International Tax Avoidance Is Deeply Ingrained in the Neoliberal Economic System

2016.4.21.Cameron.OsborneUK Prime Minister David Cameron travelled to Yorkshire with UK Chancellor of the Exchequer George Osborne as they announced the long-term economic plan for Yorkshire and North Lincolnshire. (Photo: Number 10 / Flickr)

News outlets around the world have been awash this week with stories on the Panama Papers. The biggest data leak in history, they contain over 11 million documents detailing the secretive activities of Mossack Fonseca, a Panama-based legal firm who specialize in creating offshore companies that enable wealthy individuals and corporations to keep their money hidden from prying eyes and out of the hands of the taxman.

The material released thus far are wide ranging, offering a rare glimpse into the murky financial activities of a number of individuals in positions of power. Some 140 politicians and officials — including current and former presidents and heads of state — are shown to be involved with the company in one way or another. The political implications for some of those involved are already apparent: the Prime Minister of Iceland was forced from office in a matter of hours amid huge street protests after it was revealed he and his wife were in control of an offshore company; and, here in the UK, Prime Minister David Cameron is coming under increasing pressure over his family connections to offshore tax-havens and his arrogant and increasingly inept response to questions over his own personal gains from his father’s tax-free offshore fortune.

One fact that has been brought sharply into focus by the revelations in the Panama Papers is the extent to which the UK is, in fact, leading the world when it comes to tax evasion. The UK sits at the center of an intricate web of offshore tax havens in the form of crown dependencies and British Overseas Territories. The government has considerable influence over these territories and could easily apply pressure to enforce transparency, and yet it chooses to do nothing.

But apart from the minutiae of who, where and how, the revelations of the Panama Papers will offer little to shock or surprise those familiar with the way our political and economic system has worked in recent decades. Furthermore, while many may consider the revelations and profusion of coverage to be a victory for democracy and an example ofthe free press “holding the powerful to account,” to adopt the rhetoric of the Guardian, there is more than a grain of truth in the point made by Cameron’s defenders that the outrage and indignation pouring forth from the pages of the “liberal” press is somewhat disingenuous, coming as it does from people of whom a remarkable degree of willful ignorance would have been required to remain oblivious to the workings of the financial system until the present moment.

Many, in fact, such as anti-corruption blogger Craig Murray, consider the leaking of the documents to the corporate press to be a “dreadful mistake,” and its management thus far by the International Consortium of Investigative Journalists to be an example of (not an exception to) the power-friendly propaganda function of the mainstream media. When looked at closely, the coverage has indeed followed a familiar pattern: heavy focus on the nefarious activities of official enemies such as Russia’s President Putin; Iran; Zimbabwe and North Korea; with some “balancing” coverage of western minnows such as Iceland and a sacrificial lamb in the form of David Cameron — a figure on whom major sectors of the establishment have already turned their back. Notably absent from most of the coverage is any substantive analysis of the systemic nature of international tax avoidance and its main beneficiaries: the vast multinational corporations that constitute the major concentrations of economic, and thus political, power in the modern world.

Commenting on the furore over David Cameron’s past financial activities, one bemused tax lawyer speaking to the BBC suggested he thought an appropriate headline might run: “MAN MAKES MODEST INVESTMENT. PAYS TAX.” Again, there is more than a grain of truth behind this sentiment, and while the calls from figures such as Jeremy Corbyn and Bernie Sanders for independent inquiries into whether individuals or companies have evaded tax (and have thereby broken the law) are worthy of support, they do nothing to address the core of the problem — that, as campaigner Isaiah J. Poole wrote,”what’s criminal about the Panama Papers is what people can do legally.” (Emphasis mine).

Information about what corporations do legally is readily available to those with the resources and inclination to look. Oxfam’s annual report on the state of global inequality released in January focused heavily on the role of tax avoidance in both creating and compounding the twin phenomena of rising global inequality and rapidly accelerating wealth concentration. The report pointed to one recent estimate “that $7.6 trillion of individual wealth — more than the combined gross domestic produce of the UK and Germany — is currently held offshore,” showing the true scale of the problem — and making the finances of the Camerons seem modest indeed. Commenting on the vast scale of these almost always legal activities, Oxfam explains:

Exploiting tax loopholes and engaging in large-scale tax avoidance are integral components of the profit-making strategies of many multinational corporations (MNCs). Companies can artificially shift the ownership of assets or the real cost of transactions to paper subsidiaries in low-tax jurisdictions or jurisdictions that do not require disclosure of relevant business information. Profits disappear from countries where real economic activity is taking place, to exist only in tax havens. In 2012, for example, US MNCs reported $80bn of profitsin Bermuda — more than their reported profits in Japan, China, Germany and France combined.

Just how these activities come to be legal is also well understood. As the report notes, the “relationship between economic and political power and inequality creates a cycle which affects the design of institutions established to govern economies. Wealth has the potential to capture government policy making and bend the rules in favour of the rich, often to the detriment of everyone else.” In other words, concentration of wealth translates into concentration of political power. This, in turn, leads to the enactment of policies that increase wealth concentration, which yields still further concentration of political power, and so on and so forth, in a zero sum game in which wealth always wins.

Details of how this works in practice were revealed in September 2013, in a special report by the UK newspaper Private Eye and the BBC’s Panorama.[1] Largely ignored by mainstream media, the report described the scandalous way in which the UK’s tax legislation is actually formulated. At the time, UK tax laws had recently undergone a major overhaul; accompanied by much obsequious fanfare in the press about George Osborne “tackling” taxavoidance. In 2012 Osborne was quoted in the Financial Times saying, without irony, “under the last government, it was the boast of some high earners that, with the help of their accountants, they were paying less in tax than their cleaners. I regard tax evasion and, indeed, aggressive tax avoidance, as morally repugnant.”

And yet, as Private Eye’s report revealed, “through a series of committees comprising notorious tax avoiders including Vodafone, Tesco and HSBC, the most important British corporate tax laws — those governing how multinationals’ overseas profits are taxed,” were being overhauled in such a way as to knowingly facilitate vast tax avoidance — so repugnant to the chancellor — on an unprecedented scale. “The Treasury, HM Revenue & Customs and Britain’s biggest accountancy firms all connive to allow the biggest companies and richest individuals to deny the UK exchequer billions, while undermining the global fight against tax dodging too”, declared Private Eye, in flat contradiction to the government’s public announcements.

The report is worth reading in full, but the key points to understanding how this is done are strikingly simple; almost unbelievably so. They also reveal much about the state of western democratic governance.

The “Big 4” major UK accountancy corporations, (PwC, Deloitte, EY and KPMG), operate as consultants, receiving tens to hundreds of millions of pounds in government contracts to give advice on, among other things, writing tax legislation. Simultaneously they also maintain an even more lucrative revenue stream generating hundreds of millions of pounds by selling tax “planning” services to other big corporations and the super-wealthy. Clearly, since they play a crucial role in writing the laws, they are thus well-placed to manufacture tax plans that minimize their clients tax expenditure and maximise profit — all perfectly within the law. As Private Eye wryly comments, “[t]his is how premier league tax avoidance now works. Designing laws and then finessing their interpretation, the upper corporate echelons and their Big 4 advisers create their own tailor-made tax system.”

David Cameron’s response to the Panama Papers revelations is without doubt a display of outrageous hypocrisy, particularly the appeals to privacy by the head of a government that has undertaken with alacrity an unprecedented assault on the privacy of its own citizenry by allowing and subsequently defending the right of GCHQ (Government Communications Headquarters) to participate in (along with the US National Security Agency) the mass surveillance of anyone who ever uses the internet. Yet Cameron’s hypocrisy and deceit over the privacy of his father’s finances are nothing compared to his government’s hypocrisy and deceit over UK tax legislation. As Private Eye put it in their report:

In January [2013] David Cameron told his Davos audience that “businesses setting up ever more complex tax arrangements abroad to squeeze their tax bills right down, well they need to wake up and smell the coffee, because the public who buy from them have had enough”. Osborne then wrote in the Guardian that multinationals “are exploiting [outdated international] rules by getting profits out of high tax countries and into tax havens, allowing them to pay as little as 5 percent in corporate taxes while smaller businesses are paying up to 30 percent. This distorts competition, giving larger companies an advantage over smaller domestic companies”. Just six weeks earlier, the new UK laws facilitating exactly this harmful tax avoidance had come into effect. Rarely can the rhetoric and reality of government policy have been so contradictory.

For anyone who has been living in a cave somewhere, perhaps only seeing the goings-on of the world by the means of shadows cast on the wall by the mainstream media and journals of intellectual opinion, it might seem strange that concentrations of wealth, whether they be individuals or corporations, are able to manufacture, with considerable ease and with the complicity of governments, legal entities such as offshore companies and trusts — as well as the laws themselves and the tax “plans” to navigate them — whose primary purpose is to allow those concentrations of wealth to minimize the amount of tax they pay in the locations where their wealth is derived.

After all, if one believes what is found on the pages of the press, this has been an issue of pressing concern for years, and has been receiving the attention of the best and brightest in government for quite some time now. According to the Guardian, David Cameron and Barack Obama are “chief among” the world leaders for whom “the secrecy surrounding [offshore tax havens] has become increasingly unpalatable.”

Yet, as one can also learn from the Guardian, behind closed doors, Cameron is also chief among those who in fact lobby to block offshore transparency laws. Sadly, facts such as this do little to reduce the frequency of assertions about government commitment to “clamping down” on tax avoidance, which are obediently repeated without evidence as liberal commentators happily adopt high-sounding government rhetoric.

On the pages of the business press, which is one of the few places one can find regular coverage on tax issues, a clearer picture can often be found. Journals such as The Economist provide much valuable reporting on the state of global corporate taxation, as well as details of tax avoidance techniques such as transfer pricing and the manipulation of intellectual property for tax avoidance in the digital age. But the same doctrine of governments and regulators struggling against cunning tax avoiders manipulating the “ridiculously complex set of rules” is also prevalent. In “an issue that many find mind-numbingly technical,” “companies are bound to exploit weaknesses in the rules; not to do so would be to put themselves at a competitive disadvantage.” Under this interpretation, lawmakers are locked in an immense Sisyphean struggle with “the multinationals’ phalanxes of lawyers and bean counters” who somehow always manage to stay one step ahead.

Yet in reality, as we see from the more honest reporting of Private Eye and Oxfam, corporate interests are so deeply embedded in the established institutions of power that it is often the very same lawyers and bean counters that are shaping policy and legislation, making for plain-sailing in their subsequent navigation. Parliamentary scrutiny of this process is also little more than a joke, with the Labour opposition reliant on PwC for tax briefings and all three establishment parties heavily dependent on the Big 4 for donations in the form of secondments and advice.

This is not simply a problem of the current government. As Oxfam rightly asserts, large-scale tax avoidance has been a key feature of the neoliberal era, going back 30 years through successive governments in many countries. While official rhetoric on the issue has remained consistent — often reaching new heights of grandiloquence, in fact — actual policy has gone in the opposite direction, leading to record levels of inequality and wealth concentration, as profits soar and treasuries report historic lows for corporate-tax receipts as a percentage of tax revenue, placing the burden of paying for public services and infrastructure squarely on the poor and middle-class. Further evidence should not be required that the official rhetoric on tax is for public consumption only.

David Cameron is right about one thing: the public has had enough. Evidence of this is available all over the world, where people are forming popular movements and rejecting the established status quo. They don’t need to understand complex systems of corporate tax management to know that the economic and political system is rigged in favor of the tiny concentrations of wealth and power that use them. As Oxfam revealed in its report, this is a system that has created a world in which 62 individuals control more wealth than the poorest 3.6 billion people; a world in which the share of wealth belonging to the poor majority is rapidly shrinking, to the point where the richest 1% have now accumulated more wealth than the rest of the world combined. The public are justifiably angry, and it is hoped that the outrage over the Panama Papers will lead to enough pressure to force the government to make good on its perennial promises on tax avoidance and match its rhetoric with action. Little of substance can be reasonably expected, however, while corporate self-interest remains at the heart of established power. For this to change, public pressure will need to be enough to enforce serious measures of wealth redistribution to reverse the unprecedented levels of inequality that are a malignant plague on modern societies.

Footnote:

1. “Tax, lies and videotape”; Private Eye, September 20, 2013.