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.
Ralph Steadman for the New Statesman.
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Tim Farron: Theresa May is "the prisoner of the Ukip wing of her party"

The Liberal Democrat leader on his faith, Blairism and his plan to replace Labour as the opposition. 

This is Tim Farron’s seventh general election. His first was in 1992, when his Tory opponent was a 36-year-old called Ther­esa May. He was just 21 and they were both unsuccessful candidates in the Labour fortress of North-West Durham. He recalls talking “to a bunch of ex-miners who weren’t best pleased to see either of us, some kid Liberal and some Tory”. Now he sees his former and current opponent as “the prisoner of the Ukip wing of her party . . . I think it has rendered Ukip almost pointless – she is Ukip now.”

May was elected to parliament in 1997, but it took Farron until 2005 to join her. She leads the dominant Conservatives while he heads a party of only nine Liberal Democrat MPs. Still, their reversal of fortunes gives him hope. “After the 1992 election, every­one said there’s no way for a non-Tory government, and it turned out there was. So let’s not assume it’s a given there’s a Tory government [for ever].”

In April, I accompanied Farron to Manchester Gorton, in the lead-up to a by-election that was cancelled by May’s decision to call a snap election on 8 June. Still, the 46-year-old’s party has been in campaign mode for months; Lib Dems spoke of using last December’s Richmond Park by-election to test their messaging. It clearly had an effect: the incumbent Conservative, Zac Goldsmith, lost to their candidate, Sarah Olney.

Brexit, to which the Liberal Democrats are vehemently opposed, will be a dominant theme of the election. Their party membership has just exceeded 100,000, close to an all-time high, and they have enjoyed much success in council by-elections, with more to come in the local elections of 4 May.

However, any feel-good factor swiftly evaporated when Farron appeared on Channel 4 News on 18 April. He was asked by the co-presenter Cathy Newman whether or not he believes that homosexuality is a sin, a question that he answered obliquely in 2015 by saying that Christianity started with acknowledging that “we’re all sinners”.

This time, he told Newman, he was “not in the position to make theological announcements over the next six weeks . . . as a Liberal, I’m passionate about equality”.

The Channel 4 interview divided opinion. One Liberal politician told me that Farron’s stance was “completely intolerable”. Stephen Pollard, the influential editor of the Jewish Chronicle, described it as
“a very liberal position: he holds certain personal views but does not wish to legislate around them”. Jennie Rigg, the acting chair of LGBT+ Liberal Democrats, said it was “as plain as the nose on my face that Tim Farron is no homophobe”.

Farron declined the chance to clarify his views with us in a follow-up phone call, but told the BBC on 25 April: “I don’t believe that gay sex is a sin,” adding, “On reflection, it makes sense to actually answer this direct question since it’s become an issue.”

For his critics, Farron’s faith and politics are intertwined. He sees it differently, as he told Christian Today in 2015: “. . . the danger is sometimes that as a Christian in politics you think your job is to impose your morality on other people. It absolutely isn’t.”

Tim Farron joined the then Liberal Party at the age of 16 but didn’t become a Christian until he was 18. Between completing his A-levels in Lancashire and going to Newcastle University to read politics, he read the apologetics, a body of Christian writing that provides reasoned arguments for the gospel story. “I came to the conclusion that it was true,” he told me. “It wasn’t just a feel-good story.”

In speeches, Farron now takes on the mannerisms of a preacher, but he had a largely non-religious upbringing in Preston, Lancashire. “I don’t think I’d been to church once other than Christmas or the odd wedding,” he says. “I went once with my dad when I was 11, for all the good that did me.”

When we meet, it is Theresa May’s religion that is in the spotlight. She has condemned the National Trust for scrubbing the word “Easter” from its Easter egg hunt, a row it later emerged had been largely invented by the right-wing press in response to a press release from a religious-themed chocolate company.

“It’s worth observing there’s no mention of chocolate or bunny rabbits in the Bible,” Farron reminds me. “When people get cross about, in inverted commas, ‘us losing our Christian heritage’ they mean things which are safe and comfortable and nostalgic.” He pauses. “But the Christian message at Easter is shocking, actually, and very radical.”

British politics is tolerant of atheists (such as Ed Miliband and Nick Clegg) alongside those who, like David Cameron, are culturally Christian but whose faith is “a bit like the reception for Magic FM in the Chilterns: it sort of comes and goes”. But the reaction to Farron’s equivocation on homosexuality prompted many to wonder if a politician who talks openly about his faith is now seen as alarming. Nebulous wishes of peace and love at Christmas, yes; sincere discussions of the literal truth of the Resurrection? Hmm.

Tim Farron’s beliefs matter because he has a mission: to replace not only Jeremy Corbyn as leader of the opposition but Theresa May in Downing Street. Over lassis at the MyLahore curry house in Manchester, he tells me that Britain is facing two calamities. “One is Brexit, indeed hard Brexit . . . and the other is a Tory government for 25 years. We have to present a genuine, progressive alternative that can not only replace Labour as an opposition, it can replace the Tories as a government.” This is ambitious talk for a party with nine MPs. “I understand the ridicule that will be thrown at me for saying those things: but if you don’t want to run the country, why are you in politics?” He pauses. “That’s a question I would ask most people leading the Labour Party at present.”

What does he think of May, his one-time opponent in North-West Durham? “She strikes me as being very professional, very straightforward, somebody who is very conservative in every sense of the word, in her thought processes, her politics, in her style.” He recalls her 2002 conference speech in which she warned Tory activists: “Our base is too narrow and so, occasionally, are our sympathies. You know what some people call us: the nasty party.”

“In many ways, she was the trailblazer for Cameron in being a softer-focused Tory,” he says. “It now looks like she’s been trapped by the very people she was berating as the nasty party all those years ago. I like to think that isn’t really her. But that means she isn’t really in control of the Conservative Party.”

Voters, however, seem to disagree. In recent polls, support for the Conservatives has hovered between 40 and 50 per cent. Isn’t a progressive alliance the only way to stop her: Labour, the Liberal Democrats, the Greens, the SNP and Plaid Cymru all working together to beat the Tories?

“Let’s be really blunt,” he says. “Had Jeremy Corbyn stood down for us in Richmond Park [where Labour stood Christian Wolmar], we would not have won. I could have written Zac Goldsmith’s leaflets for you: Corbyn-backed Liberal Democrats.

“I’m a pluralist,” he adds. “But any progressive alliance has got to be at least equal to the sum of its parts. At the moment, it would be less than the sum of its parts. The only way the Tories are losing their majority is us gaining seats in Hazel Grove –” he ticks them off with his fingers, “– in Cheadle, in the West Country and west London. There’s no chance of us gaining those seats if we have a kind of arrangement with the current Labour Party in its current form.”

What about the SNP? “Most sensible people would look at that SNP manifesto and agree with 99 per cent of it,” Farron says. “But it’s that one thing: they want to wreck the country! How can you do a deal with people who want to wreck the country?”

There’s no other alternative, he says. Someone needs to step up and offer “something that can appeal to progressive younger voters, pro-Europeans and, you know, moderate-thinking Middle England”. He wants to champion a market economy, strong public services, action on climate change, internationalism and free trade.

That sounds like Blairism. “I’m a liberal, and I don’t think Blair was a liberal,” he replies. “But I admire Blair because he was somebody who was able to win elections . . . Iraq aside, my criticisms of Blair are what he didn’t do, rather than what he did do.”

Turning around the Tory tide – let alone with just nine MPs, and from third place – is one hell of a job. But Farron takes heart from the Liberal Party in Canada, where Justin Trudeau did just that. “I’m not Trudeau,” he concedes, “He was better-looking, and his dad was prime minister.”

There is a reason for his optimism. “I use the analogy of being in a maze,” he says, “You can’t see a way out of it, for a progressive party to form a majority against the Tories. But in every maze, there is a way out. We just haven’t found it yet.” 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

This article first appeared in the 27 April 2017 issue of the New Statesman, Cool Britannia 20 Years On

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