Lessons from the World of Tax Avoidance: How Nations Can Negotiate With Global Capital
SUNDAY, MAY 26, 2013
A Senate report criticises Apple for shifting billions of dollars in profits into Irish affiliates where its tax rate is less than 2%, yet a growing chorus of senators and representatives call for lower corporate taxes in order to make the US more competitive. The American public wants to close tax loopholes and shelters used by the wealthy to avoid paying taxes, yet the loopholes and shelters remain in place.
The same disconnect is breaking out all over the world. The chairman of a British parliamentary committee investigating Google for tax avoidance calls the firm “devious, calculating, and unethical,” yet British officials court the firm’s CEO as if he were royalty.
Prime Minister David Cameron urges tax havens to mend their ways and vows to crack down on tax cheats, yet argues taxes must be low in the UK because “we’ve got to encourage investment, we’ve got to encourage jobs and I want Britain to be a winner in the global race”.
These apparent contradictions are rooted in the same reality: global capital, in the form of multinational corporations as well as very wealthy individuals, is gaining enormous bargaining power over nation states.
Global companies are not interested in raising living standards in a particular country or improving any nation’s competitiveness. Their singular goal is to maximise returns to their investors. “We don’t have an obligation to solve America’s problems,” said an Apple executive last year. “Our only obligation is making the best product possible” (he might have added “in order to make as much money as possible”). Likewise, the wealth of rich individuals flows all over the world in search of the highest returns and lowest taxes.
Such single-mindedness is abetted by a new wave of technologies, represented by the likes of Google, Apple, Amazon and other new tech behemoths: advanced software applications combined with enormous computing power, all available on the internet in such a way as to enable users to shift resources almost anywhere on earth at the speed of an electronic impulse.
Not only does money move immediately to wherever it can summon the highest return and be subject to the least tax, but jobs can be dispatched almost as quickly to wherever workers get the lowest wages for the most output.
Yet such technologies are simultaneously making nations ever more dependent on global capital, as “brick and mortar” investments in plant and equipment (requiring commitment to a particular geographic location) are replaced by intellectual capital and portfolio investments that are essentially rootless.
These technologies are also displacing workers from assembly-line and routine service jobs (bank tellers, telephone operators, petrol station attendants), as well as any skilled jobs that can be replicated by software (brokers, accountants, insurance claims adjusters). They’re even starting to threaten higher-level professionals (how long before doctors are replaced by diagnostic software and professors by online lectures?).
All this, in turn, is putting increasing pressure on politicians to produce more investments and jobs. Because citizens don’t like it when global corporations or wealthy individuals are found to avoid taxes, such practices elicit indignant reports, hearings and warnings from political leaders. But little or nothing is done to end these practices because nations are too dependent on those corporations and individuals.
Nations are in a fierce “global race” for investments and jobs, as Cameron says. But it’s rapidly turning into a race to the bottom. Effective tax rates on global companies and wealthy individuals are declining almost everywhere; regulations are being dismantled (not even the worst financial disaster since the 1930s has produced much by way of new financial rules); government subsidies to corporations are growing; and real wages are dropping.
In the US, the UK and other rich nations, the percentage of gross domestic product going to wages continues to decline while the percentage going to profits steadily increases. Almost all the economic gains in the US since the Great Recession have gone to the wealthiest 1%, who own the lion’s share of financial assets, while the bottom 90% has become poorer.
Individual states in the US have embarked on their own races to the bottom, seeking to lure investments and jobs – often from neighbouring states – with lower taxes, higher subsidies, reduced regulation and lower real wages. Here again, the new generation of information technologies is intensifying the race.
But these trends are not inevitable. One way for nations (as well as individual states or provinces) to regain some bargaining leverage over global capital would be to stop racing against one another and join together to set terms for access to their markets.
After all, global capital depends on consumers, and access to large consumer markets such as the US and the EU is essential if global capital is to earn a healthy return. Why should Apple have access to US consumers, for example, if Apple refuses to pay its fair share of taxes to finance the infrastructure and education that Americans need to improve their living standards? Americans could buy from one of Apple’s competitors instead.
Likewise, it makes no sense for regions or provinces in any nation to compete against one other for jobs and investment; such races only further strengthen the hand of global capital and reduce the bargaining power of the nation. These contests don’t produce net new jobs or investment but only move the jobs and investments from one locale to another and should be prohibited by federal law.
Similarly, the EU could be a bargaining agent for its citizens if it were to condition access to its hugely valuable market on paying taxes in proportion to a global corporation’s EU earnings, as well as making investments (including research and development, and jobs) in similar proportion. As a member of the EU, Britain would have more bargaining leverage than it would if it bargained separately. Hence, an important reason for Britain to remain in the EU: rather than a race to the bottom, the UK would thereby join in a race to the top.
Any move toward enhancing the power of nations or groups of nations relative to global corporations and wealthy individuals would surely provoke fierce resistance. Corporate-financed lobbyists, lawyers, political operatives, media empires, campaign donations, thinktanks and the potential lures of lucrative jobs and directorships awaiting high government officials will all be deployed in opposition.
This doesn’t make the goal of countervailing the power of global capital any less important. It just makes it difficult to achieve.
Why Democrats Can’t be Trusted to Control Wall Street
FRIDAY, MAY 24, 2013
Who needs Republicans when Wall Street has the Democrats? With the help of congressional Democrats, the Street is rolling back financial reforms enacted after its near meltdown.
According to the New York Times, a bill that’s already moved through the House Financial Services Committee, allowing more of the very kind of derivatives trading (bets on bets) that got the Street into trouble, was drafted by Citigroup — whose recommended language was copied nearly word for word in 70 lines of the 85-line bill.
Where were House Democrats? Right behind it. Rep. Sean Patrick Maloney, Democrat of New York, a major recipient of the Street’s political largesse, co-sponsored it. Most of the Democrats on the Committee, also receiving generous donations from the big banks, voted for it. Rep. Jim Himes, another proponent of the bill and a former banker at Goldman Sachs, now leads the Democrat’s fund-raising effort in the House.
Bob Rubin – co-chair of Goldman before he joined the Clinton White House, and chair of Citigroup’s management committee after he left it – is still influential in the Party, and his protégés are all over the Obama administration. I like Bob personally but I battled his Street-centric views the whole time I served, and soon after I left the administration he persuaded Clinton to support a repeal of the Glass-Steagall Act.
Jack Lew, Obama’s current Treasury Secretary, was chief operating officer of Citigroup’s Alternative Investments unit, a proprietary trading group, from 2006 to 2008, before he joined the Obama administration. Peter Orszag, Obama’s Director of the Office of Management and Budget, left the Obama Administration to become Citigroup’s vice chairman of corporate and investment banking, and chairman of the financial strategy and solutions group.
All these men are honorable. None has broken any law. But they and their ilk in congress – the Democrats who are now rolling back Dodd-Frank – don’t seem to appreciate the extent to which Wall Street has harmed, and continues to harm, America.
It’s not entirely coincidental that the Obama Administration never put tough conditions on banks receiving bailout money, never prosecuted a single top Wall Street executive for the excesses that led to the near meltdown, and still refuses to support a tiny tax on financial transactions that would bring in tens of billions of dollars as well as discourage program trading.
Democrats can’t be trusted to control Wall Street. If there were ever an issue ripe for a third party, the Street would be it.
Global Capital and the Nation State
MONDAY, MAY 20, 2013
As global capital becomes ever more powerful, giant corporations are holding governments and citizens up for ransom — eliciting subsidies and tax breaks from countries concerned about their nation’s “competitiveness” — while sheltering their profits in the lowest-tax jurisdictions they can find. Major advanced countries — and their citizens — need a comprehensive tax agreement that won’t allow global corporations to get away with this.
Google, Amazon, Starbucks, every other major corporation, and every big Wall Street bank, are sheltering as much of their U.S. profits abroad as they can, while telling Washington that lower corporate taxes are necessary in order to keep the U.S. “competitive.”
Baloney. The fact is, global corporations have no allegiance to any country; their only objective is to make as much money as possible — and play off one country against another to keep their taxes down and subsidies up, thereby shifting more of the tax burden to ordinary people whose wages are already shrinking because companies are playing workers off against each other.
I’m in London for a few days, and all the talk here is about how Goldman Sachs just negotiated a sweetheart deal to settle a tax dispute with the British government; Google is manipulating its British sales to pay almost no taxes here by using its low-tax Ireland subsidiary (the chair of the Parliamentary committee investigating this has just called the do-no-evil firm “devious, calculating, and unethical”); Amazon has been found to route its British sales through a subsidiary in low-tax Luxembourg, and now receives more in subsidies from the British government than it pays here in taxes; Starbucks’ tax-avoidance strategy was so blatant British consumers began boycotting the firm until it reversed course.
Meanwhile, At a time when you’d expect nations to band together to gain bargaining power against global capital, the opposite is occurring: Xenophobia is breaking out all over.
Here in Britain, the UK Independence Party — which wants to get out of the European Union — is rapidly gaining ground, becoming the third most popular party in the country, according to a new poll for The Independent on Sunday. Almost one in five people plan to vote for it in the next general election. Ukip’s overall ratings have risen four points to 19 per cent in the past month, despite Prime Minister David Cameron’s efforts to wrest back control of the crucial debate over Britain’s relationship with the European Union.
Right-wing nationalist parties are gaining ground elsewhere in Europe as well. In the U.S., not only are Republicans sounding more nationalistic of late (anti-immigrant, anti-trade), but they continue to push “states rights” — as states increasingly battle against one another to give global companies ever larger tax breaks and subsidies.
Nothing could strengthen the hand of global capital more than such breakups.
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