Across Europe a realisation has dawned in almost every government that the commodity now in shortest supply in almost every economy is tax revenue. From economies like the UK, where tax income in aggregate from 1997 to 2007 comfortably covered current government spending and a significant part of investment cost as well, to Greece where, let's be honest, rampant tax evasion associated with a shadow economy representing more than 25% of GDP, the impact has been broadly similar. Something akin to suppressed panic is breaking out as the realisation dawns that the reason for continuing massive deficits accumulating no longer has much to do with, and certainly can no longer be blamed on, the failure of banks in 2008 and has instead everything to do with a failure of almost all governments to collect sufficient revenue to pay for the services their populations demand and which, very clearly, their economies have the capacity to supply.
This last point is vital: the reality is that government deficits are currently facilitating economic activity that there is real capacity to deliver. What is more, without deficits we would have massively more unemployment, greater inequality and a bleak future populated by under-trained people without hope, and with the prospect of shorter lives. Amazingly, that deficit spending is doing all this without boosting inflation, destroying the exchange rate or, astonishingly, leaving us with a mountain of debt, since quantitative easing has eliminated some of the risk there by cancelling £375 billion of the cost of the deficit, so far.
However, even that sum though does not balance the books: we are still short of tax revenue. And that's why the outbreak of press interest in another dimension of this story in the last few weeks was, perhaps, predictable. I refer, of course, to the problem of US multinational companies (in particular) not paying tax on what appears to be all the profits they make in the UK. By a variety of means, whether it be multiple transfer pricing escapades in some companies, or by simply claiming that their sales do not arise here by way of legal artifice that leaves almost anyone with just a modicum of cynicism open to at least reasonable doubt that anyone with a similar modicum of credibility might suggest that such an arrangement is plausible, it seems that companies are simply sidestepping their UK tax liabilities. The amount lost is open to dispute: identified cases are suggested, so far, to give rise to losses of at least £900 million in tax. Those losses are, therefore, bound to be bigger. For the record, I would add that not a penny of this is in my estimate of the UK tax gap caused by the tax avoidance of large UK based parent companies, which I think might be £12 billion a year: that's because these are losses caused by non-UK parent companies.
Let me leave aside how this abuse happens; that is for another place, even if it has not been properly explored yet. And let's also ignore for now why this happens: let's take it as read that companies think this is an action that is in their interests. So let's instead look at the political issues that the shortage of tax revenue, and the contribution of large companies to this phenomena, give rise to.
First, it is now apparent that politicians' panic about deficits has created the need for a villain. The first target was tax havens. They deserve their role, but they remain remote, conceptually and physically. Companies familiar to households across the country are not so remote. That means the perfect villain has been found by the media in the form of these companies, even though by itself their behaviour could never create the deficit, or resolve it if addressed. That does not matter; a media anxious to appease people who have now realised that the austerity that a shortage of tax revenue has created is very personal as its impact spreads, now has a ready, and seemingly guileless, villain to blame.
Secondly, the fact that for largely methodological reasons, for which I have some responsibility, it has been easier to target US rather than UK companies at this stage of the awareness building on this problem has also played into the hands of those who wish to blame 'someone else' for what is happening. These companies are undoubtedly tax avoiding; no-one could possibly suggest otherwise, but they have certainly played straight into the hands of opposition politicians and an anxious press by doing so.
Thirdly, the fact that it can be suggested that the solution to this problem lies elsewhere as well - at the Paris based OECD or within the EU - lets government politicians also express their outrage and then wring their hands when nothing can be done.
In combination it is a perfect amalgam for the creation of a political demand for change that those with responsibility for delivering it do, if their action is anything to go by, hope will pass before anyone notices they have done nothing about it.
That hope that this storm will pass is the action of what I have called cowardly politicians in my book The Courageous State. Those politicians - and I cast quite a variety of politicians of recent years, including, almost without exception, the current government - seek always to put distance between themselves and a problem, trusting others, whether it be the market, other institutions or time, to solve it.
I, on the other hand, favour Courageous politicians, driven by conviction that leads them to take action in innovative response to the public mood. Nye Bevan instinctively understood such politicians when he wrote in 'In Place of Fear' “The first function of the political leader is advocacy. It is he (sic) who must articulate the wants, the frustrations, and the aspirations of the masses. Their hearts must be moved by his words, and so his words must be attuned to their realities.”
The current tax crisis is a situation where, I suspect, only such courageous advocacy in tune with public opinion will do. Firstly, deficits are not going away, so this problem will persist. Secondly, as yet there is no reason to think companies will voluntarily change their behaviour. Thirdly, having established a simple means to identify this behaviour the press is unlikely to let it go. That means it will remain a perfect gift to opposition politicians seeking popular support. And therefore, lastly, hand wringing will not do unless a clear political fault line with potential significant consequences for the government is going to develop. No politician can afford to look weak in the face of a threat. These companies pose a threat to the government and its revenue and unless they act in the face of it then they will definitely look weak, and the public will perceive it.
That's not least because the tax justice movement, of which I am a part and which has helped generate many of these stories, is solution focussed. We have said there's an issue and the world now believes us. We have also said the problem can be solved. What is more the press and opposition know it. So do activists like UK Uncut and Occupy, whose role in this has been vital.
The option of knowing what corporations are doing is available if only country-by-country reporting were introduced, which would demand a profit and loss account for each and every jurisdiction in which a company worked. Worryingly for the government, this has enough NGO support to have already been driven onto the statute books of the US and (soon) the EU, albeit only in part and for the extractive industries alone, but the momentum is clear. And yet our government is doing nothing and says this is an issue for the OECD (which it is not, and never will be since they have no serious accounting remit).
So too is there momentum for a real general anti-avoidance principle in UK law, and yet the government in the face of the demand is delivering a proposal so toothless that its own impact assessment says it will have no measurable consequence for the UK economy. If ever there was an admission of cowardice in the face of a crisis that is it. The alternative, written by me and tabled by Michael Meacher in the House of Commons, is a strong measure designed to tackle just the sort of arrangement that US corporations are using. Unsurprisingly the Labour front bench are showing interest in it.
And there are moves afoot to suggest that in the face of George Osborne's move to a territorial base for UK corporation tax the whole logic of the OECD's approach to solving this problem, which he has demanded they tinker with in search of a solution, no longer makes sense and that unitary taxation - which apportions the profits of multinational companies to states on a formula basis after which those states have complete sovereignty over tax rates and allowances (now but a dream) makes a great deal of sense.
Each of these steps requires vision, understanding and leadership though; qualities that this government is not evidencing. If the opposition assumed that mantle instead they could redirect a lot of anger aimed at the government's inaction onto their ability to solve a problem, and win credibility as a result.
The media have not latched onto this issue by chance, or by coincidence. The Tax Justice Network has worked on it since 2003. It's current emergence is not just the result of more data; it reflects real public concern about their own well-being which the press are reflecting in their commentary. That though makes this a difficult issue for government and opposition alike. Who has the courage to tackle this (conveniently) foreign aggressor and bring back the spoils to the UK? Those spoils are big enough to fight over. This issue has the potential to remain on the political agenda as a result.
Watch out for the story of tax avoidance to run, and run, to the next election and beyond. This is a Marmite agenda: where you are on this is for most people unambiguous. It has the power to divide politics as a consequence.
That is what I, and the Tax Justice Network, hoped for. We recognise that this is not a fence sitting issue. It is one that drives to the heart of our belief in democratic government that has the right to impose its will.
That is why I expect this issue to deliver opportunities, and since I can't see anyone in the current government rising to this challenge it is wide open for Labour. This is about One Nation, and its right to tax. That's pretty much a gift right now, and one that needs to be accepted with open arms.
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But don’t the government apparently want to re-sell these bonds in order to “get their money back” and “destroy” that money?
As the printed money, as I understand it, is going into bank reserves, it is a straight asset swap, that is, a £1000 bond exchanged for £1000 of government credit, therefore there would be no inflation that wasn’t already there anyway.
Incidently, I heard that banks do not buy bonds anymore but buying interest in them through derivatives.
Therefore, are they really buying bond from banks?
This was money printing
Of course it can “reissue” the bonds if it wants in the future
But that won’t be any different from issuing new ones
For all practical purposes they’re cancelled – not least because there will not, for decades, be demand for £375 bn of UK bonds
“The last time we were in a depression was the 1930s, and what got us out was cheap money. We need a zero interest rate and a housing boom.” quote from Crispin Od{ius}ey in MoneyWeek, 22 Nov. What a complete pillock.
We do need zero interest money
We don’t need a housing boom
We need housing
My comment seems to have disappeared! I don’t know if it actually has or the rather bizarre quirk of this website that appears to sometimes hide your previous comments! 🙁
Give me a chance – I sometimes have other things to do
Moderation happens when I have time
Apologies! It just semed to disappear, that’s all!
Re QE: Isn’t it fair to say that it is simply being used as a device to hold down interest rates? It apppears all this money is going to the top and, rather than driving productive investment, is precipitating the sucking out of resources to the financial sector.
Isn’t QE just helping to keep the voodoo banks alive?
No, it’s a way of creating money to keep the economy going when banks weren’t lending, which i the way it is normally done
In both cases the banks capture the profit from creating the money
That is why they are so profitable
Isn’t it fair to say that QE is artiificially holding down interest rates though? Without which the global debt would become completely unmanageable?
I am not against the idea of QE, just the way it is being used. Instead of it being used to fund productive and useful investment, it is being used to buy commodities and to keep alive the casino culture at the top!
The idea is supposed to be that it will trickle down to the bottom. That plainly isn’t happening.
If QE was funding what it was evidently supposed to, that is, to the productive economy and small businesses, there may well be on the road to recovery by now.
As it is, without the help of QE, this govenment’s policies would have come close to collapsing the economy by now.
Without worthwhile productive investment, QE is only a device to serve those at the top, in my view!
I created the idea of Green QE – I too object to the way it is being used
Look it up
I was reading through the comments against a telegraph article http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/9707121/Google-UK-boss-Matt-Brittin-fights-back-over-tax-payments.html , when one by Yamasachi at around 11:50 caught my attention. I reproduce it here (without permission)..
“It’s quite a thorny issue because British companies do the same in many countries around the world where the make eye watering profit. You can’t eat your cake and have it. The UK government signed all this agreements with other countries where by a company pays the bulk of its tax in its country of origin not necessarily where it operates. Now the politicians pretend as if they don’t know what’s going on. What can we do?”
There is no reason why that is necessarily true of UK companies in the past
And with the changes in the law now happening there is no reason at all why it should be the case ion the future
Wrong, in other words, is my response
I am not convinced the government is worried about the deficit. If they were they would take steps to increase the tax take where they can. But it seems to me one need look no further than the announcement about minimum pricing for alcohol to see that is not true. If the problems really exist and are best tackled by raising the price of alcohol the natural (and unarguably legal) way to do that is through an increase in tax. It could be made progressive, which minimum price is not; the take would go directly and quickly to the treasury rather than indirectly through tax on profit in the future; and it would require no new administrative arrangements.
I think this government is intent on transferring money to their private sector friends and increasing inequality: I think the deficit is being increased as cover for that agenda.
QE enables deficit spending, it also enables the middlemen (banks) to take a cut on the deal.
The banks are also able to borrow close to zero, this is less true of anyone else not close to government.
1) QE for productive investment and for encouraging housing provision – absolutely.
2) QE for supporting a broken banking model – no
3) QE to the public to pay down debt – yes
4) I support a move to 100% reserve banking and government creation of money( with some electoral controls) by spending via tenders on infrastructure to reduce imports, encourage exports and encourage long term sustainability and purchasing power stability.
5) Interest rates help to determine capital allocation, with 4) in place why not let the market decide.
I do worry about inflation – reference basic costs of life – energy,rent,house prices,transport costs. ( Reports abound of individuals intention to ration use of power)
Keep up the great work- i feel the country/world is a much better place for the work you do.