The New Serfdom

by Angela Eagle

  The IMF’s disavowal of Thatcherite economic orthodoxy and advocation of the traditional democratic socialist ideas about increasing taxation of the super-rich represents a key moment in the fight for a more equal distribution of income and wealth. But it is only the beginning of the battle.

  History shows us how this global domination of wealth by a few individuals has been dismantled in the past, and it offers some guidance, though not a perfect road map, as to how we might do so again. Political will as well as international coordination and co-operation will be crucial if we are to restore some balance to the deeply polarised ownership and control of wealth and power in our globalised world. We will have to confront the powerful vested interests which are currently enriching themselves beyond the dreams of avarice. It will not be easy, but it has been done before and it must now be done again. A more progressive tax rate – that levies more from the richer who can afford to pay more – is certainly part of the answer, both for income and – we would argue – also for wealth. This is democratic socialism in action – the return of social solidarity and the values which advocate that the subscription rate for a civilised society should be set at a level which seeks to take from each according to their means in order to provide for each according to their needs.

  A further market fundamentalist argument against levying very high levels of marginal tax on large incomes has always been that it yields very little in the way of revenue. It would, however, raise substantial revenue if it was comprehensive and the global tax loopholes were closed. And even if it does not, high marginal tax rates have other uses apart from yield. Some are designed to make the accumulation of high concentrations of income and wealth much harder, because of its unacceptable social effects for society and because it is unproductive economically and most likely lowers growth rates.

  Experience demonstrates that high marginal tax rates on wealth or income work to modify inequality between and across generations. They also maintain the entrepreneurial activity which is necessary to generate economic growth in the private sector of a mixed economy. Of course, there will be the usual threats of a ‘brain drain’ – but it’s time to call their bluff. In 1919, economist Irving Fisher called for high marginal rates to achieve the democratisation of the economic system and prevent the rise of a European-esque oligarchical society in the USA.26 He wished to use high tax rates to tackle the ‘undemocratic distribution of wealth’, which was in his opinion held in too few hands in the USA. He was right then, and he is even more correct today in Trump’s America.

  Following the aftermath of the 1929 Wall Street Crash, which nearly destroyed American capitalism and left a quarter of the workforce destitute, high rates of personal income tax were indeed levied by President Roosevelt to stabilise the teetering capitalist system and help pay for the New Deal. He also wished to respond to the rising popular anger at the financial elites whose speculation had caused the crisis in the first place. His predecessor, President Hoover, had set rates at a derisory 25 per cent; Roosevelt put them up first to 63 per cent and then to 79 per cent. During the Second World War, they went up as high as 94 per cent. Between 1932 and 1980, they averaged 81 per cent in the USA, while in the UK they were similarly high, reaching 98 per cent during the Second World War and varying between 80 per cent and 90 per cent between the 1930s to 1980. In the USA, President Reagan reduced income tax rates to 28 per cent in 1986 and a significant reduction was also introduced during the Thatcher years by Chancellor Nigel Lawson in the UK. What happened next proves just how effective progressive taxation is at curbing the rising tide of inequality, which has been experienced since the triumph of the market fundamentalists. Both levels of top remuneration and the accumulating income and wealth of the top 1 per cent soared after their taxes were cut. Since the tax disincentive to bargain for huge increases in executive remuneration had gone, all previous restraint went too, and executive remuneration soared. This trend is now spreading to the public sector and it is causing deep resentment.

  The evidence is clear. The size of the decrease in the top marginal income tax rate exactly correlates with increases in the amounts of national income taken by the top 1 per cent. This causes the increasing levels of inequality in society, which have been a feature since top levels were cut in the 1980s. It follows from this that reversing the huge cuts in top rates and restoring progressive tax rates will reverse this trend to unequal distribution of wealth and income.

  However, the world has changed since the days when high marginal tax rates were the norm. Capital has globalised, and this means that high marginal rates can only work if they are accompanied by the end of banking secrecy and transparency rules to prevent money being hidden away in secretive offshore financial centres. Bringing the activities of such institutions into the light and ensuring that they operate within the law is also essential. To achieve this openness and transparency, international co-operation and the creation of global enforcement institutions to strengthen tax oversight and enforcement internationally will be needed. No such institutions currently exist, but the gains from forging an international agreement to create them would be very substantial. If the Bretton Woods Conference could bring new institutions for orderly global governance into being in the aftermath of the Second World War, it is not beyond the bounds of human ingenuity or political possibility that new structures could be agreed upon internationally, designed and then introduced. This would enable more progressive systems to be introduced at both the national and international level because dirty money, be it the proceeds of crime or terrorism, would have nowhere to hide and the capacity of individuals and corporations to avoid taxes would be much reduced. It would also significantly improve financial stability and reduce the risk of another global financial crisis occurring.

  GLOBALISED FINANCIAL MARKETS

  The global financial crisis of 2008 demonstrated just how interconnected and interdependent all parts of the world financial system have become in the past thirty years. The 1986 ‘Big Bang’ in the city was just the beginning of a growing global integration of capital and the financial markets that speculate with and distribute it. According to economic theory, and most policy-makers, globalised financial markets were supposed to spread and therefore minimise risk. At the same time, market mechanisms were meant to provide for the most efficient use of capital by connecting the money people save with the projects that need investment. In reality, neither prediction has proved to be remotely accurate. Far from the efficient distribution of capital, globalised financial markets have succumbed to massive amounts of speculative activity – otherwise known as ‘gambling’. At the beginning of 2017, the world’s biggest market, that for foreign exchange, had a turnover of $5.3 trillion in trades every single day. This was up from $1.2 trillion twenty years ago but down from its peak of $6 trillion in 2014. Much of the activity in the globalised markets consists of such speculation and clearly has nothing whatsoever to do with the most efficient allocation of capital and much more to do with making a killing betting on movements in prices from one jurisdiction to another (arbitrage). This is neither economically or socially useful, but it can be personally either very profitable or ruinous – as can most gambling. That is why demands for a globalised ‘Tobin tax’ on market turnover designed to dampen down the very high levels of speculative flows has been growing stronger year by year. And these demands have much merit. As is the case with the suggestion of introducing a global wealth tax, this highly desirable aim has been thwarted so far by the lack of political will and the absence of the global infrastructure which would be needed to introduce it. It is, however, something that would immeasurably improve global economic conditions if it could be agreed and enforced internationally, and the revenue raised could be used to support the global fight against climate change or ensure the achievement of the UN development goals.

  TACKLING TAX AVOIDANCE, EVASION AND SECRECY

  The sheer scale of lost revenue caused by the existence of a sophisticated netw
ork of offshore financial centres (OFCs), more colloquially referred to as tax havens, can never be known with any certainty until the secrecy which is currently being maintained is finally blown away. These OFCs make a living by obscuring the true owners of wealth via secrecy and a network of obtuse shell companies, which can be used to manage money while hiding their customers from the gaze of the tax authorities. Tax havens also operate within very low- or zero-tax environments, with little or no regulatory supervision, effectively helping to siphon off what would be the tax revenues of other countries for their own benefit. Much of the money which finances right-wing and libertarian think tanks, from Breitbart to the Heritage Foundation, is held offshore in this way.

  The leaks contained in both the Panama Papers27 (11 million documents leaked in 2016) and the Paradise Papers28 (13 million documents leaked in 2017) reveal these offshore tax havens facilitating financial secrecy, money laundering, sanctions busting and tax evasion on a colossal scale. This activity involves both rich individuals and multinational companies, and is shocking in its scale. Aggressive tax avoidance, it seems, is now the norm, and tax havens are revealed as the key enablers in the rise of global inequality.

  The leaks also reveal that the leaching of tax revenues is a serious and growing problem, depriving countries of much-needed revenue that should have been collected and used to finance public services or for development purposes. If this behaviour continues to go unchecked, the scale will only increase. It already presents a growing threat to the rule of law and the integrity of all tax systems across the world, since the legitimacy of any tax system relies on the knowledge that paying tax is the obligation of all citizens and companies, however wealthy and privileged they may be. Paying tax can never become voluntary. The detail contained in the leaks reveal the lengths that companies and individuals will go to in order to avoid their domestic tax authorities’ scrutiny of their financial dealings. Both sets of papers reveal the growth of a newly powerful globalised and parasitical web of ‘intermediaries’ who are responsible for the commoditisation of tax avoidance.29 Firms of lawyers, accountants and so-called tax specialists are growing brazen in touting their dubious wares to an increasing number of people. Their aim is to make it as easy and convenient as possible for income and wealth to be sheltered from tax offshore. They advertise ‘tax packages’ as they would holiday packages, equipping individuals with the companies, the bank accounts and the business addresses in different tax havens to facilitate abuse. And this parasitical ‘industry’ is growing by merger and acquisition; one has offices in forty-six different jurisdictions. Until these facilitators are dealt with, it is hard to see how this global larceny of myriad state tax revenues can be prevented.

  While some of this secret activity may be illegal, not all of it is – and tax havens are not the only jurisdictions that facilitate the legal but morally dubious activity of minimising tax liabilities on a huge scale by companies and individuals. In 2014, the so-called Luxembourg leak30 revealed that an EU member state had created 340 corporate structures designed explicitly to minimise tax liabilities, including for companies such as Dyson from the UK, Disney and the American Koch brothers. The latter have used their wealth to finance a huge network of Conservative and libertarian think tanks and right-wing campaigning organisations which explicitly seek to influence American politics, including the Cato Institute, the Reaganand Thatcher-worshipping Heritage Foundation and the John Birch Society. They also spend large amounts of money supporting their favoured Republican candidates in their congressional races. It has recently been reported that the billionaire Koch brothers have pledged to donate $400 million to Republican candidates to defeat the anticipated Democratic surge in the upcoming midterm elections. Thus they seek to buy political influence in a jurisdiction in which they arrange their business affairs to minimise their tax liabilities. This is the very opposite of the ‘no taxation without representation’ cry which launched the American revolution.

  The Luxembourg leaks revealed that there was one modest address in the country which had 1,600 companies registered to it – an absurdity that stretches credulity beyond all limits. This multiple registration of companies at one ‘letterbox’ address can equally be observed in the offshore financial centres dotted around the world, including many British Overseas Territories. Estimates were that the EU could have lost up to €70 billion in tax revenues as a result of the opportunities for ‘profit shifting’ and ‘base erosion’ that Luxembourg facilitated by signing these agreements. In the aftermath of the scandal, no multinational company was ever charged with wrongdoing. Exploiting loopholes for ‘tax minimisation’, after all, is not explicitly illegal. The companies concerned seemed to have forgotten that legality is not always synonymous with morality. It appears that the rewards for such immoral behaviour are so large that these companies seem not to care about the reputational damage it may cause them. Every single company involved in this scam evidently had no shame – no sense of loyalty or duty either, to the societies that facilitated and nurtured their existence and development. The Competition Commissioner Margrethe Vestager has used some of the information disclosed to pursue cases of provision of unfair state aid by Luxembourg to individual companies. But this is a very unsatisfactory and indirect way of attempting to call these companies to heel. And it has not worked.

  This so-called tax competition, whereby countries compete with one another in the provision of low corporate taxes and tax laws which allow multinationals to shift profits and set up tax-minimising structures, is wholly damaging to the integrity of every national tax system. It facilitates a race to the bottom and the only real beneficiaries are those companies, tax accountants and law firms who create complex structures to avoid paying the taxes which are due. This sets up a dangerous downward ratchet by which, over time, corporate tax receipts will fall again. Yet, following the EU referendum, Eurosceptic government ministers and MPs pursuing a ‘hard’ Brexit have routinely threatened the rest of Europe with inaugurating a new race to the bottom on taxes, employment and environmental standards, which should make us in Britain very afraid for our future prospects. Furthermore, the devolution of tax powers to Scotland and Northern Ireland creates the potential for a race to the bottom within the UK itself. A downward bidding war on corporate tax rates would only create a situation whereby corporate tax rates fall even further.

  The outrage around the Luxembourg leaks was genuine. However, two years later, only the whistle-blowers who had originally leaked the documents had been brought before a court and convicted. And it was revealed that the number of agreements Luxembourg had signed since the revelations had more than doubled.31 This reveals a truth: outrage is the easy part; effective international action to prevent the abuses has proved to be much harder to deliver.

  ACHIEVING TAX JUSTICE

  Estimates of tax revenues lost in this benign international environment for the tax cheats vary. The IMF has put it at $600 billion annually. More recently, the Tax Justice Network used the IMF’s peer-reviewed study and broke the estimate down country by country. They calculated global losses at $500 billion per annum. The cost of creating new international tax co-ordinating institutions to narrow this gap seems cheap in comparison. Thus far, the G8 and the G20 have taken this forward and tasked the OECD with delivering some of the work on information compliance. As the Tax Justice Network has pointed out, neither of these bodies is designed to tackle this crucial problem. Both the G8 and the G20 meet only intermittently with very crowded agendas, and they have no permanent staffing capacity to pursue these issues effectively in the long term. The OECD is essentially a policy-based organisation which does not command the confidence of the more recently emerging economies. Nor is there any enforcement mechanism available to use to ensure compliance by tax havens with the requirements that have been agreed at the international meetings. The current arrangements are clearly not fit for purpose. Consequentially, while there has been some modest progress, especially on transfer of
information, nothing achieved to date is likely to transform the current situation.

  In the UK, HMRC calculates the tax gap – the difference between theoretical tax liabilities and tax actually collected – at a much more modest but still substantial £34 billion per annum. This is 6 per cent of theoretical liabilities and, according to the government, this figure has been decreasing. In the latest HMRC report, only £5.2 billion of the UK tax gap was attributed to explicitly illegal evasion, £1.7 billion to avoidance, £5 billion to criminal activity and £3.5 billion to activity in the hidden economy.32 In an era of seemingly never-ending austerity, it should not be forgotten that this sum is greater than the entire annual transport budget (£29.6 billion), the budget for law and order, the courts, the police and the fire services (£30.2 billion), and the money spent on providing secondary education (£28.4 billion).33

  The Tax Justice Network proposals for stamping out such routine abuse – which focus on ending secrecy and changing the way multinational corporations are treated for tax purposes – would go a long way to recovering much of the lost revenue if they were accompanied by an international determination to transform the current situation by co-ordination and co-operation.