The contradiction of aggressive tax avoidance

“The Internet didn’t get invented on its own. Government research created the Internet so that all companies could make money off the Internet.” Barack Obama

Whether the Internet was invented “so that all companies could make money from” it, is debateable, but there is no doubt that this is what has happened. The Internet is a resource paid for by taxpayers and used by countless companies without them having to make any payment back to the taxpayers who funded its development. How many private companies would be so generous? Yet these same companies think they have no moral responsibility to pay tax and actively seek ways within the letter of the law – but not the spirit – to avoid paying any real tax in any jurisdiction.

It was John Maynard Keynes who first pointed out the logical contradiction of individuals reducing expenditure, paying off debt and increasing savings in a recession. The individual citizen is worried about their job, and it is the right decision for the individual to try and protect their family’s future. However, what is good for the individual is not always best for citizens as a whole.

The combined result of these actions by those in work creates the vicious circle whereby the overall reduced spending leads to more people losing their jobs. This is why Keynes’s solution to a recession/depression was not austerity, but for Governments to borrow money to fund large-scale infrastructure projects. These projects create the work that will put spending power back in people’s pockets, and end the recession.

The logical conclusion of aggressive tax avoidance has this same basic contradiction. The individual trans-national corporation is looking to minimise tax and increase profits, which means shareholders’ dividends increase, as do senior management’s bonuses. However, when all the corporations reduce their tax payments to a minimum, the overall result is to reduce the tax base of the countries that are not tax havens. The greater the amount of tax avoidance, the quicker the trans-nationals will eventually kill the goose that laid all those lovely golden eggs!!

A reduced tax base, both in the first and third world countries, should sound alarm bells in the corporations’ own hierarchy, even if only because of enlightened self-interest. When a country’s tax base falls, it has three choices:- (a) increase the tax rate for those who do pay (b) reduce state expenditure, or (c) a combination of the first two. Whatever the choice, it will mean that the individual citizens, in each country, will therefore have less disposable income and less money to spend on the products offered by Amazon, Google, Starbucks, Vodafone, Facebook, etc. Even companies that do not sell direct, but make their money from selling advertising space, will find that the advertising spend decreases over a period of time.

Additionally, the modern non-tax-paying behemoths rely on technology, especially the Internet that they got for free. To carry on the development of their products – to remain at the cutting edge and to carry on making vast profits – they need to keep recruiting a highly educated work force, educated at universities, funded at least in part by governments with taxpayers’ money. Reduce the tax base and cut government support for universities (as is now happening in Britain) and students will only come from the wealthiest section of society, not necessarily the brightest!

Will the companies see further than the next dividend or bonus cheque? Unlikely, as the slowdown in their sales will not be uniform, but like the recession, will hit suddenly when an unforeseen catalyst happens. Did anyone expect the collapse of Lehman Brothers to have the effect it did? The reality of the collapse of Lehman Brothers was not the actual collapse itself, but the knock-on effect that destroyed confidence in the financial system, a confidence that has still not returned, and may never do so.

Governments have no political will to collect tax (http://bit.ly/ZmAFOf) though they do pay lip-service and talk about international agreement that will probably require years of negotiations, by which time todays’ politicians will be past their sell-by date, and have retired with large pensions.

What is now required is one sizeable first-world country to unilaterally bring in a holding tax –the equivalent of Corporation Tax – which, in the UK, is currently 23%. This would mean that all the trans-national companies selling, directly or indirectly, in the UK would have to pay a holding tax of 23% off their declared global profits. If a company is paying corporation tax in other countries, they will be able to deduct this from their UK tax. If, as is happening now, these companies are paying next to no tax in other countries, then there will be very little to deduct from that 23%.

There is an argument that to do this risks the trans-nationals upping stakes and leaving Britain and it may be necessary to let them do this. There are enough alternative options for search engines, buying books, cups of coffee, mobile phones etc.

Such a common sense move would soon get us out of austerity, and get our economy moving again. It just requires that little thing called ‘political will’… Have current politicians got the courage to do this? Don’t hold your breath…

Michael Gold,

michael@radicalsoapbox.com

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