Tax justice and the global fiddle
Photo: Tim A Hetherington / Panos
Private equity tycoon Guy Hands, head of the troubled entertainment group EMI, must have reckoned he was finally on to a sure-fire winner. For every dollar he invested in a film called Crust – about a two-metre-long shrimp – he expected to recover $1.40 in tax relief. He apparently anticipated a similar return from Nine Dead Gay Guys and other guaranteed box-office flops, in the tradition immortalized by the film The Producers. But the tax office refused to pay up. So Hands and 74 others sued the accountancy firm and the lawyer who had advised them – which is the only reason the rest of us ever got to hear about it.1
The fiddle typifies well enough the increasingly disreputable nature of a tax ‘consensus’ that has emerged during the past decade or so. It has been applied worldwide, regardless of local circumstance. But what may look at first sight like a harmless spectator sport, rewarding its star players more generously than baseball or soccer, is in fact killing children.
As ever on the shadowy back roads of globalization, the signposts passed largely unnoticed at the time. In the club of rich nations, the Organization for Economic Co-operation and Development (OECD), an uncharacteristic but quite determined effort was made in the 1990s to restrain ‘harmful’ competition between national tax regimes that were out to lure corporate and personal wealth to their shores with the lowest rates.
Then the George W Bush regime slipped into Washington and pulled the plug on the OECD plans. The international tax race to the bottom duly gathered pace. Footloose cash multiplied as never before around a veritable orchestra of exotic financial ‘instruments’ in tax havens that came to be embraced everywhere, including Wall Street and the City of London.
Meanwhile, in 2001 and 2003 the Bush Administration introduced a programme of tax cuts that would, by 2012, give an average $45 a year to each of the poorest 20 per cent of Americans, and $162,000 a year to those with annual incomes of $1 million or more. In 10 years an extra $1.35 trillion would go to the American rich.2
This cutting crusade – originally launched by Ronald Reagan – was by no means unique to the United States. A worldwide ‘tax consensus’ was just one facet of a ‘Washington consensus’ based on free market orthodoxy that was centred around the International Monetary Fund (IMF).3
Accompanied by IMF inducements familiar to campaigners on issues like debt and trade, the consensus promoted indirect taxes (on things) in place of direct taxes (on people). So sales or consumption taxes were favoured over personal or corporate income taxes – an unapologetic ‘incentive’ to accumulate personal wealth. The poorer you are, the larger the proportion of your daily income you spend on consumption, so you pay proportionately more tax. The richer you are, the less of your wealth you pay in indirect tax – because you can never consume more than a small fraction of your income. At the very top, you probably pay no direct tax – rather than tax consultants – at all.
Tax regimes of this kind are usually described as ‘regressive’ rather than ‘progressive’. Any ‘redistributive’ role for the state, restraining or compensating for material inequality, is abandoned. The IMF consensus now dictated that the unforgivable sin of ‘market distortion’ had to be avoided at all costs. ‘Tax efficiency’ became a hallmark of business and personal acumen, even a moral imperative. Worldwide, the top rates of tax on corporate or personal wealth tumbled, while revenues from indirect taxes rose to take their place.
At the same time, a series of mergers created just four giant transnational accountancy firms – Deloitte Touche Tohmatsu, PricewaterhouseCoopers, Ernst & Young and KPMG. They were now able to fix the rules by which the international tax game was to be played. Together with corporate finance chiefs (including Microsoft) and some appointed experts, the Big Four came to dominate the International Accountancy Standards Board, based in the City of London. The Board’s proposals on accounting practices are adopted as a matter of course by governments around the world.4 A sizeable chunk of Big Four business comes from selling expensive advice on tax efficiency to wealthy clients: what could be more efficient than fixing the rules themselves?
Rot from within
This cabal, and the shift to regressive taxation, had the effect of rotting the liberal democratic state from within. An ancient injunction – ‘no taxation without representation’ – was casually stood on its head. The less tax you paid, relative to your wealth, the more political clout you were now likely to be accorded. The state became an agent of the market, simply policing the gross injustices built into the unrestrained accumulation of private wealth and political power.
What may look at first sight like a harmless spectator sport, rewarding its star players more generously than baseball or soccer, is in fact killing children
One sign of this was the speed with which ‘equality’ became a mere qualifier of ‘opportunity’ in the language of social democracy. The New Labour Government in Britain, for example, narrowed its focus right down to ‘equality of opportunity’. So discreet was Gordon Brown about his modest redistributive measures as Chancellor (Finance Minister) that, having introduced a low 10 per cent income tax rate for the least well-off when New Labour came to power, he appeared to have forgotten altogether what the point of it was when he abolished it just prior to becoming Prime Minister 10 years later. The attentiveness bestowed at the same time on a few immensely wealthy ‘non-domiciles’ in Britain, who were enraged at the very suggestion of a blatant tax loophole being closed, could hardly have been more telling. The tax regime in Britain, never markedly progressive in the first place, had crossed the threshold to become regressive. According to the respected Joseph Rowntree Foundation, inequality in Britain reached levels not seen for at least 40 years.5
The rhetoric that accompanied the worldwide shift towards regressive taxation spoke of small government and more personal liberty. In the event, governments got more authoritarian but no smaller, while personal liberty shrivelled. In rich countries, tax revenues as a proportion of national income remained much the same as before, though they were now collected more indirectly.
They were also spent rather differently. In place of public service came private contracts, armies of consultants and propagandists, political élites in awe of wealth and celebrity, the disciplining of a society made lean and hungry for business. The more or less hopeless task assigned to ‘governance’ was to provide some sort of security in a world driven mad by unscrupulous competition and organized around a series of unilateral, self-perpetuating wars on drugs, crime, terror or whatever.
All this applied in the rich Minority World. Something rather different applied in the Majority World, where the true nature of the beast is invariably unmasked. Here the machinery of states, and their ability to collect taxes, is much reduced. Such revenues as they do possess have tended to rely on taxing exports to the rich world, particularly of non-renewable commodities like oil, copper or gold. In recent years, the price of these commodities has been driven sharply upwards by speculation and their increasing scarcity. You’d have expected public budgets in the Majority World to be boosted accordingly.
This has not happened. Here the preference of the corporations that control international trade was for direct taxes on their profits, rather than indirect taxes on the commodities they market – seemingly in complete contradiction to such principles as the ‘consensus’ has.
Why the about-turn? Well, it’s relatively hard to hide a physical commodity, relatively easy to hide profits in tax havens and arcane accounting practices – such as the mispricing of transfers between one part of a transnational corporation and another, or one tax haven and the next, duly endorsed by the Big Four. Since some 60 per cent of world trade passes between corporate subsidiaries or havens of one sort on another, governments don’t stand a cat in hell’s chance of getting their hands on much of it. As ever, only when things got seriously out of hand did we discover what this really meant. In 2005, for example, KPMG were fined $456 million in the US for ‘designing, marketing and implementing illegal tax shelters’ – the largest tax case ever filed in US history.6
As a result, the annual revenue loss to the Majority World from transfer mispricing and tax havens now runs at an astounding $160 billion a year – more than one-and-a-half times the combined development aid budgets of the rich countries in 2007.7
Meanwhile, the liberalization agenda at the World Trade Organization dictated that taxes on trade ‘distort the market’. As trade negotiations progressed, all forms of tax on commodity exports from the Majority World were cut. So, at the extreme, in 2006 the Democratic Republic of Congo – one of the places most richly endowed with mineral resources, most tormented by the conflicts they provoke – received a grand total of just $86,000 for mineral rights. Tanzania lost $400 million in seven years from declining royalties and taxes from mining companies.8
The reform agenda also insisted that taxes on international trade must be supplanted by domestic indirect taxes, like value added tax (VAT/GST). These are essentially ‘flow-through’ taxes paid by the final consumer. VAT was first introduced in France in 1948, then Brazil in 1967. It is now in place in 130 countries. During the 1990s the number of African countries levying a value added tax increased from two to thirty. But, by 2000, middle-income countries had been unable to recover via VAT much more than a half of the revenues they had lost from trade, while in poor countries it was less than a third. ‘We can conclude,’ says one authoritative study, ‘that in respect of total government revenues the global tax reform agenda has failed the poorer countries.’9
Something resembling liberal democracy might indeed be more recognizable worldwide if governments raised their revenues from their own citizens – rather than from, say, development aid – and were perhaps more accountable as a result. But what, precisely, is the justification for imposing regressive indirect taxation on the people of the Majority World, most of whom live in countries where the maldistribution of wealth is already grotesque?
The consequences are not notional or abstract, but stark and brutal. Detailed analysis by Christian Aid, in its deeply shocking Death and Taxes report, demonstrates that some 350,000 children under the age of five die every year as a direct result of the missing revenues.10
Finance for development
Seen in this light, the resources needed to achieve the UN’s Millennium Development Goals by 2015 are modest indeed. The UN is convening another ‘Financing for Development’ conference in Doha, Qatar, at the end of this coming November – and there are at least some signs that the penny may finally be about to drop (see page 14). But if the ‘tax consensus’ were not just another means of transferring wealth from poor to rich, South to North, Majority to Minority Worlds, the ‘Goals’ themselves might never have been needed in the first place.
The Doha conference will take place as the Washington consensus itself unravels in the most spectacular fashion, generally styled the ‘credit crunch’. The very same banks and accountancy firms that, not much more than a year ago, were tuning up their financial instruments, their ‘sub-prime’ and ‘securitized’ loans, cultivating their havens and castigating the iniquities of ‘market distortion’, are now demanding – and getting – huge public bail-outs, in what amounts to blackmail on an industrial scale.
The real argument is not about how much to tax, or how big the state should be. It is about what kind of tax and what kind of state
In Britain, at least $100 billion of public funds were conjured up to rescue Northern Rock. Similar amounts came from the New York Federal Reserve to salvage Bear Stearns. It transpired that the chaotic consensus relied on foundations provided by public funds, such as the venerable, now re-nationalized Freddie Mac and Fanny Mae, which underwrite more than half of the mortgages in the US. The security of those public funds now rests, in its turn, on regressive tax revenues. The effective transfer of the private liabilities of the rich on to the general public seems likely to surpass even that achieved by the ‘Third World’ debt crisis a decade earlier.11
The beneficiaries of the fiddle will, naturally, do their best to ensure that someone or something else pays. So one can anticipate that governments at Doha will plead poverty as a result of the ‘credit crunch’. Real wages will have to fall (or inflation will get you anyway); people will have to lose their homes and their jobs; the environment will have to be scavenged more recklessly than ever.
But if this is what they’re counting on, they’d better count slowly. It used to be asserted as an article of faith that taxing the rich produced little revenue because there were only a few of them and they possessed only a small proportion of the world’s wealth. So much of it is now in their hands that this evasion does not apply, if it ever did. And relying on public bewilderment about tax is foolhardy. The first signs of rebellion are showing already, only partially concealed behind the global price hike in oil. Protests against indirect taxes on fuel flared up last June in Britain, Spain, France, Portugal, Venezuela, Chile, Panama, Thailand, Indonesia, Malaysia, the Philippines, China and elsewhere.
The argument that matters is not, for the time being at least, about how much to tax, or how big the state should be. It is about what kind of tax and what kind of state. If taxes are used to increase inequity, fund illicit wars or shoulder private liabilities, then no state, however liberal or democratic it may appear to be, can sustain them for long. If tax evasion permeates the culture of those with the means to pay then, eventually, no form of liberal democratic expression can function at all. If the two come together, fundamental questions arise about the purpose of government.
The injustices of an unprincipled tax consensus, forged between peoples who were not even remotely aware of it, will not be rectified until governments belong to the many who need them most – not to the few who have too much wealth and power to need them at all.
Quite what kind of consensus might then emerge is open to debate. But it’s a safe enough bet that it will not resemble the present disreputable fiddle. Perhaps it’s time to revisit first principles: no representation without progressive taxation, based on the ability to pay and the most elementary demands of justice. In this respect at least, history may be just about to begin.
- The Guardian, 5 July 2008.
- David Edgar, ‘Bye George’, The Guardian, 14 June 2008.
- See, for example, Mick Moore, ‘Between coercion and contract: competing narratives on taxation and governance’, in Taxation and State-Building in Developing Countries, Cambridge University Press, 2008.
- John Christensen, ‘The Haven Experts’, in Death and Taxes, Christian Aid, London, 2008.
- ‘New poverty maps of Britain reveal inequality to be at 40-year high’, www.jrf.org
- US Department of Justice, press release 17 October 2005.
- Death and Taxes, op cit.
- Death and Taxes, op cit.
- Odd-Helge Fjeldstad and Mick Moore, ‘Tax reform and state-building in a globalized world’, in Taxation and State-Building in Developing Countries, op cit.
- Available online at www.christianaid.org.uk
- See, for example, Graham Turner, The Credit Crunch – housing bubbles, globalization and the worldwide economic crisis, Pluto Press, London, 2008.
*Bono* - You too
Irish minstrel and anti-poverty campaigner Bono joined the band of celebrity tax dodgers (which includes the Rolling Stones) in 2006, when it was revealed that his band U2 had moved its royalty income from Ireland to the Netherlands. For many years Ireland had famously not taxed the income of ‘artists’. Then the Government decided to set a cap of $200,000 a year – a fortune for most artists, but not for U2. Ireland is itself a corporate tax haven. But the Netherlands offered a more competitive deal, partly through its link with the Antilles. Another band member, The Edge, pleaded: ‘Who doesn’t want to be tax efficient?’
Bono once told a prayer breakfast in the US attended by President Bush: ‘Withholding life-saving medicines out of deference to the Office of Patents... that’s a justice issue.’ Withholding tax payments that might also have helped to make life-saving medicines available to people with no money, out of deference to tax efficiency, is no less obviously a ‘justice issue’. But then, Bono knows all about justice issues. At the time he was taking his former stylist, Lola Cashman, to court, claiming that she had stolen a trademark Stetson hat from him.
*Rupert Murdoch* - Dirty digger
In March 1999The Economist discovered that Rupert Murdoch’s News Corporation had, in the four previous years, paid just $250 million in corporation tax worldwide – a mere six per cent of its profits. Corporation tax in the US, Australia and Britain was over 30 per cent at the time. During the previous 11 years Newscorp Investments, Murdoch’s holding company in Britain, had paid no corporation tax at all, despite accumulated profits of $2.8 billion. His ‘financial engineering’ constructed a worldwide maze of about 60 News Corporation subsidiaries in tax havens such as the Cayman Islands, Bermuda and the British Virgin Islands. Meanwhile, Murdoch had been encouraging parents to compensate for the absence of public education funds by collecting tokens in his newspapers to buy school textbooks. Murdoch gained the nickname ‘Dirty Digger’ because of the salacious content of some of his most successful newspapers, such as The Sun and News of the World in Britain.