Subsidising the rich: how workers pay the price for corporate tax dodging
By Daniel Bertossa | Original Source: International Union Rights | 5 June 2018
For decades wages have stagnated, public services have been squeezed and inequality has risen as workers struggle to understand why the riches of globalisation seem to pass them by. Recent leaks and tax scandals make for great headlines and expose the missing piece of the globalisation riddle – where all the money has gone. But what is often overlooked is that workers are the biggest losers of tax dodging.
Those who benefit put great effort into keeping information about tax avoidance and evasion away from the public. They also relentlessly promote the myth that we cannot afford quality public services. For decades, we’ve been told that there simply isn’t enough money available. We’ve seen privatisation, cuts to education, health and public housing, the introduction of user-pays and rising service charges. And we’ve seen wage freezes for essential frontline staff such as nurses.
When globalisation brings phenomenal riches but workers are repeatedly told there is no money for wage rises or public services they look for answers. Migrants, refugees, unemployed and welfare recipients become easy targets.
If we cannot provide bold alternatives to address inequality, ensure universal access to public services and require the wealthy to make a fair contribution, we risk ceding ground to the false promises and fear mongering of the far-right. Ending corporate tax dodging must be a central pillar to our alternative programme.
How big is the problem?
Estimates put the total value of assets held offshore, beyond the reach of effective taxation, at $32 trillion USD, equal to about a third of total global assets. Of this, it is estimated that about $11 trillion is from the world’s least developed economies. Jeffrey Sachs calculated the cost of ending global poverty would be a fraction of this amount: about $3.5 trillion.
The biggest losses are due to corporate tax avoidance. The Tax Justice Network estimates that multinational corporate tax evasion in the USA costs $188 billion USD annually. For Pakistan it’s $10 billion or 30 percent of total tax revenue and Chad lose $1 billion a year, equivalent to 37 percent of total tax collection.
These are only estimates – the real amount remains unknown because of the secrecy which shrouds the offshore system. The inability to get accurate information about the size, actors and exact methods of tax dodging is critical in undermining the fight against it.
Tax dodging hurts workers
Make no mistake, tax avoidance supresses wages. At the heart of these avoidance schemes is a simple concept. Companies shift their profits to low tax and high secrecy countries and away from the countries where the work is done or the sales are made. This is done to demonstrate to the tax office that there is no profit to be taxed. But it is also handy to show to workers and unions that there are no profits to pay wage rises – and is often used to justify job cuts. If the tax office can’t find the money what chance do workers have?
Starving Services hurts workers
The Paradise papers and other leaks make clear why our public services are underfunded: far from trickling down, we can see that wealth is flooding offshore. And workers pay the price. Perhaps the clearest example is healthcare. In many countries, the health budget is struggling to keep pace with an aging population and better, but more expensive, medical care. The gradual underfunding of health systems forces a simple but difficult choice. We either find funds for health care or we allow privatisation.
The basic flaws of private provision are shockingly simple: user pays creates a barrier to poorer people getting the care they need. As the US experience shows, highly private health systems not only drive crippling inequality but are also highly inefficient.
Research by the Institute of Medicine shows the US system wastes nearly one third of every medical dollar spent – almost $750 billion a year. That is more than the Pentagon budget and more than enough to care for every American who lacks health insurance. Most of the waste comes from unnecessary services ($210 billion), excess administrative costs ($190 billion) and inefficient delivery of care ($130 billion).
National comparisons using OECD figures show the US system is not just wasteful – it is vastly more expensive. France, renowned as one of the most comprehensive universal public health care systems in the world (with very low out of pocket expenses and some of the best health outcomes) spends 10.9 percent of GDP on health compared to 16.4 percent in the USA. Australia with a high quality universal system spends just 8.8 percent – slightly lower than the OECD average.
To achieve universal public healthcare, along with other vital services such as education, housing water and more, we need to ensure that our governments have the resources required. This cannot happen without everyone paying their fair share – corporations included.
Supercharging inequality hurts workers
Public services like health, education, childcare and public housing have a strong redistributive effect by providing services to everyone. OECD figures show that public services add about 75 percent in kind, to disposable income for the poorest 20 percent. Services such as child care, elder care and education also have a big impact on gender and ethnic equality. Public infrastructure like water, sanitation, electricity and roads increase equality because they make it possible for the poorest to improve livelihoods by using these services.
When people are denied the right to essential services such as health care, it can lead to personal tragedy – but it often also leads to financial hardship. The WHO estimates that over 100 million people suffer financial catastrophe annually as a result of health bills. When rich and large multinational corporations avoid tax, workers not only face cuts to vital services, but bear a double burden as rises in regressive taxes like goods and services taxes and income tax are needed to fund what services remain.
Undermining Development hurts workers
Quality public services are vital to the economic development of least developed countries. Economic development relies on the provision of critical public infrastructure. What is often forgotten is that the industrialisation of many of today’s most developed countries occurred with government investment, public provision and substantial subsidies to infrastructure like water, ports, roads, rail, water, electricity and telecoms. Gaps in vital infrastructure, often caused by a lack of public finance, undermine productivity and hamper investment.
The main cause of illicit financial flows out of developing countries is neither corruption nor crime, but the tax dodging practices of large multinationals. Indeed, more money flows out of Africa because of tax dodging than the total inflow of foreign aid. This not only harms economic and social development: it reinforces colonialism by removing the ability of countries to independently raise revenue for self-determined purposes, in favour of aid and loans which are often tied to foreign-imposed conditions.
Corporate tax avoidance is even more harmful in developing countries, which tend to rely more on corporate tax revenue as a proportion of the tax base. This has been exacerbated by tariff cuts; a recent trend in neoliberal trade, which further undermines the tax base.
The sheer size of profit shifting out of developing countries is remarkable. These examples show the percentage of total government revenues lost from corporate profit shifting:
■Zimbabwe – 31 percent
■Congo 25 percent
■Cameroon 17 percent
■Ethiopia 16 percent
■Philippines 30 percent
■Malaysia 15 percent
■Costa Rica 22 percent
Contrary to the much-promoted myth, evidence shows that taxation does not undermine development. Developed countries have the highest tax rates – and they increase over time with development. Countries like USA and Europe have increased their tax rates as they developed
The rhetoric is constructed by the enemies of workers
When universal public services do so much good and when tax dodging by large corporations and the very wealthy undermine the wellbeing of so many, it can be difficult to understand why more is not done to stop it.
The clumsy attempt by UK Prime Minister, Teresa May, during the election to respond to a nurse asking why she was undermining the NHS illustrates how confident the elites are that they will go unchallenged.
When asked why real wages for nurses had gone backwards in the last 5 years, May responded by saying she would like to help but that there is ‘no magic money tree’.
In fact, the UK is one of the worst tax avoidance enablers in the world. It has built and defends the most comprehensive web of offshore tax havens – starting at the city of London, spreading out to the Jersey and Guernsey islands and reaching to Hong Kong, Singapore and the Caribbean. All designed to shift cash offshore. There is a magic money tree, and right-wing political parties have worked to protect it. Until recently even progressive political leaders internalised the thinking that tax rises to fund public services are economically and politically untenable.
But people are waking up to the massive fraud perpetrated against them. Like the nurse who confronted Teresa May. But it could have been a firefighter asking about job cuts in the fire brigade. Or a pensioner. Or a public housing tenant.
Corporate profits have soared, yet we still don’t pay workers living wages or properly fund our schools, health, housing or infrastructure. Sometimes with tragic and disastrous consequences, like in Flint, USA or Grenfell, London or in Ebola affected West Africa…
But perhaps the most pernicious outcome of tax avoidance is the anti-democratic effects. The very point of the offshore system is to accumulate wealth and avoid scrutiny. These unprecedented levels of unaccountable wealth both concentrate power and remove its influence from public scrutiny – capturing decision making and hiding nefarious interests.
There is massive web of vested interests, fighting to maintain their stake. When the European Union ruled that Apple’s tax arrangements in Ireland broke EU rules and ordered Apple to pay $16 billion in taxes, the Irish Government appealed the ruling to preserve its status as a ‘tax-friendly’ jurisdiction.
The recent leaks expose these connections between the mega-rich, high-level politicians and global tax avoidance. The Panama and Paradise Papers, which come from just two companies, have implicated over a dozen current or former world leaders, as well as hundreds of government officials, family members and associates in countries such as China, the UK, Australia, Malaysia, Mexico Colombia, Liberia, Nigeria, Uganda, India, Indonesia, Japan, Kazakhstan, Pakistan, Austria, Montenegro, Jordan, Saudi Arabia, Turkey, Costa Rica, Argentina and Brazil. They also revealed the offshore actions of Facebook, Apple, Uber, Nike, Walmart, Allianz, Siemens, McDonalds, Yahoo, Glencore and subsidiaries of Kremlin-controlled GazProm.
And just in case you thought these tricks were the sole preserve of dodgy, far-away places and corrupt dictators, these leaks have also exposed Wilbur Ross, US Secretary of Commerce, Queen Elizabeth II, U2’s Bono and three former Prime Ministers of Canada.
Ever feel like there is a party going on and you have not been invited?
We must have an alternative
It is difficult to believe that our leaders do not understand the problem. More likely is that they do not want to act. We must mobilise but we must also have a credible alternative vision.
PSI and our affiliates have worked with civil society to identify the changes that must be made. We are a founding member of the Independent Commission on the Reform of International Corporate Taxation (ICRICT), which has brought together eminent thinkers, including Jospeh Stiglitz, Eva Joly, Thomas Pikkety and Magdalena Sepulveda, to develop and recommend policy solutions. Many country tax campaigns have adopted the ICRICT declarations as their policy platform, and we encourage trade unionists to read the ICRICT declarations to understand the full policy suite required.
Central to any solution is the rejection of the myth of tax competition – promoted to make it sound as if tax policy will be most efficient if it is designed as a race to the bottom. The reality is tax policy requires co-operation and co-ordination across national borders.
No solution is possible without challenging the outdated international rules, based on the myth that subsidiary companies, in the same conglomerate, trade with each other as if they are unrelated. Multinational corporations must be taxed on a unitary basis. This one simple change would almost completely end corporations’ ability to shift their profits to tax havens.
It is inexplicable that no global tax body exists to provide the needed global tax cooperation. We have global bodies for health, labour standards, trade, intellectual property and even football. But we have never had a global tax body. At the very least we require a global tax treaty that sets minimum standards and an agreed minimum effective corporate tax rate. The European Trade Union Confederation is advocating for 25 percent in Europe – a goal which needs to be advanced at the global level.
National governments require well-resourced tax agencies with well-trained staff. While the big four accounting firms employ more staff, and pay hugely better wages than the public sector, countries will struggle to enforce even the best laws. After the Government in the UK fired over 3000 tax workers, a parliamentary committee estimated there was over £10 in potential tax revenue lost for every £1 saved. But you can’t fight what you can’t see.
Transparent, public country-by-country reporting should be adopted globally as well as automatic exchange of tax information between government tax bodies. There should be a global-assets register and full disclosure of beneficial ownership, including trusts.
What to do
Fixing the global tax system is a project whose essential aim is to take money from the rich and give it to the poor. The radical nature of the project means that we are threatening the most powerful interests in the world and we should never underestimate the forces we are up against. The vested interests arrayed against us spend a lot of energy and money trying to avoid even having a debate about tax. They tell us there is no magic money tree, that we wouldn’t understand the technicalities or that companies will always find a loophole.
Up against them is the wider public, who intuitively understand that something is very wrong, but often can’t quite put their finger on what that is. Our primary task is to explain to workers what’s going on and how it can be fixed. Where this has occurred in recent years we have been able to force politicians and political parties to change their tone – and change the rules. Each time we have the debate we win.
PSI, the Council for Global Unions and our affiliates recently launched a project to help unions anywhere in the world to examine corporate tax dodging in their industries. We also work with academics and groups of journalists such as Finance Uncovered. A global best practice conference will be held later this year.
Daniel Bertossa is Director of Policy and Governance at Public Services International in Ferney-Voltaire, France