Corporates remain too big to fail, too big to jail

Marta Pacheco

Brussels, (Brussels Morning) Taxation is one of the most powerful means of corporate regulation. By the end of the year, the European Commission is expected to announce a new initiative that is set to transform the business taxation for the 21st century. 

Earlier this year, the EU executive announced a series of measures aimed at curbing corruption by fighting tax evasion and tax avoidance. But is the Commission making progress on this front? It is hard to assess and there is no single correct answer. 

Crises always offer opportunities, for governance and for companies, for public and for private stakeholders. At present, opportunity is tilting dangerously in favour of the private sector. The responsibility to restore an equitable re-balancing rests with regulators and governments. To assess how seriously we are taking this challenge, Brussels Morning talks to John Christensen, Director of the Tax Justice Network

The network came to prominence in 1996, unveiling illegal currency trading by Union Bank, Switzerland’s largest bank. Since then, Tax Justice Network has monitored the monitors to ensure that the taxpayer is politically represented, and not sacrificed in the regulatory process. 

John Christensen, director of the Tax Justice Network

Brussels Morning (BM): There is a feeling that there is a huge discrepancy between income tax and corporate taxation. Why can’t we make companies pay their fair social share?

John Christensen (JC): 

JC: It seems to me that for decades, countries in the EU, and others, have been basing their tax policies around supporting the big multinational companies to gain market positions around the world, and they have been doing this by giving preferential tax treatment to multinationals compared to small and medium enterprises. And this is not always obvious because often it is a case of being lenient towards offshore tax avoidance.  But tax avoidance isn’t a legitimate activity in any circumstances, and this leniency creates a harmful market distortion: It’s essentially an indirect subsidy to big companies which allows them to operate as economic free riders. 

I think this is based on the politically mistaken idea that we need to support “our “multinational companies. In the long run, this leniency towards tax avoidance strengthens monopolies and weakens small companies, innovators and job creation. 

BM: Multinationals like Apple and Microsoft can use the extra cash that they don’t pay in taxes (and their competition does!) to aggressively market their products and buy out smaller firms that do.  Do you feel that ‘tax competitiveness’ can be regulated in the Single Market given the reliance of a number of member states on the model? 

JC: The EU needs to totally rethink its competition policy.  I favour applying higher tax rates to excess profits generated by monopolies, but I think the EU needs to go much further in shaping its competition policy, accepting that many companies are given monopoly rights through their intellectual property rights that can go on for decades. That is fundamentally anti-market and anti-competition. And to make matters worse, current tax rules allow these companies to park their intellectual property rights in offshore subsidiaries registered in the Cayman Islands, Bermuda, or other tax havens, and to shift their profits there to avoid taxes.  Anyone looking for the systemic roots of inequality should start by looking at how tax havens have disastrously distorted market economies.  

BM: Income tax in Europe is 51% in some countries. How do you see a tax system based on consumption and not on income as a means to reform capitalism? 

JC: Faced with capital mobility and massive lobbying from powerful corporations, political leaders feel themselves incapable of defending domestic tax sovereignty and resisting race-to-the-bottom pressures.  In response, they have shifted tax charges away from capital by largely abolishing wealth taxes and lowering corporate income tax (CIT) rates, while at the same time increasing value added and similar consumption taxes, and cutting back heavily on welfare provisions.

The decades-long trend away from direct taxation of wealth and income must be reversed. The COVID-19 pandemic makes it imperative that the EU reduces reliance on regressive indirect taxes like VAT, and makes much greater use of wealth taxes and excess profits taxes on the monopoly rents being generated by some companies.

BM: LuxLeaks, Panama Papers, Paradise Papers, FinCEN, and with whistle-blowers like Rudolf Elmer, Hervé Falciani coming forward… It’s official that chronic excess of debt is a consequence of central banks’ reckless modus operandi, perhaps based on orthodox neoliberal practices. Yet, debt is now regarded as something normal. Is there a sense of apathy? 

JC: I’m more optimistic than the question suggests. It’s not a question of people feeling powerless. We can see this in the US elections, where there is an astonishing level of political activism, whether coming from the right wing supporting Trump, or the centre-left supporting Biden. The Brexit divisions in the UK also revealed a huge level of public participation from across a wide spectrum of society.  There is a degree of political activism now that I haven’t seen in my lifetime and that shows how passionately engaged people truly are. I think the same applies in most European countries. What I think is missing is a coherent sense coming from progressives that another world is possible.  

Since the banking crisis of 2008, people have begun to lose confidence in any idea that returning to what was previously regarded as “normal”, amounts to a good idea. The public wants a radical departure from neoliberalism, preferably in the direction of a Green New Deal, to tackle both the climate crisis and the inequality crisis.  And the COVID-19 crisis has shown that states will necessarily be key players in shaping and financing the enormous investments required to make a transition away from a fossil fuel-based economy to a genuinely sustainable, renewables-based economy.  This will require a massive change of behaviour on the parts of central banks, which haven’t exactly covered themselves in glory, either in terms of preventing waves of banking crises, or in recognising the enormous existential risks posed by the climate crisis.

BM: The general sentiment of the public towards any kind of banking activity is one of great distrust…

JC: And rightly so.  Banks played a key part in the 2008 financial crisis. They were bailed out by states, and then went back to business-as-usual.  Ten years later we have record levels of corporate debt, record levels of household debt, record highs on stock markets, and record property prices.  Clearly something is not right; the global economy is even more fragile than it was before the financial crisis. 

BM: The TV documentary you co-produced in 2017 — “The Spider’s Web: Britain’s Second Empire” — is a comprehensive eye-opener about the global-scale of the tax evasion issue How is it that the City of London manages to avoid the scrutiny of political scientists and economists? 

JC: This reflects the way in which neoliberalism penetrated the state and most of the institutions of modern democracy, including media concentration in the hands of unaccountable billionaires, and the massive funds flowing into bogus think tanks, which then publish bogus research to distort political arguments. I think something similar has happened to academia. Too many academics say they can’t secure research funding to do this kind of critical analysis or critical accounting, and not surprisingly they’re concerned about the consequences of exposing the corruption that lies at the heart of offshore finance.

From my own experience, going back to when I blew the whistle on corrupt politicians and regulators in Jersey, once you stick your neck out, you can expect to be personally attacked.  Former friends and allies will fall back into the shadows because they’re frightened of losing their jobs. The police and judiciary will do nothing, and you run the risk of ending your career. It takes tremendous personal courage to engage in the kind of in-depth investigation of what is truly happening behind the surface of the City of London and other offshore financial centres.  In most cases, we would know nothing about the corrupt practices were it not for the heroic whistleblowers behind the LuxLeaks, the Panama Papers, the Paradise Papers, and the recent Jersey offshore scandal.

BM: There was an understanding that a common OECD framework (on domestic tax Base Erosion and Profit Shifting – BEPS) would allow cooperation between developed economies on limiting tax avoidance. How is that working?

JC: When the OECD first announced the BEPS programme many years ago, I asked them whether this would open the door to a comprehensive shift away from the arm’s length method, which is flawed beyond repair, towards unitary taxation.  But the OECD seemed determined to retain the arm’s length method, and the result is even greater complexity, even more possibility for lengthy and expensive disputes and arbitration processes, but still no clarity on how to tax multinational companies in this age of the digital economy.

The fact that they weren’t prepared to abandon the previous flawed system is not because of a political failure — quite the opposite. The previous system suits powerful interests — the big companies and big countries, like the US and the UK, and several other major EU countries. They’re perfectly happy to continue with this system because the losers are the poorer countries, which are not allowed to play a role in the decision-making processes. This isn’t an economic issue. This is all about the politics of corporate power.

I think this is a huge challenge facing humanity, ranking alongside climate crisis.  We’ve seen the rise of extremely powerful corporations, which are highly aggressive in shaping policies, particularly around regulation and taxation, to suit their interests.  And the BEPS process demonstrates the extent to which corporate power is able to resist change that would benefit the vast majority of people on this planet.

BM: The European Commission pledged to do more about tax evasion, but it seems like the system has a solid structure in place to protect those who commit the fraud and punish those who come forward to expose it.  Is there any way change can be achieved by political means?

JC: Yes, I’m reasonably optimistic because we have a lot of support coming from the European Parliament to strengthen whistleblower protection, which is an important step forward. 

We need to recognize that whistleblower protection is expensive. At high-level, particularly in financial services, a whistleblower is likely to suffer enormous financial damage as a result of whistleblowing. I would like to see in the EU, the development of a system of payments to support whistleblowers and, at the very least, to not allow financial penalties to discourage whistleblowing. And the payment should not come from general taxation. It should come from a levy imposed on the financial services sector and administered by an independent body.

Without whistleblowers, we would have made almost no progress during the last 30 years. We have seen how whistleblowers have been attacked — Antoine Deltour, Hervé Falciani and my own experience in Jersey. The attacks have been ferocious. The attackers have never been penalised for their bullying behaviour, which is, in many cases, criminal. 

BM: Do you think EU Commissioner for Competition Margethe Vestager is doing a good job?

JC: Initially, I was encouraged by her appointment, but less so now. She hasn’t significantly changed EU competition policy, which seems to start from a confused position of thinking that in order to support European companies to compete on the world stage we must allow them to monopolise domestic markets.  So, in one sector after another, we’ve seen mergers and acquisitions which have concentrated corporate power, and we’ve seen a steady modification of intellectual property rights which also concentrate corporate power, and we’ve seen the relentless rise of corporations both too big to fail and too big to jail.  And the competition authorities appear powerless to take effective action to protect public interest.

BM: How will the Tax Justice Network respond to such persistent challenges?

JC: Well, our work on investigating tax havens and identifying the areas where they fail to meet standards on transparency and regulatory compliance goes on, and we will continue to explore ways in which tax havens harm human rights, democracy and international security.  We have some new initiatives underway, including the imminent launch of a new anti-monopoly network to fight back against excessive corporate power. We’re optimistic that this will become as large and influential as the Tax Justice Network.

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Brussels Morning is a daily online newspaper based in Belgium. BM publishes unique and independent coverage on international and European affairs. With a Europe-wide perspective, BM covers policies and politics of the EU, significant Member State developments, and looks at the international agenda with a European perspective.
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Marta Pacheco is the Brussels Morning European Commission Editor. She studied Political Science and Media & Journalism at the Catholic University of Portugal (UCP). A former Blue Book trainee of the European Commission, Marta has a keen interest in global affairs and experience in EU and diplomatic affairs reporting.