The Conservative Party has always been about cutting public expenditure and rolling back the state, but now the Tories are cunningly excusing this by creating a great fear of debt and borrowing in order to justify the cuts they want for ideological reasons, while switching the blame to Labour.
The cuts will devastate public services, halt recovery and hit the poor and vulnerable and the working class – starting with public sector employees, punishing them for a financial crisis they did not cause. Meanwhile, those who did cause it are still collecting their bonuses. Their risks of failure are borne by taxpayers, while the greedy rich continue their self-enrichment. Tesco chief executive Sir Terry Leahy collected £5.2 million in pay and bonuses, excluding pension contributions, last year. He will retire at 55 on a pension of around £1 million a year. Ordinary workers have take pay cuts, work until they drop and get measly pensions – always assuming that the cuts leave them with a job.
We need to make it clear that the public and private sectors are inter-dependent, so cutting the first does not regenerate the second. Even in the boom years, the private sector couldn’t generate enough jobs for those willing and able to work. Only public investment stopped former industrial regions turning into employment deserts. There are alternatives to cuts. Public investment can be funded without them. All we have to do is to stop tax fiddles, check speculative activity and use the tax system to rebuild the economy. Here’s how.
The banks, which caused the current economic crisis, must bear a major share of the cost of cleaning it up. The Government has announced a levy on banks that will yield £2 billion-£2.5 billion a year. This is based on a percentage of a bank’s liabilities booked in the United Kingdom. Yet the International Monetary Fund says banks are under-taxed and that the G20 countries should aim
for higher levies – around £6 billion a year.
Banks are masters of tax avoidance and will artificially shift taxable transactions to secretive tax havens. Analysts at UBS, the global financial services firm, say they expect the legislation in this country to lead to a significant review of group structures and where trading activity is booked in order to minimise the tax charge. So we need to be proactive. We can raise much more than £6 billion by closing the loopholes.
First, we should make directors personally liable for any tax avoided by schemes which have no real economic substance – in other words, they are merely shuffling papers and transactions to avoid taxes. This goes under the name of a general anti-avoidance rule (GAAR), which the tax avoidance industry will fight tooth and nail.
Second, the deposit-taking licenses for banks should be auctioned, say every five years, with a floor price, plus a levy on the amount of deposits taken. Banks engaging in socially useless activities should not be able to renew their deposit-taking license, thus bringing banks under regular public scrutiny at set intervals. We should split banks’ trading functions off from merchant banking and bring the huge neo-banking sector under banking regulations.
Finally, there should be a Tobin tax levied on foreign exchange transactions, derivatives (which should be registered) and other speculative activities. A modest rate of 0.05 per cent would raise £255 billion ($400 billion) worldwide, with a sizeable chunk coming to Britain to fund pensions, schools and other projects.
Secrecy and the lax regulation of offshore tax havens enable arms dealers, dictators, drug barons and tax evaders to hide their loot – with some $15-$20 trillion of private wealth stashed away. Most of this offshore wealth is managed by just 50 banks and has no relationship with any economic activity in these sparsely-populated exotic places.
The Americans are getting tough. Britain must get tough, too. Why not require banks to reveal the identity of the owners of the assets? A modest 0.5 per cent levy on this offshore loot could raise $75 billion globally. If this $20 trillion earns a modest return of 5 per cent, a taxable income of $1 trillion has gone missing. So, if the owners of the funds paid tax at, say, 25 per cent, that would yield $250 billion (£170 billion) globally each year.
Jersey, Guernsey and the Isle of Man routinely undermine Britain’s tax base by tax fiddles. They have now developed a VAT dodge, because personal imports of less than £18 from outside the European Union are exempt from VAT. This was meant for the convenience of travellers, but is used by big companies such as Asda, WH Smith, Dixons and Argos, which have set up operations in the Channel Islands to allow the ordering of DVDs, CDs and other small items.
The goods arrive nominally from the Channel Islands, but without paying VAT. So we lose more than £110 million each year. With VAT rising to 20 per cent, the losses will be even bigger, as will the loss of jobs for high street businesses.
Whatever happened to Vince’s Cable masterstroke – the mansion tax? A 1 per cent tax on all “mansions” worth £2 million or more would raise £1.7 billion a year. That could be used to stimulate the construction industry and build affordable housing.
All returns – whether from human labour, property, shares, salaries, savings or pensions – are the same and all should be taxed at the prevailing rates of income tax. Capital gains should be aggregated and taxed at the appropriate marginal rates of income tax, be it 40 per cent or 50 per cent.
The coalition Government has decided that capital gains should be taxed at 28 per cent, which will encourage accountants to find more ways of converting income into capital gains. David Cameron told us that this capital gains tax dodge was costing £1 billion in lost tax revenues each year. So why don’t we stop it?
Private schools are big businesses. They use teachers trained by the state to deliver selective education to the wealthy at a high cost that excludes ordinary people. Private schools receive £100 million a year in public subsidies because of their charitable status, as well as grants from local authorities. The subsidy should be scrapped: £100 million could build 20 schools each year to improve the life of thousands of children.
And we must change the way companies are taxed. They make profits in this country, but for tax purposes they claim to be resident in Caymans, the Bahamas, Bermuda and other offshore boltholes where they do little or no business, but avoid paying taxes here. They can book large chunks of their profits there, but deduct interest bearing debt and other costs in Britain. As a result, many pay little or no tax here. A 2007 report from the National Audit Office showed that, despite record profits, 220 of the 700 biggest companies paid no corporation tax. A further 210 companies paid less than £10 million each.
Rupert Murdoch’s News Corporation has used complex corporate structures and tax havens to shave its tax obligations. Its accounts comply with the prevailing laws, but are complex and almost impossible to analyse. They do not provide any information about the profits made in each country of its operations or the taxes paid there. The 2007, 2008 and 2009 accounts of the global operations of News Corporation show gross revenues of $92 billion, profits of $7 billion and virtually no tax. If this was subjected to a global tax rate of, say, 30 per cent, some $2.1 billion would be raised. Since lots of Murdoch’s money is generated in Britain, a large part of that should that come here.
Express Newspapers makes money in this country, but are owned by a company registered in Jersey and hence pay little tax here. Virgin Atlantic is controlled from the British Virgin Islands, but makes its money in Britain. Shire Pharmaceuticals, United Business Media and WPP have all recently switched their tax bases to Ireland. Regus has switched to Luxembourg, Omega Insurance Holdings to Bermuda and Ineos to Switzerland. Indeed, most of the top 30 companies are considering switching their headquarters to tax havens, while we boost their profits by providing an educated and healthy workforce, financing their export credits, transport, security and defence, and allowing them not to pay for it.
This reverse socialism can be stopped by requiring that all profits made in Britain are taxed here. Why don’t we? Regardless of where these companies claim to be resident, they should be taxed in this country on the revenues and profits that they make here.
Stopping tax avoidance and reforming the system isn’t an issue of class warfare. It’s simple social justice. If huge cuts in public spending are really necessary the burden can’t be placed on the poor, women, the vulnerable and workers whose share of the nation’s wealth has been steadily reduced. It should fall on the corporations, the rich and those who have grown fat over the growth years. Now is the time for all good companies to come to the aid of the country. Cuts can be avoided and managed by reforming the tax system and arresting leakage.
Sadly, the signs are not good. The Government has announced the creation of an Office of Tax Simplification, with the ostensible aim of simplifying tax laws. Its early recruits include PricewaterhouseCoopers partner John Whiting. More accountancy grandees will follow. So the people selling tax avoidance systems will run tax policy: poachers turning gamekeepers and another step in the corporate takeover of the state.
Putting foxes in charge of the hen house always leads to disastrous results and putting accountancy firms in charge of British tax policies won’t stop tax avoidance, but will shift tax burdens from footloose capital to workers, pensioners, consumption and savings.
Labour must take a principled stand. We need progressive taxation policies that redistribute wealth and rebuild the economy.
