Wednesday, 28 October 2015

EU ruling will bring realistic approach to "Tax Wars"

Paul Sweeney: “I like to pay taxes. With them, I buy civilization.” said Oliver Wendel Holmes Jr, a US judge in 1927.

Today many major companies see tax minimisation as a core business strategy. And governments, until recently let them away with it. The EU rulings on Starbucks and Fiat will be welcomed by citizens. They should also be welcomed by governments which are cash strapped and cannot pay for much needed and often basic public services.

However, it is likely that the Irish government will be somewhat ambiguous in its response because it may think that the Apple case may impact on future foreign investment. But it could also bring in a lot of much needed tax. The judgement may help bring a more realistic approach to “Tax Wars” between states where the only winners are multinational tax avoiders.

Taxation pays for public services, for the state and for civilisation itself. It is of great importance. The scale of tax evasion and tax avoidance in the European Union is immense. If substantially curbed, both could fund greatly improved public services (or reduce taxation).

Tax evasion is the non or under payment of taxation. It is illegal. It is estimated at almost 20 percent of EU GDP and it was higher in the past. Bank secrecy has been key to evasion, not just by drug barons and money launderers but by the wealthy and major firms.

Tax avoidance is the minimisation of taxation by persons and firms. It is legal. It is growing, particularly with aggressive tax planning by multinational corporations (MNCs), using tax havens and low tax jurisdictions, assisted by the tax power brokers, the multinational tax advisors in the Big Four accounting and major legal firms and Tax Wars between governments.

Globalisation and technology have greatly facilitated both tax evasion and avoidance. The digital economy, rapidly growing in importance, is extremely difficult to tax because there are no physical goods and it is difficult to ascertain where value is added. It is admitted by the highest authorities that the international tax system is broken.  Only international cooperation will fix it.

Tax evasion, avoidance and use of tax havens impact on all citizens, in all countries. They have contributed to the major decline in Labour’s share of national income for almost four decades, as globalisation and financialisation took hold, and capital controls fell. This because the very rich and great corporations no longer pay tax that would, in turn have generated fairer and more efficient economies.

The great anger shown at the tiny tax payments by some of the world’s most profitable corporations demonstrates that this is a vital issue for most of us. But it is one where we feel impotent, as there seems to be little we can do. This alienated feeling of impotence on taxation has contributed to the decline in respect for politics, and for institutions like the EU.

There is, finally, action on the non-taxation of some MNCs, and an effort to tackle tax evasion and avoidance. The lead by the US government in forcing tax havens like Switzerland to disclose information on US citizens’ banks accounts represents progress. The exchange of information is also good news for “the little people” who pay taxes. There is now hope that the famous words of tax cheat, Leona Helmsley "We don't pay taxes. Only the little people pay taxes" will finally be addressed by governments.

Political leadership is not dead. Coordinated government actions also show that sovereign states, working together, can deal effectively with the abuse of markets and the rule of law by large corporations, the wealthy and criminals. This EU ruling is welcome. Good progress is finally being made internationally on curbing evasion, avoidance and tax havens. Much, however, remains to be done.

Paul Sweeney Chair of TASC Economists’ Network and will give a lecture on Tax Evasion, avoidance and havens on Thursday 29th October 2015 at TASC

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