For decades, wages have stagnated, public services have been squeezed and inequality has risen as workers have struggled to understand why globalisation’s riches seemed to pass them by. The leaked Paradise Papers help to show where a lot of that wealth was siphoned off.
Whilst these leaks make for great headlines about tax dodging – and expose a missing piece of the globalisation riddle – what is often overlooked is that workers are the biggest losers.
Although the secrecy means nobody really knows how much tax has been avoided, credible estimates put the total amount in tax havens at about US$30 trillion. That is almost double the GDP of the entire European Union economy, or 150 times the annual amount estimated by Jeffrey Sachs required to ending extreme poverty.
Firstly, make no mistake: tax avoidance suppresses wages. At the heart of these avoidance schemes is a simple concept. Companies shift their profits to low-tax and high-secrecy countries, away from the places where the work is carried out.
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 increase wages; the same logical is often used to justify job cuts.
Second, for decades, we’ve been told that there simply isn’t enough money to properly fund our public services. The Paradise Papers make it painfully clear why: far from trickling down, the wealth floods offshore.
Figures from the Organisation for Economic Co-operation and Development (OECD) show that public services add about 75 per cent in kind to disposable income for the poorest 20 per cent.
When companies dodge taxes they force privatisation, cuts to education, health and public housing, stagnating public sector wages, the introduction of ‘user pays’ charges for public goods and rising service charges. All of these things hit workers hard.
As the wealthy pay less and less taxes, the tax mix shifts to workers and small businesses through greater reliance on income tax and consumption tax.
Spreading the poverty, bolstering the populists
Tax avoidance also undermines economic development. More money flows out of sub-Saharan Africa due to illicit financial flows than what flows in from aid.
Far from the ‘tax cuts are good for business’ mantra, if these countries collected this tax it could fund the road, rail, infrastructure, education, power and justice systems that are the real magnet for inward investment in most countries.
Starving the public purse also drives right wing, racist and nationalist politics. 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.
But perhaps most pernicious 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.
Whilst not quite a conspiracy there are massive vested interests at stake.
Last year, just one leak, from one company, Mossack Fonseca, in Panama, implicated five serving heads of state, two former heads of state, four former prime ministers and 61 family members and associates of prime ministers, kings and presidents including from China, the UK, Australia, Malaysia and Mexico.
So far, the Paradise leaks have exposed the offshore actions of Facebook, Apple, Uber, Nike, Walmart, Allianz, Siemens, McDonald’s, Yahoo, Glencore and subsidiaries of the Kremlin-controlled Gazprom.
Also mentioned are the financial affairs of former or current presidents, senior politicians or heads of state and their families in Colombia, Liberia, Nigeria, Uganda, India, Indonesia, Japan, Kazakhstan, Pakistan, Austria, Montenegro, Jordan, Saudi Arabia, Turkey, Costa Rica, Argentina, Brazil and Colombia.
They also name Wilbur Ross, the US Secretary of Commerce, the UK’s Queen Elizabeth II, U2 frontman Bono and three former prime ministers of Canada – and we can be confident that there will be more revelations in coming weeks.
PSI’s new report Private profits and the public purse outlines the way UK, Swiss and Canadian companies use offshore tax havens in the electricity, health and education sectors, raising difficult questions about how tax payers’ money subsidises privatised public service providers who then shift the profits offshore.
Do you ever get the feeling that there is a party going on and you are not invited?
Pressure and power to act
For too long we have been told that nothing can be done, but on the contrary, the solutions are not difficult. When governments wanted to stop money flowing to terrorists, they found ways to do it.
The recently formed Independent Commission for the Reform of International Corporate Taxation (ICRICT) has produced two simple policy guides that it believes would fix most of the problems. With members including a Nobel prize-winning economist, a former UN under-secretary general and academics from across the globe, the solutions are credible.
The rules must be re-written to ensure that:
- Companies pay tax on their whole global operations – and cannot transfer profits to tax havens
- Companies report their operations on a country-by-country basis, allowing national tax authorities to see what they earn, how they operate, and tax paid in other countries. Key elements must be public so we all know who is paying their fair share
- National tax authorities provide automatic exchange of key financial information to other countries where companies and individuals hold bank accounts, pay tax or do business to stop people hiding their money offshore
- All governments should publish annually in parliament which companies they gave tax breaks to and why
- Tax authorities are well-funded, and staff trained and supported. Studies show that each dollar saved from cuts to tax offices cost government many times more in lost revenue
- There is a commonly agreed tax base and preferably an agreed minimum corporate tax rate. Otherwise companies will force governments into a race to the bottom by threatening to shift production offshore. Just like wage competition, tax competition harms workers, and;
- There must be a global body that writes the tax rules in the public interest – not in the interest of corporations or wealthy countries who protect them
- But more important than the technical solutions is building political support for taking action.
Stunningly, last year, when the European courts judged that Apple should pay back €13 billion (US$15.2 billion) in taxes to Ireland – equivalent to its annual health budget – the Irish government challenged the decision. And that despite Apple having an estimated US$216 billion in cash reserves.
The Paradise Papers revealed that Apple later moved two subsidiaries to the UK island tax haven of Jersey.
When governments get away with inaction, workers suffer. We must build the necessary political will for change. We know big business, most of the mainstream media and the wealthy will not. Unions must take up the fight.
When the rich and powerful shut down the debate by hiding the facts, complicating the issues and making untestable threats about the economic consequences, we cannot make progress.
Every time we expose the facts and force the debate, we win.
Already the International Transport Workers’ Federation (ITF) has successfully forced the US multinational Chevron to pay US$10 billion in back taxes. The US Service Employees International Union (SEIU) in cooperation with Public Services International (PSI) and the International Union of Foodworkers (IUF) also pushed the European Commission to investigate the tax affairs of McDonald’s.
But the scale of the theft from workers demands that unions do more. These leaks have given us the information we need. We can no longer say we did not know.
More on the Equal Times website.