The Loophole Economy

As human beings we have to be optimistic. There is nothing natural or inevitable about the current state of affairs. We all need to steer the social system.

People these days are well aware of corporate bribery and corruption. You can hardly turn a newspaper page without reading about phone hacking, banking scandals, energy companies ripping people off, or the economic elites giving themselves telephone number salaries without creating anything of social value, while subjecting workers to wage freezes and loss of pension rights. But there has been virtually no scrutiny of the tax avoidance industry.

Various economic models suggest that the government may be losing around £100bn a year due to organised tax avoidance and evasion, but the UK government has done little to check it. It is the biggest sponsor of tax havens and could combat their destructive practices, but the political will is not there.

We all look to the state to take action, but the state’s autonomy to act is severely compromised. Political parties have sold out to the highest bidder. Partners from major accountancy firms, the global epicentre of tax avoidance, are now ministers and their colleagues hold senior position at HM Treasury. Organised tax dodging is a cause and symptom of a deeper crisis of democracy.

About 1% of the world’s population controls about 40% of the global wealth. They could pay decent wages and democratically agreed taxes, but choose not to. What does on in their heads, hearts and minds? Many make headline-making donations and receive vast media coverage and public accolades, yet the payment of miserable wages and relentless tax dodging consigns millions to an early death and miserable a life. Do they ever think about such things?

The Occupy movement has done a great public service by bringing issues like these to light, and raising the level of public debate. It needs now to turn its moment into calls for a series of democratic reforms.

The UK government could easily take practical steps. These would include publishing tax returns of all corporations; all companies should be forced to state the amount of corporation tax that they pay in each country. The government could stop awarding public contracts to companies abed in tax havens or those who avoid taxes. There should not be any knighthoods and peerages for anyone involved in tax avoidance.

The tax authorities should have unfettered access to the files of accountancy firms peddling tax avoidance. When these firms lose court cases, and they often do, the government should recover the costs of fighting the case and also fine them ten times the tax lost. Firms that persistently offend should be closed down.

How did the rich become so rich? Successive governments have helped corporations to maintain their profitability by transferring wealth away from ordinary people. In 1976, wages paid to workers, expressed as a percentage of GDP came to 65.1%. By 1996 it had shrunk to 52% and even after the introduction of the national minimum wage the ratio is around 53%. That is a massive decline of 12% though it doesn’t tell the full story as fat-cats have taken a huge chunk of this shrinking share. In the UK alone, 13.2 million people, including 2.8 million children and 1.8 million pensioners, are living in poverty.

All over the world government are pressing the panic button about cuts, which will mean even less economic activity. So where is the economic stimulus going to come from? For many people austerity will mean the difference between life and death and even in the western world many will not be able to live fulfilling lives. Many people will have to forego healthcare, education, pensions, jobs and savings. The potential of social disorder will increase.

Ordinary people simply do not have the purchasing power to revive the economy.

Addressing income and wealth inequalities is a necessary condition of any economic revival but the UK government is oblivious to the calls. We need someone like President Roosevelt to take on the vested interests and introduce a modicum of economic reforms, but I cannot see any politician with the moral and philosophical backbone on the horizon.

The world of money is totally disconnected from the real economy. I say, if bankers want to gamble let them do it with their own money and would remove the benefit of limited liability from the speculative side of banking. Let them pick them the tab for their own follies. It is sobering to realise that the global GDP is around $65 trillion, but at December 2007 bankers had bets (they call them derivatives) with a face value of $1148 trillion.

We need to democratise corporations and look at alternatives, such co-operatives, mutual, employee ownership and other structures. Nearly 70% of the world trade and 80%-90% of the foreign direct investment is controlled by just 500 corporations and a mere 1% of corporations own half the total stock of foreign direct investment. Just 20 corporations control the global coffee trade; only 3 account for over 80% of the global cocoa trade. 10 global corporations control 55% of the global trade in pharmaceuticals. There is no sign here of ‘free markets’ – if anything, global power of corporations are becoming even more concentrated. We need to look at the world as it is and develop new policies and practices for democratic reform and accountability.

A better world is possible. Durable change always comes from the grassroots and ordinary people need to ensure that their voice is heard and that they are not take-for-granted by any political system. Organised dissent and protest are the mother and father of all social reforms and it is so good to see that the Occupy movement has been peaceful. That strengthens its credentials.

The truth is that we all enjoy many rights today which are only here because someone somewhere was willing to challenge the conventional wisdom and argue that lives can be lived differently. So history is on our side and emancipatory change will come.

Prem Sikka, Professor of Accounting at the University of Essex