The biggest loophole is capitalism itself

As austerity deepens, with spending cuts stretching into the far horizon, there is a renewed focus on the tax that corporations pay, or rather don’t pay. Some argue that if they paid their “fair share”, cuts in services like health and care would not be so severe.

Others like Richard Murphy of Tax Research UK, go further, claiming that "if only more had been done to tackle rampant tax evasion, Europe would not be facing a crisis today."

It’s an attractive – but ultimately misleading – theory that would seem to solve the problem of public finances and the economic crisis at a stroke.

Tax avoidance by the major corporations is an obvious target, so much so that MPs last week called names like Starbucks and Amazon to explain themselves before the Commons public accounts committee.

Chancellor George Osborne has even dedicated some funding to allow Her Majesty’s Revenue and Customs to chase the worst abusers and close loopholes. He even described tax evasion as “morally repugnant”. But it’s making no impact.

While individuals and small firms are hounded by HMRC with some success, the major transnational corporations continue to run rings around the government, as the PAC found out.

Research based on data from 145 countries, shows that tax evasion schemes amount to $3.1 trillion annually. The Tax Justice Network says that the UK misses out on about £70 billion annually, which represents over half of the health budget. 

There are many devices in play. Corporations locate holding companies and assets in tax havens, where profits are declared even though the activities are located elsewhere. They also use “transfer pricing” – internal, cross-borders trading schemes that help to reduce the tax burden.  

Sol Picciotto and Nicholas Shaxson, respective authors of Regulating Global Corporate Capitalism and Treasure Islands, were given space in the Financial Times this week to make their case for change. Before suggesting a remedy, they rightly stated:

The international tax system in effect provides vast subsidies for multinationals, helping them outcompete local rivals on a factor – tax – that has nothing to do with economic productivity. They free-ride on tax-funded benefits – roads, educated workforces, reliable courts – provided by the countries where they do business, while others pay for those benefits.

Their appeal for change is based on the claim that the present system “corrupts the very fabric of markets”, which is a bit of a giveaway. Neither Picciotto nor Shaxson are against capitalism itself – just the ruthless way it operates. So they have come up with a counter-ruse which is known as the unitary tax. Put simply, corporations would be taxed according to the “genuine economic substance of what they do and where they do it”.  

Unfortunately for them, there is little support among policy-makers for such a change. They acknowledge that the OECD, which oversees the international tax system, has not even put the idea of a unitary tax on its agenda.

Picciotto and Shaxson argue that the tax system hasn’t kept pace with changes in the global economy. Quite the opposite. What they miss is that the corporations have become more powerful than governments and that international agencies are there to facilitate their operations.

Nation states have had to compete for inward investment through low tax rates while allowing the repatriation of profits and turning a blind eye to tax avoidance. For example, the world average corporation tax rate has fallen in each of the past 11 years, from 29.03% percent in 2000 to 22.96% in 2011, according to a KPMG survey.

As a result, the burden falling on wage earners rose while governments (and households) ran up budget deficits on the basis that the global economy would continue to grow ad infinitum. Well, it couldn’t and didn’t. With due respect to Murphy, the deepening recession is hardly the result of tax avoidance schemes which themselves reflect the power of globalised capital.

In that sense, the biggest loophole is capitalism itself.

Paul Feldman

Communications editor