer be assumed. We are in new territory: we haven’t been here before. The smart suits long preferred by New Labour wannabes are no longer a symbol of success and ambition but of alienation from, and rejection of, those who have been left behind; who, from being ignored and dismissed, are in the process of moving to the centre of the political stage.

Corbyn, you may recall, was instantly rejected and ridiculed for his sartorial style, and yet we can now see that, with a little smartening, it conveys an authenticity and affinity with the times that made his style of dress more or less immune from criticism during the general election campaign. Yet fashion is only a way to illustrate a much deeper point.

The end of neoliberalism, once so hegemonic, so commanding, is turning Britain on its head. That is why – extraordinary when you think about it – all the attempts by the right to dismiss Corbyn as a far-left extremist failed miserably, even proved counterproductive, because that was not how people saw him, not how they heard him. He was speaking a language and voicing concerns that a broad cross-section of the public could understand and identify with.

***

The reason a large majority of the PLP was opposed to Corbyn, desperate to be rid of him, was because they were still living in the neoliberal era, still slaves to its ideology, still in thrall to its logic. They knew no other way of thinking or political being. They accused Corbyn of being out of time when in fact it was most of the PLP – not to mention the likes of Mandelson and Blair – who were still imprisoned in an earlier historical era. The end of neoliberalism marks the death of New Labour. In contrast, Corbyn is aligned with the world as it is rather than as it was. What a wonderful irony.

Corbyn’s success in the general election requires us to revisit some of the assumptions that have underpinned much political commentary over the past several years. The turmoil in Labour ranks and the ridiculing of Corbyn persuaded many, including on the left, that Labour stood on the edge of the abyss and that the Tories would continue to dominate for long into the future. With Corbyn having seized the political initiative, the Tories are now cast in a new light. With Labour in the process of burying its New Labour legacy and addressing a very new conjuncture, then the end of neoliberalism poses a much more serious challenge to the Tories than it does the Labour Party.

The Cameron/Osborne leadership was still very much of a neoliberal frame of mind, not least in their emphasis on austerity. It would appear that, in the light of the new popular mood, the government will now be forced to abandon austerity. Theresa May, on taking office, talked about a return to One Nation Toryism and the need to help the worst-off, but that has never moved beyond rhetoric: now she is dead in the water.

Meanwhile, the Tories are in fast retreat over Brexit. They held a referendum over the EU for narrowly party reasons which, from a national point of view, was entirely unnecessary. As a result of the Brexit vote, the Cameron leadership was forced to resign and the Brexiteers took de facto command. But now, after the election, the Tories are in headlong retreat from anything like a “hard Brexit”. In short, they have utterly lost control of the political agenda and are being driven by events. Above all, they are frightened of another election from which Corbyn is likely to emerge as leader with a political agenda that will owe nothing to neoliberalism.

Apart from Corbyn’s extraordinary emergence as a leader who understands – and is entirely comfortable with – the imperatives of the new conjuncture and the need for a new political paradigm, the key to Labour’s transformed position in the eyes of the public was its 2017 manifesto, arguably its best and most important since 1945. You may recall that for three decades the dominant themes were marketisation, privatisation, trickle-down economics, the wastefulness and inefficiencies of the state, the incontrovertible case for hyper-globalisation, and bankers and financiers as the New Gods.

Labour’s manifesto offered a very different vision: a fairer society, bearing down on inequality, a more redistributive tax system, the centrality of the social, proper funding of public services, nationalisation of the railways and water industry, and people as the priority rather than business and the City. The title captured the spirit – For the Many Not the Few. Or, to put in another way, After Neoliberalism. The vision is not yet the answer to the latter question, but it represents the beginnings of an answer.

Ever since the late 1970s, Labour has been on the defensive, struggling to deal with a world where the right has been hegemonic. We can now begin to glimpse a different possibility, one in which the left can begin to take ownership – at least in some degree – of a new, post-neoliberal political settlement. But we should not underestimate the enormous problems that lie in wait. The relative economic prospects for the country are far worse than they have been at any time since 1945. As we saw in the Brexit vote, the forces of conservatism, nativism, racism and imperial nostalgia remain hugely powerful. Not only has the country rejected continued membership of the European Union, but, along with the rest of the West, it is far from reconciled with the new world that is in the process of being created before our very eyes, in which the developing world will be paramount and in which China will be the global leader.

Nonetheless, to be able to entertain a sense of optimism about our own country is a novel experience after 30 years of being out in the cold. No wonder so many are feeling energised again.

This article first appeared in the 15 June 2017 issue of the New Statesman, Corbyn: revenge of the rebel

Martin Jacques is the former editor of Marxism Today. 

This article first appeared in the 15 June 2017 issue of the New Statesman, Corbyn: revenge of the rebel

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