Lessons from the World of Tax Avoidance

A Senate report criticises Apple (AAPL) 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.

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