Tuesday, 14 November 2017

A publicly-owned shadow economy is the only real answer to tax havens

“Tax havens on some tropical island” the writer Thomas Frank said last week, “aren’t some sideshow to western capitalism; they are a central reality. Those hidden billions are like an unseen planet whose gravity is pulling our politics and our economy always in a certain direction.”

Looked at this way, tax havens are a permanent and unalterable reminder of the impotence of governments in the face of footloose multinational corporations and the 0.001 per cent. But, in reality, their very success may be the ultimate undoing of the corporate system. They may make the creation of an alternative economy unavoidable.

To captive governments, tax havens exhibit a ghastly allure – if you aren’t in on the act, somebody else will be. To corporations in the US, a country with the highest corporate tax rate in the developed world, Britain is a tax haven. Hence, the problem of ‘inversion’ – corporations deliberately re-locating where they are legally registered to take advantage of the lower rate (currently 19% in the UK but soon to be lower). To corporations in Britain, Ireland, with its 12.5% corporate tax rate, is a tax haven. To corporations registered in Ireland, the Netherlands is a tax haven because it allows profits to be transferred at negligible cost to zero tax Bermuda, whereas Ireland imposes a high tax on such transfers.

The sobering reality is that Ireland used to have a corporate tax rate of 50% buy it makes more revenue from the current rate of 12.5% than it did when the rate was four times higher. This isn’t because the low rate is attracting actual business investment – investment is at historically low levels – but because it is stealing the tax revenue of other countries. Many corporations are legally domiciled in Dublin and pay tax there but don’t carry out any investments in Ireland.

Thus there is a competitive advantage to lowering your corporate tax rate, even while the system as a whole is gradually strangling government revenue and enshrining austerity as a permanent feature of political life. It is estimated that EU loses 350 billion to multinational tax dodging every year, while in Britain the figure is 12.7 billion; a little less than the £12 billion of social security cuts that the May government inherited from George Osborne and is still implementing.

With Donald Trump about to reduce the headline US corporate tax rate from 35% to 20% the race to the bottom will likely further intensify.

Rather than going through the motions of cracking down on tax avoidance, governments could get serious. They could close down the tax havens that are within their jurisdiction or the shell corporations that enable profits to be funnelled tax-free out of the country. They could insist that corporate tax equivalence is an integral part of any free trade deal – an agreed international band of 30-33% for example. At present, the Eurozone, as part of its Stability & Growth pact, mandates that government deficits don’t exceed 3% of GDP, whereas it leaves corporate tax rates entirely at the discretion of national governments. It’s no surprise, therefore, that six EU countries – Luxembourg, Ireland, the Netherlands, Belgium, Malta and Cyprus – are classed as tax havens.

But even if this happens, and that’s a mighty big ‘if’, it probably won’t be sufficient. There will always be loopholes that teams of lawyers can exploit and doubtless some ‘rogue states’ that will offer zero per cent corporate taxation. Therefore, in the fullness of time, governments may well be forced to consider the ultimate legal sanction – the withdrawal of corporate status. The Achilles heel (and dirty secret) of seemingly invincible multinational corporations is that they are entirely dependent – legally dependent – on the state. As Joel Bakan writes in The Corporation, “The state is the only institution in the world that can bring a corporation to life. It alone grants corporations their essential rights, such as legal personhood and limited liability, and it compels them to always put profits first … without the state, the corporation is nothing. Literally nothing.”

It has been mooted that the threat of the withdrawal of banking licenses should be invoked in order to deter major banks from facilitating tax dodging. For major corporations who routinely engage in massive tax avoidance (just look at the names that crop up in the Paradise Papers) the threat of the withdrawal of limited liability or corporate status in its entirety is probably the only thing that would make them think twice.

It will be immediately objected – and with good reason – that for the really big corporations – Facebook, Apple, Google – this is simply inconceivable. They are too powerful, and just as importantly so integral to people’s daily lives, that they are untouchable. Withdrawing Facebook’s corporate status is probably the psychic equivalent of banning coffee.

Given the terrible bind that corporate tax avoidance places governments – and by extension the public – in there is only one alternative. Publicly owned, cooperatively-run companies need to be created to, in time, compete with the behemoths. Companies that will, openly and willingly, pay their taxes and whose very existence gives credibility to the threat of withdrawing corporate status or limited liability from those that don’t.

The technologically know-how certainly exists in the public sector – many of the breakthroughs that the tech giants rely on were hatched in the public sector and gifted to them at no charge. There are already pioneers. The New Economics Foundation is piloting a ‘mutually-owned, publicly regulated’ alternative to Uber. At the last GE, the Labour party committed itself to the ‘right to own’; giving employees the right of first refusal if the company they work for is put up for sale. Community Interest Companies – for profit companies with an asset lock that commits them to working in the public interest – are growing following their creation more than a decade ago.

All this indicates that it is not utopian to think that, in time, a publicly owned ‘shadow economy’ could be a viable alternative to the corporations that dominate the intimate details of our lives. Given the implications of tax havens, they may be the only hope for a liveable world.