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.

How about some 'market non-conforming democracy' Angela Merkel?

If the yes votes wins Sunday’s Greek referendum and Syriza falls, “too many will believe”, fretted the Guardian’s columnist in chief, Jonathan Freedland on Saturday, that Brussels and Berlin engineered the toppling of a democratically elected government.

I wonder where they could have picked up that delusionary belief?

It clearly can’t have come from the senior German conservative politician, described as “one of Europe’s most influential politicians” who told the Times newspaper  last week that Angela Merkel’s CDU would block any deal with the ‘communists’ Alexis Tsipras and Yanis Varoufakis, campaign vociferously for a ‘yes’ vote, and then install a ‘technical’ government in Syriza’s place.

Revelations from Martin Schulz, German social democrat (!) and President of the European Parliament, to the effect he wanted to Syriza to resign and be replaced with a “technocratic government so we can continue to negotiate” obviously had no effect.

But, perhaps, you know, “too many” have just been paying attention to the record of Eurozone institutions and core country governments like Germany’s since the beginning of the financial crisis. A record that betrays an unbending desire to topple recalcitrant governments and views the will of the people as a minor impediment to which no credence should be given.

Let’s have a brief refresh

Ireland, February 2011

On the eve on the Irish general election in February 2011, the European Commission helpfully intervened to point out that the result would have absolutely no effect on the country’s IMF-EU bail-out conditions, imposed after the financial sector imploded and its enormous bad debts were transferred to the state. It could not be renegotiated as it was “between the EU and the Republic of Ireland, it's not an agreement between an institution and a particular government,” the Commission said.

The Irish government, it emerged last month, was strong-armed by European Commission into agreeing the 2010 bail-out in the first place, and also to accepting that ‘senior bondholders’ such as large banks, should not share any losses. The ex-General Secretary of the Irish government’s Finance Department, told an inquiry into the causes of the financial crisis in June that the European Commission applied enormous pressure through “misinformation” and “anonymous media briefings” so that Ireland swiftly agreed to the €85 billion IMF-EU bail-out.

All this was quite in keeping with the views expressed in May 2011 by now European Commission President Jean-Claude Juncker, that fiscal policy was “too important” for voters to have any say over, and should be determined in “dark, secret debates”.

But, you can say that, technically speaking, Eurozone institutions were not toppling governments, just telling them what to do.

Hang on a minute …

Portugal, April 2011

After months of Portuguese Prime Minister Jose Socrates refusing to accept a bail-out, the European Central Bank (ECB) intervened for the sake of the banks (sorry Eurozone). In April 2011, Portuguese banks decided to stop buying government bonds if Lisbon did not seek a rescue. The head of the country’s banking association admitted that he had been given “clear instructions” from the ECB and Bank of Portugal to cut off the tap.

During the ensuing general election campaign, ECB and European Commission experts demanded that all parties sign an accord agreeing to the bail-out memorandum. Before the election, that is. “Let's not have a public dialogue every day,” said EU economy commissioner, Olli Rehn. Portugal has since been lauded by the London School of Economics for establishing consensus over implementing austerity. Well done.

Moving swiftly on …

Greece, November 2011

You could be forgiven for thinking the Eurozone’s current travails with Alexis Tsipras and co were the first time a Greek Prime Minister had thought of holding a referendum on bail-out conditions. But back in November 2011, Prime Minister Georges Papandreou (of the centre-left Pasok party, currently riding high at about 3% in the polls), announced a referendum on whether to remain in the euro and accept the then austerity measures being proposed. But before it could happen he was called in for a swift re-education session with Angela Merkel, then French President Nicolas Sarkozy, the ubiquitous Jean-Claude Juncker, then European Commission President Jose Manuel Barroso and the IMF’s Christine Lagarde. “We made Papandreou ... aware of the fact that his behavior is disloyal,” said Juncker.

But they didn’t stop there. In the words of the Financial Times journalist, Peter Spiegel: “Mr Barroso had called Mr Samaras, the Greek opposition leader, from his hotel before the meeting. He knew Mr Samaras was desperate to avoid the referendum. Mr Samaras told Mr Barroso he was now willing to sign on to a national unity government between his New Democracy party and Pasok – something he had assiduously avoided for months in the hopes he could secure the premiership on his own. Mr Barroso summoned his cabinet and other commission staff to his suite… to plot strategy. He decided he would not tell Mr Sarkozy or Ms Merkel of the conversation but according to people in the room, they began discussing names of possible technocrats to take over from Mr Papandreou in a national unity government. The first person to come to Mr Barroso’s lips was Lucas Papademos, the Greek economist who had left his post as vice-president of the ECB a year earlier. Within a week, Mr Papademos would have the job.”

Technocrats, engineered to take over from elected politicians, who’d have thought it?

Last but not least:

Italy, November 2011

Alright, this one involves Silvio Berlusconi, who you could say, deserved it, but the point still holds. If the EU could remove an obstructive right-wing politician, they would have no qualms about doing so in the case of a left-wing government - like Syriza.

According to a 2014 book by former US Treasury secretary, Timothy Geitner, he was approached by EU officials in November 2011 with a plan to overthrow Berlusconi. The idea was that the US would refuse to back IMF loans to Italy as long as Berlusconi remained in power. Geitner didn’t oblige but the plotting didn’t stop there.

According Lorenzo Bini-Smaghi, Italy’s former member on the European Central Banks’s executive board, the EU decided to remove Berlusconi and replace him with former European Commissioner, Mario Monti, because he started threatening in private meetings to ditch the euro and bring back Italy’s former currency, the Lira.

What did definitely happen was that the interest rate on Italian government bonds rocketed in the autumn of 2011 and Berlusconi resigned on 9 November. He was replaced by Monti, who announced an austerity programme and the interest rate miraculously plummeted.

Greece, 2015?

The difference now is that the current Greek government is not prepared to accept ‘dark, secret debates’ or hotel room coups and won’t go quietly into the night. With a ‘no’ vote in Sunday’s referendum, Angela Merkel’s guiding philosophy of ‘market conforming democracy’ is threatening to turn into, heaven forfend, market non-conforming democracy.

And they are really, really asking for it …

Vote Oxo cube