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.

The ethical rot at the heart of capitalism

The list of crimes of which the pharmaceutical industry is accused is legion. According to a professor at Copenhagen University, prescription drugs are now, behind heart disease and cancer, the third most common cause of death in the West and estimated to be responsible for half a million deaths a year in the over 65s. The editor of the UK’s Lancet magazine, Richard Horton, contends that maybe half of all scientific research is simply untrue, “afflicted by small sample sizes, tiny effects, invalid exploratory analyses and flagrant conflicts of interest”. In 2012, two French researchers claimed that half of all drugs prescribed in that country were either useless or dangerous and responsible for 20,000 deaths annually.

There is an obvious connection between these outcomes and the character of the pharmaceutical industry – capitalist corporations duty bound to maximise short-term profit for their shareholders. Even western governments, in unguarded moments, agree. A 2003 report for the UK’s Treasury (finance department) conceded that the pitfalls of a market in healthcare were overtreatment and the abuse of monopoly power. But then pressed ahead anyway.

But that connection, clear to any reasonably honest person, is not what stands out here. What is most interesting is how this profit maximising model has so thoroughly infected the apparatus of regulation. Horton blames individual scientists who too often “sculpt data to fit their preferred theory of the world”, medical journals aiding and abetting the “worst behaviours” and universities engaged in a “perpetual struggle for money” and “high-impact publication”.

What’s clear is how far these institutions are from providing, in the writer Ben Goldacre’s words, “a competent regime of regulation”. There is a deep ethical rot at work, seeping outwards into society’s foundations. What’s more the ethical rot is essential for capitalism to function effectively.

Financial dis-regulation

Consider finance. Seven years after a monumental financial crash, triggered by ordinary people defaulting on mortgage payments, sub-prime mortgages have made a comeback in the UK, an event unencumbered by government regulation. Regulations drafted after 2012’s Libor rigging scandal have been watered down. The bank levy, intended as recompense for the financial crisis and bail-out, has been reduced (as an incentive, many think, to keep HSBC headquartered in Britain), a ‘penalty’, in any case, more than compensated by the huge 38% drop in corporate income tax, from 28% to 18% since 2010.

The EU, in the TTIP negotiations, is pushing for the US to adopt weaker financial regulations (on derivatives) than it has at present. And as part of the separate ‘Trade in Services Agreement’ between the US, Europe, Japan and Australia, it is proposed to make it mandatory that countries accept “any new financial service”.

Government regulation is giving way on many fronts to voluntary agreements, in the UK and EU, which have been proven to fail.

It is tempting, and probably correct, to blame intense and unrelenting lobbying by corporations for these outcomes. Most politicians are members of the 1% or 0.1% and may have a direct financial interest in the successful expedition of these policies. And they may not even know of the effect of the policies they so adamantly pursue.

But I believe the deliberate feebleness of regulation has a deeper cause than ‘regulatory capture’ or ideological blindness. It stems from a recognition that economic growth now depends on facilitating avowedly anti-social practices. Aside from the pharmaceutical and finance industries, consider the way the food processing industry works. Huge amounts of sugar are routinely and covertly added to a range of products, not just the openly sugary fizzy drinks, and have caused an epidemic of Type 2 Diabetes. The publicly funded NHS is obliged to treat this scourge which consumes a tenth of its budget. Yet, the UK government sets its face against regulation, preferring a toothless ‘responsibility deal’.

The extractive industries, oil, gas and coal, rely on taking fossil fuels out of the ground, in increasingly dangerous places, a practice which will inevitably take the world into the realms of civilisation-devouring global warming.

Mrs state-mop

The role of the state now is merely to mop up, whether in the form of bank bail-outs, NHS spending or flood defences, the detritus caused by these anti-social practices. Because, at root, the economic and political elite cannot imagine another form of economic growth.

The Angry Person’s Guide to Finance, a pamphlet published by the UK’s Red Pepper magazine in 2014, contends that a “serious regime of strict financial regulation” could outlaw securitised debt, derivatives, the shadow banking system and the whole shebang of ‘financial weapons of mass destruction’. But at the cost of plunging the world economy into a deep depression, as companies fold like dominoes. Similarly, stringent regulations for the production and marketing of prescription drugs would proscribe many of the products relied on by pharmaceutical companies for their profit stream. At a time when these companies already provoke grumbling from their shareholders for not being profitable enough investments, this would be absolutely lethal.

The urgent question, therefore, is whether there is another form of growth that can safeguard the public interest and not degenerate into flagrantly anti-social forms of profiteering. An answer is taking shape in the proposed policies of Labour party leader Jeremy Corbyn. A mix of part-nationalisation, regulation, and public investment, can invigorate economic growth and substitute for anti-social private sector growth. Because private investment is so weak, public investment, through the state (or as Corbyn proposes a National Investment Bank) can direct economic growth to more benign ends, such as investing in renewable energy or retro-fitting houses, than the ‘instant gratification’ approach that the corporate sector relies on when left to its own devices.

However, what this policy alternative leaves in doubt is whether it can replace or merely augment socially harmful private sector growth. The economist Harry Shutt says the western world has been afflicted by a ‘glut of capital’ for four decades. With a decline in the demand for fixed, or productive investment, mainly because of technological progress, the economy has to find increasingly speculative or harmful outlets for profitable investment. This ‘wall of money’, added to by the growth of private, stock market invested pension schemes, is inevitably funneled into speculative or useless (copycat prescription drugs) investment, because sufficient productive outlets do not exist.

In 2013 the UK Parliamentary Commission on Banking Standards concluded that institutional shareholders, such as pension funds and hedge funds, were incentivised to encourage the banks they invested in to pursue ‘high risk strategies’ and, in the run-up to the financial crisis, some were actually criticising banks for ‘excessive conservatism’. In other words, the problem of growth harmful to the public interest is systemic and not the handiwork of greedy or reckless bankers.

Liable for your sins

What this means is that any economic strategy based on public investment has to contend with this ‘actual existing capitalism’ and, as I have argued before, probably cannot pull the plug on it without precipitating an economic meltdown. It is also why Harry Shutt and others argue that more drastic action is required to get to the root of a capitalism hostile to the public interest. Shutt proposes restrictions on limited liability; the right, first introduced in Britain in the 1850s, that shareholders in corporations are only legally responsible to the extent of their monetary investment, and that if misdeeds happen, only the company, never its shareholder owners, can be sued. Limited liability should only be granted, in Shutt’s opinion, if a company agrees to a public veto on board decisions concerning major investments, employee pay and pricing.

To return to the Lancet’s Richard Horton. I believe the ethical corrosion he talks about - the scientists sculpting the data to fit the theory, the medical journals giving the green light to dubious drug trials, and the universities engaged in a perpetual struggle for money - has an ultimate cause; the shareholder-based corporate model of capitalism currently ensconced in power and which we regard as untouchable. And any attempt to reverse this moral decay has to contend with the ultimate cause.

More Bad Pharma

This is a longer version of the Bad Pharma article I was posted last year. Red Pepper were going to use this piece but didn’t in the end. So here it is.

“It’s easier to imagine the end of the world than the end of capitalism,” everyone’s favourite Marxist film critic, Slavoj Žižek, once remarked. Perhaps a sudden fleeing of the imaginative capacity explains the strangely brain-dead reaction of the science writer Ben Goldacre to the idea that the pharmaceutical industry should, for the good of humanity, not be conducted on a capitalist basis.

The question, posed by the economist Harry Shutt, was not complicated. Given that the pharmaceutical industry appears totally unsuited to being run on a profit-maximising basis in shareholder-owned companies, Shutt asked Goldacre in The Observer, wouldn’t its functions be better carried out by non-profit or publicly-owed enterprises?

Goldacre is clearly a very intelligent person, whose Guardian newspaper Bad Science columns are oases of un-credulity refuting the claims of corporate science. His book Bad Pharma says that drug companies deliberately put dangerous or useless drugs on the market. He’s no fool and no shill so why this did obvious question precipitate such confusion?

Niall Ferguson has invaded my head

First, Goldacre said he was a realist, clearly implying that he’d like a different way of running the industry but that wasn’t possible. But by the next sentence, he revealed that he didn’t want a “central command state economy” (Help! Niall Ferguson has invaded my head), a very jaded straw man and definitely not what Shutt was advocating. This was followed, most bizarrely, by the assertion that people in the drugs industry perpetuate acts of great evil, not because they are innately evil, but because they work in a badly designed system. This is precisely what Shutt was saying – it’s a badly designed system, its acts are not the “fault” of the individuals working in it, so change the system. As an answer, that lacks something. It’s like saying 2+3 isn’t 5, it’s 5.

Finally, Goldacre says what he thinks should happen – a “competent regulatory framework”. Are you still awake? Don’t worry, the boogie man won’t get you because the good regulation fairy will stop him. Spoiler alert. She won’t.

Imagine, as an experiment, the reaction if state pharmaceutical agencies were guilty of the foisting dangerous or dysfunctional drugs on the market. There would be immediate and deafening calls for privatisation. You get an insight into the balance of power, intellectual and otherwise, by the fact that critics of the misdemeanours of corporate drug companies call merely for better regulation.

Let’s set aside for one moment the integral problem that western “democratic” political systems, and frequently the politicians in them, have been bought by corporations so that regulation is not remotely competent or effective.

Regulation/Smegulation

For the sake of argument, imagine an ideal world where the state sits benevolently above the fray and government regulation can do its job unimpeded. What would regulation actually do?

Bear in mind the recent claim by two French medical specialists, Professor Phillipe Even and Bernard Debré, that over half of the medicines prescribed in France are either useless or dangerous. 20,000 deaths a year and 100,000 hospital admissions are linked to hazardous medication, they claim. Goldacre’s book, Bad Pharma, is specifically about the dangerous medicines that shouldn’t be out there, but are. “… for several of the most important and enduring trials in medicine, we have no idea what the best treatment is, because it’s not in anyone’s financial interest to conduct any trials at all”, he writes. And that doesn’t take into the account the drugs that, while not harmful, do not serve any medical purpose. “If you can get on to the market by making a me-too copycat drug that represents little or no therapeutic advance and is even less effective than the drugs that it copies, then you will,” says Goldacre.

So competent and effective regulation will, if it does anything, radically reduce the number of pharmaceuticals that are allowed to go on the market. Thereby massively hitting drug company profits and, in turn, the number of people they employ; numbers which are dropping anyway.

Thus, you are soon face to face with a fundamental conflict of our capitalist system. An unavoidable collision between the impulse most decent people share for reducing the anti-social effects of capitalism, against the need for capitalism to prosper so that everyone can have good jobs and incomes. We are, whether we like it or not, materially dependent on the system’s success. But a successful system causes outcomes, such as global warming and prescribing dangerous medicines, that are inherently destructive.

Planned Regulatory Obsolescence

If regulation of the pharmaceutical industry were actually competent, as Goldacre wants it to be, it would prevent capitalism from working. Actually it’s not working well, once high performing pharma stocks have fallen below those of Coca-Cola and Unilever and drug companies are shunning research, but effective regulation would be another drag on profits. A UN report in 2009 found that a third of the profits of the world’s biggest 3,000 companies would be wiped out if firms were forced to pay for the use, loss and damage to the environment they cause. In other words, truly effective environmental regulation would render capitalism impossible.

So regulation is, quite deliberately, not effective. It allows, as research has found, just enough reform to buy off critics without seriously impeding corporate priorities. In the end, Goldacre’s vision of a “competent regulatory framework” is far more utopian than changing the system so that profit maximization is no longer the modus operandi of pharmaceutical companies.

An Alternative to regulation

 Is there an alternative to the futility of regulation that avoids the pathologies of a Soviet-style command economy? Actually there is:  a weapon to bend bad pharma to the public interest that entails no mass expropriations and preserves a market economy.

“A man who causes harm in the course of his work can be sued for the full cost of that harm to the point of personal ruin,” writes Dan Hind in his book, The Return of the Public.  “A man who owns shares in a company that causes the same harm risks only his original investment.” This is the privilege of limited liability, granted by the state, on the grounds that by limiting risk to corporate investors, innovation, in the public interest, is encouraged. But recent experience of the finance industry, as well as pharmaceutical companies, demonstrates that limited liability, far from promoting the public interest, inculcates public harm.

Hind argues that limited liability be reserved for employee-owned and managed companies. Harry Shutt, who originally voiced the incompatibility of profit-maximising pharmaceutical companies with the public good, believes that limited liability should only be granted to companies that represent the community on their boards and serve a defined public purpose.

Removing the automatic conferring of limited liability would restore the non-profit impulse that was once a significant part of the pharmaceutical industry. Before it was floated on the stock exchange in 1986, the Wellcome Foundation, wholly-owned by a charity, was one of Britain’s largest pharmaceutical companies. The Royal Marsden Hospital in London – part of the NHS - is, still today, a major source of research into drugs combating cancer, financed by a combination of state and charitable contributions.

Without the cover of limited liability, shareholders would, as Shutt has said, “rapidly become an endangered species”. Profit maximising for external owners, the root cause of “bad pharma”, would be transcended. Of course, if “drugs for drugs sake” becomes a thing of the past, so will “jobs for jobs sake”. You can’t evade the material dependence of virtual everybody on capitalism’s smooth functioning, nor the implications that would result if we collectively decide that its smooth functioning has too many damaging side-effects.

Enterprises without external shareholders, could becomes places where the concerns of citizens and workers are heard. If the effects of corporations, such as pharmaceutical corporations, have enormous social effects, then they should serve, institutionally as far as it is possible, all of society. And that doesn’t mean the patina of regulation.