Who knows if this superb story — which appeared in a Taiwanese newspaper — is true? Certainly, the British executive was performing well in his job before being suddenly forced from it after just two years. And his resignation, which followed Beijing pressure that airline staff be stopped from joining protests after the high-profile arrest of a pilot, was first announced by China’s state-run television station before the company itself made a statement.

Suggested reading

Is Xi losing his grip on Taiwan?

By Bill Hayton

The claim has led to Hogg being hailed as a hero by pro-democracy activists in the region. It would be nice to think this is a true tale, a businessman’s defiant stance reflecting the bravery of the protesters I have seen out on the streets demanding freedom and democracy in the face of Chinese autocracy. For we need corporate icons at this time of immense change. And it would also make a welcome contrast with all the grubby kowtowing seen by other Western business leaders before the Chinese authorities, toeing the Beijing line to preserve their flow of profits.

Their tawdry behaviour has been highly depressing, a reminder that capitalism and morality are not always natural bedfellows. Now we hear of a climate of fear among staff at Cathay Pacific, warned they could be fired if they “support or participate in illegal protests” in a disgusting betrayal by their bosses, who are, admittedly, under fierce assault from Beijing. Unions are urging the company to end “white terror” (acts that create a climate of fear) after the dismissal of the head of a flight attendants’ association. Staff must also endure Chinese searches of electronic devices for evidence of joining demonstrations.

This is an alarming capitulation to political pressure from an autocratic regime. Yet the Cathay Pacific firm is far from alone. Jardine Matheson is a British-listed company run by a billionaire British dynasty that enjoys the fruits of our freedoms, yet it rushed out a statement echoing the Beijing line of condemning violence while praising the police whose brutal response inflamed unruly events on the streets. PwC issued a contrite statement after employees of large accounting firms publicly backed protests, while luxury fashion houses Coach and Versace prostrated themselves in apology before China’s communist rulers after implying Hong Kong is a country.

Suggested reading

How long can Hong Kong hold out?

By Fred Attewill

These firms might say their duty to shareholders and staff is to make money — and that China is a vital and fast-growing market. As Milton Friedman argued, the social responsibility of corporations is to increase profits since, as the Nobel-winning economist argued, free-market capitalism ultimately made the world a better place.

As he wrote in his 1970 New York Times essay: “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

Even half a century ago, this was a controversial theory; it has since sparked ceaseless debate and rebuttal. I have sympathy for his view of capitalism as an inherently progressive force. Yet now Friedman’s stance — echoed by all those panicked firms doing Beijing’s bidding — is being challenged from within the world of commerce. For the chief executives of 181 major companies, including many of the world’s best-known brands, are seeking to redefine the role of a corporation.

Their pitch, made in a statement through a group called Business Roundtable, is that business must seek to serve not just shareholders but the wider community, arguing that it should improve society as well as maximise profits. So they talk of fair pay for staff, fostering diversity, dealing ethically with suppliers, protecting the planet and supporting local communities.

Great stuff. Few would quibble with these firms doing more to hire black and disabled workers, improve staff pay among lower ranks or soften the environmental impacts of their massive global operations.

Yet we should judge them by their deeds, not their smooth words. The average chief executive in America takes home 280 times more than their workers, a grotesque imbalance that seems unlikely to change fast. In reality, the statement looks like a fearful response to rising concerns over capitalism — with one billionaire financier saying inequality poses an “existential threat” to the United States — as well as the issue playing a key role in the fight for the Democratic presidential nomination.

Suggested reading

Are the Democrats ready for revolution?

By Justin Webb

In Britain too, we have seen loss of trust in capitalism. But when you look at many signatories on this document, it is hard to see it as more than a glib public relations effort designed to diffuse public anger.

After all, is the head of aircraft maker Boeing really the man to lecture the rest of us on protecting the environment? Are the bosses of banks the best people to talk about ethics after their greed caused global fiscal meltdown, and they have shown so little contrition? How can the chief of Walmart boast of supporting communities when his firm — recently described as “the largest retailer of firearms in the world” — refuses to stop selling guns despite the plague of mass shootings tormenting the United States? Should the chief executive of Lockheed Martin pose as a moral paragon when her firm is selling missiles to barbaric nations such as Saudi Arabia?

Then there is tax. For if the likes of Jeff Bezos want to show they care about communities, there is a simple way to do this by starting to pay fair taxes. This is, after all, how our society collectively funds public services such as schools and hospitals, care homes and police forces. Instead, Bezos has become the world’s richest man, able to build his vast business and indulge his ideas for space travel, by using sophisticated financial trickery to flip Amazon’s digital profits and evade traditional tax collection methods. The same goes for the companies such as Apple and Oracle.

The more you delve into the list, the more it reeks of hypocrisy. It includes pimps in pin-stripes fostering tax-avoiding practices at accountancy firms and financial houses. There are two airline and one oil company chiefs claiming to protect the environment, the boss of a fizzy drink and crisp firm ignoring the obesity crisis to pontificate about respecting communities, another major weapons-maker talking about letting people lead lives of “dignity and meaning”.

Suggested reading

How the Right lost faith in capitalism

By Giles Fraser

This is a shame. Capitalism does need to clean up its act and there is much to admire in the sentiments set out by these corporate titans and multi-billionaire tycoons. But this smacks of all those bogus mission statements, the thin veneers of greenwashing, the tiny nods towards corporate social responsibility proclaimed as transformational. The truth is that until such people start showing genuine desire to practise what they preach, even if it impacts on their bottom lines, then the clamour to control capitalism, check its dynamism and stifle competition will only grow.

Capitalism has transformed our world and the experience of humanity for the better, and business can be a highly progressive force, whether by accident or design. Just looks at the numbers being lifted from poverty around the planet, the pace of innovation in medicine, the advances in communication and connectivity. But we live in a time of incredible technological change that is disrupting work and societies with unprecedented speed, while leaving politicians paralysed in the face of its strength — and this is shaking faith in the invisible hand identified by Adam Smith.

Businesses transform society by being dynamic and open. Yet they need to start displaying social responsibility and stop undermining wider well-being before they are shackled by their foes and we all suffer the consequences. Unfortunately we have seen a glimpse of the prevailing corporate ethics exposed by the submissive behaviour of Western firms towards China’s communist rulers, not in this week’s shallow stunt from a bunch of over-paid corporate panjandrums in the US. Whether the Hogg story is true or a flight of fancy, we most definitely need corporate heroes prepared to place morality before money.

Suggested reading

Why business must break the curse of short-termism

By James Kirkup

When it comes to tax, there’s one set of rules for big business and the rich, and another for everyone else. Remember the tax deal with Google, made by George Osborne, then Britain’s Chancellor, who hailed it a “major success”? The $800 billion internet giant had generously agreed to pay £130 million to Her Majesty’s Revenue and Customs. Amounting to an effective tax rate of 3%, that sum, agreed in 2016, was to cover tax it owed since 2011.

How many small businesses would get away with that?

A 2016 report by Oxfam America suggested tax avoidance by multinationals was costing the US around $111 billion a year. In an astonishing finding, they reported that between 2008 and 2014, the “50 largest US companies collectively received $27 in federal loans, loan guarantees and bailouts for every $1 they paid in federal taxes”.[1. .‘Broken at the top’, Oxfam America, 14 April 2016]

More recently, the Paradise Papers, published late last year, provided the latest in a long list of revelations about morally-compromised corporate behaviour: Apple sent its lawyers out to shop for offshore tax havens; mining multinational Glencore has a staggering 107 offshore companies; and the intellectual property of sporting Goliath Nike is nationless.

It’s not only corporates. The Paradise Papers, like the Panama Papers before them, also exposed the super-rich individuals using offshore accounts. What do cash-rich companies have in common with cash-rich individuals? Expensive accountants – dedicated to finding the loopholes and schemes that allow those with the broadest shoulders to bear the lightest (tax) load. Ordinary families, however, like small businesses, can’t afford to avail themselves of such services.

“But they would if they could”, will be the retort of some, followed by: “Anyway, it’s all perfectly legal.” And I think there’s some truth in that. No one likes paying tax – just look at the tax gap. HM Revenue and Customs, the UK tax authority, estimates it to be £34 billion – which is driven by behaviours ranging from criminality, through “failure to take reasonable care”, to avoidance. And SMEs are bigger culprits than big business, accounting for 46% of the tax gap compared to 28% for larger companies.[2. .Measuring tax gaps 2017 edition: Tax gap estimates for 2015-16, HM Revenue and Customs, 26 October 2017]

But it is the cosy, back-scratching relationship between money and politics that distinguishes the rich from the rest. Sweetheart deals are for the big boys that governments court… such as Google.

The recent Republican tax reforms prove the point. American corporations are avoiding paying tax by offshoring their profits, so instead of dealing with that, Congress pass a bill that, as Vox so aptly put it, provides “a giant permission slip for shipping profits overseas”.[3. Dylan Matthews, ‘The tax bill is a giant permission slip for shipping profits overseas’, Vox, 19 December 2017]

President Trump’s tax cuts also benefit the very wealthy – who just happen to be political donors – above the ordinary working families he promised to champion. Washington non-profit, the Institute on Taxation and Economic Policy, reports that in 2019 the top 5% richest households will receive more than 50% of the bill’s benefits, while the bottom 40% will receive 5%.[4. .‘The Final Trump-GOP Tax Plan: National and 50-State Estimates for 2019 & 2027’, Institute for Taxation and Economic Policy, December 2017]

In the UK, the tax system is likewise skewed in favour of the wealthy. Just look at the lower rates of tax charged on income from capital compared to income from labour. A shift worker putting in 40 hours pays a higher rate of tax on their earnings than the property speculator pays on their profits. Which is a double blow when you consider that the profit has been made, at least in part, because of the investment of a local community and its taxpayers (in roads, buses, parks, policing…). That’s not about avoidance, it’s in-built bias.

78% of Americans and 76% of Brits believe “the economy of my country is rigged to advantage the rich and the powerful”.[5. .Global Trends. Fragmentation, Cohesion and Uncertainty, Ipsos, 2017] When it comes to tax, they’re right – and, along with the other six ills of capitalism, it’s threatening the free market model. Time to stop lamenting the loss of faith in capitalism’s prosperity-generating power; time to start treating its ailments.

Throughout next week UnHerd is exploring how the UK tax system can be reformed to tackle the biases in personal taxation. Our latest audio-documentary, out tomorrow, asks: Can a wealth tax save capitalism?

He’s been thinking about the future of capitalism (and whether it has one). Interviewed for Vox by Sean Illing, his words are worth reading:

“It seems to me that the greatest danger is that the truly rich, I’m talking nine and 10 figures rich, are increasingly separated from the lives of the rest of us so that they become largely insensitive to the concerns of those who still earn by the hour. As such, they will probably not anticipate many of the changes, and we will see the beginning stirrings of revolution as the cost for this insensitivity.”

That said, Weinstein believes the billionaires have woken up to the danger:

“There was a quiet shift several years ago where the smoke-filled rooms stopped laughing about inequality concerns and started taking them on as their own even in private…

“I think it’s a combination of both embarrassment and enlightened self-interest that this class — several rungs above my own — is trying to make sure it does not sow the seeds of a highly destructive societal collapse, and I believe I have seen an actual personal transformation in many of the leading thinkers among the technologists, where they have come to care deeply about the effects of their work. Few of them want to be remembered as job killers who destroyed the gains that have accumulated since the Industrial Revolution.”

That’s encouraging, but what sort of solution does Weinstein envisage?

“…some kind of hybridization of hypercapitalism and hypersocialism must enter the discussion.”

Personally, I’d prefer a much more modest form of capitalism combined with no socialism, but never mind – let’s see what he means by “hypercapitalism”:

“I believe capitalism will need to be much more unfettered. Certain fields will need to undergo a process of radical deregulation in order to give the minority of minds that are capable of our greatest feats of creation the leeway to experiment and to play, as they deliver us the wonders on which our future economy will be based.”

Letting the tech lords do whatever the heck they like, then. But what about the “hypersocialism”?

“…we have to understand that our population is not a collection of workers to be input to the machine of capitalism, but rather a nation of souls whose dignity, well-being, and health must be considered on independent, humanitarian terms.”

Now you’re talking, Eric! Except that’s not socialism, hyper or otherwise, but the moral philosophy at the heart of Catholic social teaching (and comparable ethical systems).

As for specific policies, Weinstein provides a hint as to the tech lords’ thinking:

“…in terms of wanting to leave a socially positive legacy, many of them are motivated to innovate through concepts like universal basic income, finding that Washington is as bereft of new ideas in social terms as it is of new technological ones.”

The thing about universal basic income (UBI) is that it requires money – lots and lots of money. Ideally, one would tax the super-productive robot workers of the future so that we humans could live a life of leisure and/or spiritual fulfilment; but, unfortunately, the era of super-abundance has yet to arrive. Indeed, as Weinstein tells us, economic growth is slowing down:

“…The real problem, which our society has yet to face up to, is that sometime around 1970, we ended several periods of legitimate exponential growth in science, technology, and economics. Since that time, we have struggled with the fact that almost all of our institutions that thrived during the post-World War II period of growth have embedded growth hypotheses into their very foundation.”

All too true, but to pin your hopes on universal basic income is the ultimate embedded growth hypothesis. After all, who is going to pay for it? Not, one presumes, the lightly-taxed, cash-hoarding tech giants.

We should be grateful that they’re at least thinking about the crisis of capitalism, but they need to think again. The hypersocialism of free money for everyone is not consistent with the hypercapitalism of corporate tax avoidance.

***

Ølgod, a small, unassuming railway town in Western Jutland, lies close to the sand dunes and coarse heathland that mark Denmark’s submission to the unforgiving North Sea. Out across the grey water to Britain, rain masks the horizon. From these humble roots and steely skies comes a tough operator.

Margrethe Vestager was appointed as the EU’s Competition Commissioner in 2014 and has been relentless in her crusade against companies who do not play by the rules. She has issued record fines and pursued household names.

And what a moment she has chosen. That ‘end of history’ capitalist consensus being challenged by waves of popular anger – fuelled by the range of social miseries catalogued by James Bloodworth. Launching UnHerd’s series of articles on ‘Western capitalism on a knife-edge’, the leader of Scotland’s Tories, Ruth Davidson explained why the electorates of advanced nations are losing faith in markets – despite it lifting one billion people out of poverty in recent decades.

The loss of faith is for good reason. The cost of the financial crisis has been borne by general populations – rather than the culprits. As their banks failed, CEOs collected large pay checks with one hand while waving in the taxpayer bailout with the other. YouGov’s transatlantic poll for UnHerd found that just 5% of Britons and 12% of Americans think that those responsible for the financial crash have been adequately punished.

Moreover, it is not just bankers who have pushed the public’s patience to breaking point. Within Britain, Sports Direct paid its boss a £1m bonus while its workers suffered ‘Victorian era’ conditions[1. Rupert Neate, Mike Ashley paid ex-Sports Direct chief secret £1m-a-year bonus, The Guardian, 4 July 2017]. After the collapse of the pension scheme of the BHS store chain, the long-time owner Sir Philip Green was seen cruising the Med on his £100m yacht[2. MP asks if Sir Philip Green’s yacht could be seized in BHS row, A UK Press Association report, carried in The Guardian, 23 November 2016]. The rules that apply to the many, do not seem to apply to the wealthiest few. Goliath is untamed, step forward David.

Or rather, step forward Margrethe.

The EU’s Competition Commissioner is tasked with promoting Europe’s economic growth by enforcing competition policies. In an age of much profit and little ethics, Vestager is using her office to wage an aggressive assault on corporate power. She has chased Gazprom for price fixing, fined Google for giving illegal advantage to its own shopping service, and ordered Apple to hand over €13bn of allegedly unpaid tax.

That the 49 year-old Dane has become the modern day David is fitting for the daughter of Lutheran pastors, an upbringing that helped set Vestager’s moral compass. Whereas her predecessor Joaquin Alumnia spent three years trying to reach a backroom deal with Google, Vestager just issued the fine. She refuses to meet lobbyists for fear of compromising her pitch as the champion of the small against the mighty, and of the consumer against the producer.

Annelise Dodds MP served as Labour Spokesperson on Competition while she was an MEP and reflects on Vestager’s winning formula:

“I think that Vestager has been successful in applying competition rules neutrally, but in a way that doesn’t shy away from taking on some very big players. In that way, she has shown how everyone must play by the same rules, which I think is very important.”

Vestager wants to show the people of the EU that power is on their side and has won the support of the most pro-Brexit of Tories like David Davis – as well as the likes of Remain campaigning Ruth Davidson[3. In her essay for UnHerd, Ruth Davidson recommended “empowerment of consumers relative to producers as modelled by Margrethe Vestager within the EU”].

Public faith in capitalism needs a champion for the little guy – but so too does capitalism itself. 3% of EU GDP is lost every year as a result of cartels, and tax evasion costs over €1 trillion in lost revenues[4. Report on the Annual Report on EU Competition Policy, European Parliament, 4 Feburary 2015]. Tough action on the practices that undermine free market competition is not only what Vestager calls an antidote to populism, but a tool to make the ordinary richer. It is a principled stand that allows her to display what the EU has often been lacking: leadership on issues that matter to people. She is the EU at its best.

Vestager is tackling Germany’s powerful auto industry – as well as US tech giants

And tough she has been;

• The Commission issued a record $4.1bn in fines in 2016[5. Catherine Belton, Global cartel fines hit new high, powered by $4.1bn in the EU alone, Financial Times, 4 January 2017]. This includes the largest cartel fine in EU history issued against truck manufactures, a cool $3.2bn[6. $3.2bn levied against five truck producers — Iveco, DAF, Volvo/Renault, Daimler and MAN — charged with colluding for 14 years in pricing trucks while passing the cost of environmental compliance on to consumers].
• And not just trucks… Her recent announcement of an anti-trust investigation against German auto-manufacturers pits her against one of the most protected corporate interests in the EU (see my recent piece on Volkwagen and its all too cosy relationship with Germany’s government).
• She does not seem bothered by offending EU political interests. Vestager’s upcoming ruling on McDonald’s tax affairs in Luxembourg[5. Last September the FT reported that “McDonald’s could face an order to pay nearly $500m in back taxes to Luxembourg…  According to an FT review of the commission’s McDonald’s probe, it paid an average tax rate of 1.49% on the $1.8bn profit earned by its Luxembourg-based European headquarters since its 2009 reorganisation… If the standard Luxembourg tax rate of 29.2 per cent applied to those earnings — following the broad principles the commission applied in the Apple case — McDonald’s would owe the Grand Duchy nearly half a billion dollars.”] may prove awkward for her boss in Brussels – Jean-Claude Juncker, Luxembourg’s former Prime Minister.”

Vestager has never been one to avoid the tough battles. As leader of the small Radikale Venstre party in Denmark, she faced bitter electoral defeat in 2007. People wrote her off as a poor politician, cold and impersonal. And yet she fought on. Four years later she was Denmark’s Deputy Prime Minister and Minister for Economic and Interior Affairs. She took on the unions in a battle to reduce unemployment benefits, famously telling critics “that’s the way it is”.

Vestager earned a reputation as obstinate, formidable, and capable. Despite their very public war, the unions gifted her a statue of a hand with the middle finger outstretched. It was a mark of respect and she approved. The “F**k Finger” sits in her Brussels office, a reminder of the battles of the past and a warning to visiting CEOs that she is not done yet. The dark period after the 2007 election is said to have given Vestager clarity that leadership is about making decisions and that can make you unpopular. So you may as well take the decisions you think necessary.

And she certainly has, particularly on tax avoidance. More than anything she views this as the greatest corporate affront in an age of austerity and has been utterly ruthless in her pursuit of those deemed to be ‘dodging’:

• Starbucks and Fiat have both been ordered to repay €30 million each in lost tax revenue;
• Amazon could face a fine of up to €400 million under a current investigation; and
• Apple are being chased for €13 billion owed to the Irish government.

For Vestager, the message is simple: “If you want to do business in Europe, you play by the European rule book.”

But is it that simple?

While unquestionably principled, not everyone interprets the European rule book as Vestager does. Some worry that her moral compass rather than court-proof legal mandates are driving her. Additionally, the EU seems more content in pursuing its own unilateral efforts, rather than throwing its full weight behind international cooperation.

At the centre of all tax rulings is the question of how multinational companies move profits, goods, or services between subsidiaries across international borders. Global cooperation has produced the OECD’s Transfer Pricing Guidelines which state that all transfers are priced as if they were moving between two independent companies, the ‘arms length principle’[6. Article 9 of the OECD Model Tax Convention.]. This forms the basis of most countries’ treatment of multinationals – who typically negotiate a pricing agreement with national tax authorities in advance. This usually governs how profit is allocated and how much a parent company might charge subsidiaries for things like intellectual property[7. Read Tom Bergin’s Special Report – How Starbucks avoids UK taxes at Reuters for an illustration of this works]. The OECD provides calculation methods.

That the rules are knowable, transparent, and predictable is important for the functioning of the free market. The EU also has its own rules on whether these tax arrangements threaten market competition. For state aid to be illegal, a tax deal must give one company an advantage not available to another in a ‘comparable legal and factual situation’. In previous rulings, the EU has taken the view that multinational and standalone companies are not comparable. In the rulings of Vestager’s team, they have been treated as the same (see my extended endnote at the bottom off this page if you want more on the small print of this).

This argument is at the heart of Apple’s €13bn tax bill. The EU argues that Apple’s agreement with the Irish Government was state aid because it was not available to all. The Irish disagree, arguing that it was available to all multinationals and are appealing the decision. Whoever is right, the state aid rules are being applied differently, and in Apple’s case retrospectively. They are no longer knowable, transparent, and predictable. We may cheer the public flogging of tax dodgers but it must not come at the detriment of the principles necessary for a free and functioning market. If we really want to shut down tax avoidance, the rules must be unambiguous and they must be enforced as such.

The bigger problem of course with Apple is not its transfer pricing arrangement with the Irish Government, but its exploitation of the gaps between different countries’ tax systems. Apple avoids tax by using an Irish company (Apple Operations International) into which much of its global revenue is consolidated. They pay no Irish tax because Ireland taxes companies based on where they are managed and Apple Operations International holds its board meetings in California. However, they also pay no US tax because the US does not tax overseas operations. At $250bn, Apple’s offshore pot is the biggest in the world[8. In May, The Daily Telegraph reported that “Apple’s cash pile has swelled to over $250bn (£194bn), a sum greater than the combined foreign reserves of the British government and Bank of England”].

On tackling this kind of tax avoidance, it is the OECD not the EU that is leading. Their work on Base Erosion Profit Shifting (BEPS) has been focused on precisely the international tax loopholes that Apple have exploited. Over 100 countries are collaborating to implement these measures. However, the EU is now moving to create its own Common Consolidated Corporate Tax Base – a single set of rules for companies to calculate taxable profits in the EU. Herein lies a further contradiction. Not only is this a threat to competition within the EU market (it takes away the ability of Member States to offer tax breaks on investment, including R&D), in creating a separate set of rules, it risks the creation of new loopholes. There is a frustrating vanity about the EU in this – and in Vestager. They don’t want to enforce good rules, but wants to enforce their own rules.

The USA complains that Vestager discriminates against US companies

Here, Vestager’s commendable work, reflecting the best of the EU, begins also to reflect the worst: its politics. The US accused the EU of unfairly targeting US companies[9. See letter from former US Treasury Secretary James Lew, during Barack Obama’s presidency]. While the 2017 ‘hit list’ certainly contains some US giants, it also includes European ones and the presence of top US companies is more likely a reflection of America’s corporate might[10. Nicholas Hurst, Margrethe Vestager’s top 10 cases in 2017, Politico, 1 February 2017]. The US also contends that the effects of the rulings of Vestager’s team is to turn the enforcement of competition law into a supra-national tax authority[11. US Treasury, The European Commission’s recent state aid investigations of transfer pricing rulings, US Treasury White Paper, 24 August 2016]. In many ways it is worse than this. In its revised interpretation of its own rules, the EU has been challenging tax decisions legal under Member State law, not because they are necessarily illegal under EU law, but because the EU doesn’t like them. Competition enforcement has become a political tool.

The US also contends that the effects of the rulings of Vestager’s team is to turn the enforcement of competition law into a supra-national tax authority. Morally, there is little to argue with. As Dodds says “I think most people would intuitively agree that there should be a level playing field for all similar companies”. Apple and the Irish may ultimately win their appeal, and that will be unpopular with populations still enduring austerity. But that we don’t like something is not a good argument for using competition enforcement to cast moral judgements that are ultimately challengeable in court. If the rules are not keeping up with how big and global firms are operating, the rules need to be modernised rather than politicised.

If the EU really wants to tame Goliath, then it needs unambiguous rules against the corporate behaviour it wishes to stop that are in line with international efforts. Moral judgements may make us feel better, and may seem necessary given the anti-capitalist mood, but we need punishments that stick or, ultimately, public anger will grow as corporates and courts undo them.

A 2016 Foreign Policy profile of Vestager argues that “she is forging a path as the latest arbiter of what is right and wrong, fair and unfair, in the 21st Century economy – a vital distinction not just for Europe, but for the rest of the world as well”[12. Meet the woman leading Europe’s war against Google, Gazprom, and Apple by Suzy Hansen for Foreign Policy, 18 March 2016]. There is no doubt that capitalism needs Vestagers. However fearsome – even ‘f*ck you’ – the Dane can be, only the law and combined international efforts can reliably reign in Goliath.

Not that this will stop Vestager trying. As her long time adviser, Henrik Kjerrumgaard says of her:

“She is in it for the fight. Winning is a bonus.”[13. Quoted by Suzy Hansen (link above).]

FURTHER READING

• Suzy Hansen, Meet the woman leading Europe’s war against Google, Gazprom, and Apple, Foreign Policy, 18 March 2016
• US Treasury, The European Commission’s recent state aid investigations of transfer pricing rulings, US Treasury White Paper, 24 August 2016
• OECD Model Tax Convention on Income and Capital 2014.

ENDNOTE ON EU TREATMENT OF MULTINATIONALS AND STANDALONES

In addition to ensuring that countries follow the OECD guidelines, the EU also has its own competition rules on state aid, to avoid the threat to competition that comes from a company receiving preferential tax treatment. Under the EU’s own Treaty on the Functioning of the European Union (TFEU 2007), for a tax arrangement to be state aid it must:

1. Give the recipient company an advantage compared to the general tax system, and;
2. Be granted through state resources (the EU assumes that any tax advantage necessitates lost tax revenue and should be treated as public spending), and;
3. Affect competition and trade between Member States, and;
4. Be selective (i.e. not available to another company in an equivalent legal and factual situation).

Ignoring the not-very-free-market assumption that all tax advantages necessitate a revenue loss (fiscal policy has dynamic effects that can see a tax cut increase revenue), these rules form the basis of a clear legal framework for companies operating in the EU. That rules are predictable, transparent, and knowable is important for the operation of a free market.

The problem is that the EU no longer seems to be enforcing its own rules as written. The two principles of advantage and selectivity, previously applied separately, have often been treated as the same in the rulings of Vestager’s team. An advantage offered to a multinational company is now treated as necessarily selective if it is not available to a standalone company. At the crux of it is an argument that a multinational and a standalone company are in a comparable legal and factual situation, something not backed in EU case law or in previous rulings[14. See discussion in: US Treasury, The European Commission’s recent state aid investigations of transfer pricing rulings, US Treasury White Paper, 24 August 2016].

Austerity helped, but it wasn’t the engine of post-recession growth

Ireland has been seen as the shining example of successful austerity. The rapid and deep fiscal consolidation implemented by the Irish government, the argument goes, led to a speedy return to health. Spending cuts (which accounted for roughly two thirds of the consolidation, revenue raising the other third) and regulatory reform allowed the economy to stabilise, and then quickly start growing. In 2016, Ireland retained its crown as the fastest growing European economy. Fiscal discipline, it seemed, equalled economic prosperity.

Yet, while there are good reasons for reining in spending – not least that today’s overindulgence is future generations’ debt – this interpretation of Ireland’s recovery is not quite right. Economist Stephen Kinsella argues that Ireland should be seen more as a “beautiful freak” than a “poster child” for austerity. The country’s unique conditions make universal lessons difficult, and recovery was less about cuts than exports. While domestic demand fell in the years of austerity, from 2008 exports rapidly returned to their pre-crisis levels. This Kinsella argues, was due to:

“the extremely open nature of the Irish economy, and the dominance of the export sector by multinationals…because of its extremely large ‘tradable’ sectoral composition, Ireland was able to absorb the impacts of austerity in ways that Greece, Portugal, and Spain could not”.[1.  Stephen Kinsella, Not a Poster Child, but a Beautiful Freak: Economic and Fiscal Policy in Ireland, 1996-2016, 10 May 2016] 

In addition, Ireland’s labour supply, which historically has demonstrated impressive elasticity, shrunk during the recession and is expanding in line with the return to growth – the year to April 2016 saw the first positive net migration figures since 2009. This is in part why unemployment has been falling consistently since 2012.

Of course, none of this means austerity didn’t matter – there is no counterfactual, you can’t create a control group and apply austerity to half the economy. Fiscal consolidation did play an important role in aligning government spending with the revenue it raises from taxes. Put another way, austerity was necessary, just not sufficient.

The same factors that saved Ireland’s economy make it fragile

Ireland may not be the poster child for austerity, but might it yet be the poster child for growth? That 26% jump in GDP was clearly smoke and mirrors. As The Irish Times reported, various “artificial” accounting practices led to a distortion in the growth figure.[2.  Cliff Taylor, ‘Ireland’s GDP figures: Why 26% economic growth is a problem’, The Irish Times, 15 July 2016] Contract manufacturing,[3.  Contract manufacturing is where, in this case an Irish, company outsources the manufacture of products to a foreign company, but economic ownership remains with the Irish company (even though its production may never have entered Ireland). The product is then sold abroad, at which point economic ownership changes hands and this sale is recorded as an export for the Irish company] tax inversions,[4.  This is where a multinational takes over a smaller foreign entity based in a lower tax jurisdiction, thereby shifting their headquarters. The new company’s global profits are then booked to their new home] aircraft leasing and relocation of intellectual property have all contributed to grossly inflated numbers.

Yet GDP growth in 2016 was still over 5%, compared to the UK’s 1.8%, America’s 1.6% and Germany’s almost 1.9%.[5.  GDP growth (annual %), The World Bank Data, accessed 8 August 2017] Setting aside 2015’s anomalies, this seems to show an economy in rude health. Except, even this far more realistic figure is misleading. Migrating corporate balance sheets is not real growth (which is why Ireland’s statistics office is looking to develop more domestically-focused measures).

It is a combination of factors that have led high-value multinationals to make Ireland their home, including a young, well-educated workforce, easy access to the EU market and the fact it is an English-speaking nation. But the very low corporate tax rate – 12.5% – is a key driver.

Research by University College Dublin’s Aidan Regan found that over 100 US tech firms have located in Ireland since 2004. “Total service exports”, he says, “now account for approximately 90 billion, and a handful of global tech-Internet firms, born out of Silicon Valley, now account for around 40 billion of this.” But while he notes that the likes of Google and Apple booking their revenues in Ireland exaggerates the country’s recovery, he also points out that high-tech expansion has delivered high-skill jobs. ICT services jobs grew from 2,900 in 2008 to almost 12,000 in 2013. It is, Regan argues, the direct result of a “state-led developmental strategy to attract inward FDI from large global firms in high-wage, high-tech service sectors”.[6.  Aidan Regan, ‘Debunking myths: Why austerity and structural reforms have had little to do with Ireland’s economic recovery’, The London School of Economics and Political Science, 2 February 2016]

Ireland’s economic strategy is narrow, and that’s a high-stakes gamble

A proactive strategy to attract companies and investment is surely a good thing, something other countries might look to emulate. So far so good. But Ireland’s model is not sufficiently balanced, meaning the risks are high.

• In 2016, net inflows of foreign direct investment were 27% of Ireland’s GDP – in the UK the equivalent figure was 11.5%, in the United States 2.3% and in Germany 1.5%.[7.  Foreign direct investment, net inflows (% of GDP), The World Bank data, accessed 8 August 2017]
• Although there has been a rebalancing towards income tax since the crash,[8.  Stephen Kinsella, Not a Poster Child, but a Beautiful Freak: Economic and Fiscal Policy in Ireland, 1996-2016, 10 May 2016] Ireland’s corporation tax still accounted for just over 11.5% of total tax in 2015, compared to around 7% in the UK and 5% in Germany.[9.  An Analysis of 2015 Corporation Tax Returns and 2016 Payments, Irish Tax and Customs, April 2017]

What happens, then, if Donald Trump delivers on his pledge to drop the corporate tax rate to 15%? Or the UK goes further than the promised cut to 17% in 2020? Although the UK Chancellor Philip Hammond has since back-tracked, he previously indicated that if economic competitiveness after Brexit required it, he would slash taxes. Last year it was reported that the UK Government had a ‘secret plan’ to halve corporation tax to 10% if post-Brexit Britain needed a boost.[10.  Tim Shipman, Bojan Pancevski and Jason Allardyce, ‘Threat of UK tax cut staves off hostile EU’, The Times, 23 October 2016] Action on this in either country could see the highly mobile multinationals like the tech giants relocate, with potentially devastating consequences for Ireland.

And it’s not just the threat of a rival tax haven emerging. Ireland’s export-led recovery required buyers, and recovery in America and Britain, two of Ireland’s biggest markets, facilitated that. Economic decline in either country – or Europe more broadly – would have a significant impact on Ireland. Like the Irish banking sector before the crash, Ireland’s economy is too dependent on foreign cash. Already the uncertainty of Brexit (not to mention its implications for Ireland’s border) is a very real threat to Irish economic stability.

Future-proofing the economy would, therefore, seem sensible – even urgent. Yet, if research and development spend is a proxy for that, Ireland’s approach is dangerously cavalier. Just 1.5% of GDP in 2014 was spent on R&D, compared to 1.7% for the UK, nearly 2.9% for Germany and just over 2.7% for the US (the latter is for 2013).[11.  Research and development expenditure (% of GDP), The World Bank Data, accessed 8 August 2017] There’s no sign of repairing the roof while the sun is shining.

Which brings us back to the Emerald Isle’s “Leprechaun economics”. It should enjoy its pot of foreign gold while it lasts, because its built on precarious ground. Far from being a poster child for economic recovery it risks being a further warning against excessive, narrow global dependency. If fact, other nations seeking to emulate it may be the very thing that brings Ireland’s prosperity crashing down.

*****

FURTHER READING AND LISTENING

Ireland: austerity poster child or “beautiful freak”?, Alphachat podcast, Financial Times, 16 June 2017

Cliff Taylor, ‘Ireland’s GDP figures: Why 26% economic growth is a problem’, The Irish Times, 15 July 2016

“To talk about doing serious cutbacks to entitlements, that’s out of order. The first thing we have to get rid of is entitlements for the wealthy, and at the same time, open up the economy to the disadvantaged. You can’t start taking away benefits if people don’t have any opportunities.”[1.  Jim Tankersley, ‘‘I don’t like the idea of capitalism’: Charles Koch, unfiltered’, The Washington Post, 1 August 2016]

These are words you might expect from Bernie Sanders, or Jeremy Corbyn. Or someone on the Left at least. You probably wouldn’t expect them to be the words of Charles Koch, one half of the infamous Koch brothers, and number eight on Forbes’ 2017 Billionaires list.

Yet Charles Koch has for decades been one of the loudest voices against crony capitalism, or what he refers to as “corporate welfare”. He sees it as “destroying opportunities for the disadvantaged and creating welfare for the rich.”[2.  Stephen Dubner, ‘Why Hate the Koch Brothers? (Part I)’, Freakonomics, podcast transcript, 21 June 2017] Charles Koch vehemently believes that markets should be free – to innovate and to fail – and that government intervention in the form of subsidies, tax cuts and complex regulation are harmful. And while his anti-crony capitalism stance is staggeringly hypocritical given his lobbying spend – more on that later – it doesn’t make him wrong.

The US Government Accountability Office reported that, in 2011, corporate tax expenditures cost $181 billion in lost tax revenue.[3. CORPORATE TAX EXPENDITURES: Information on Estimated Revenue Losses and Related Federal Spending Programs, United States Government Accountability Office, 18 March 2013] Last year they reported that in each year between 2006 and 2012 “at least two-thirds of all active corporations had no federal income tax liability”.[4.   Corporate Income Tax: Most Large Profitable U.S. Corporations Paid Tax but Effective Tax Rates Differed Significantly from the Statutory Rate, United States Government Accountability Office, March 2016] There’s various reasons for that, but among them they name tax deductions and incentives. The Washington Post has dubbed the annual ‘tax extenders’ bill process – which sees Congress extend expiring tax provisions – a “full-employment exercise for lobbyists”.[5.  ‘Congress needs a fiscally responsible ‘tax extenders’ bill’, Editorial Board, The Washington Post, 20 January 2014]

“Corporate welfare” in America can be seen in numerous sectors – from renewable energy subsidies (maintained well beyond seed-funding) to financial services tax loopholes (“carried interest”, which enables hedge fund managers to pay less tax, is one example). Market-distorting sugar subsidies and protections have on average kept US sugar prices 64-92% above world prices and cost consumers around $3.7 billion. A paper by Harvard Business School points out that sugar production makes up just 1.9% of the value of all US crop production, yet the sugar industry accounts for more than one-third of lobbying spend by crop producers.[6.  Malcolm Salter, Crony Capitalism, American Style: What Are We Talking About Here?, Harvard Business School, 22 October 2014] All of these examples benefit the producer over the consumer and the powerful over Charles Koch’s “disadvantaged”.

While Democrat and Republican politicians alike are cosying up to vested interests – remember it’s not just big business, unions spend upwards of $45 million on lobbying each year, and spent $207 million on the 2016 election campaign[7.  See opensecrets.org, Center for Responsive Politics] – Charles Koch is putting his money where his mouth is. In 2014 Koch Industries wrote to Congress opposing the tax extenders bill’s reinstatement of “corporate subsidies”, saying the company “oppose[s] ALL subsidies, whether existing or proposed, including programs that benefit us”.[8.  Phillip Ellender, Letter in opposition to H.R. 5771, 3 December 2013] Charles Koch has also set his mighty political machine against the proposed ‘border adjustment tax’ – which would effectively tax imports while subsidising exports. As a domestic producer, Koch told Freakanomics radio it would “make us over a billion dollars a year.”[9.  Stephen Dubner, ‘Why Hate the Koch Brothers? (Part I)’, Freakonomics, podcast transcript, 21 June 2017]

But the Koch brothers don’t quite preach what they practise

Of course, lobbying on the scale of the Koch brothers is a luxury that the “disadvantaged” can’t afford – it is itself a key part of the crony capitalism the brothers say they abhor. In 2015 an investigation by Politico highlighted the sheer scale of the Koch’s shadow political operation – and it is jaw-dropping.[10.  Kenneth Vogel, ‘How the Koch network rivals the GOP’, Politico, 30 December 2015] Americans for Prosperity (AFP) is their main group, but there are numerous spin-offs and associated bodies. All in all their machine was found to employ three and a half times as many people as the Republican National Committee and its congressional campaign arm. In 2014, Politico reported, AFP and its foundation had a budget of $104 million. Freedom Partners Action Fund, another part of the machine, spent $31.5 million during the 2016 election cycle.[11.  See opensecrets.org, Center for Responsive Politics] In a long-read in The New Yorker Jane Mayer provides a history of Koch spending.[12.  Jane Mayer, ‘Covert operations. The billionaire brothers who are waging a war against Obama’, The New Yorker, 30 August 2010] As well as highlighting the anti-environmental regulation activities of some of the Koch-funded groups, she details the brothers’ investment in think tanks and universities who share their ideological perspective.

It is this alignment of ideology and self-interest that in 2004 led the National Committee for Responsive Philanthropy to claim:

“these foundations give money to nonprofit organizations that do research and advocacy on issues that impact the profit margin of Koch Industries. For example, the foundations supported the Cato Institute, Citizens for a Sound Economy, the Competitive Enterprise Institute and the Foundation for Research on Economics and the Environment. Each of these organisations—in its own way—works to limit or remove government regulation and taxation of the industrial sector.”[13.  Jeff Krehely, Meaghan House and Emily Kernan, Axis of ideology. Conservative Foundations and Public Policy, National Committee for Responsive Philanthropy, 2004]

Action against crony capitalism must apply to all

No doubt such extensive involvement with non-profits and third-party interest groups should concern any defender of open democracy. But there is equally no doubt that the Kochs are as much pariahs for their dislike of big government and taxes as their well-funded political activities.

Mayer mentions in passing that “Of course, Democrats give money too” and cites the $100 million a year spend of George Soros’ Open Society Institute. That, she implies, is OK – because his “spokesman” explains the expenditure is not self-interested. ‘Liberal’ spend is afforded 400 words in an almost 10,000-word critique of the Koch’s “ideological network”. Just last week, The Center for Responsive Politics detailed the role of “dark money” in the 2016 election for Colorado state’s House of Representatives.[14.  Sara Swann, ‘Dark money trail reveals significant influence in Colorado elections’, Open Secrets blog, Center for Responsive Politics, 27 July 2027] Eighteen Democratic candidates received money from the third-party group Common Sense Values. Started just ahead of the elections and closed just after, the Center points out it raised $2.5 million in five months. Following the money trail reveals a murky web of donors – though left-leaning unions and social welfare organisations rather than big business. Hilary Clinton’s 2016 Presidential campaign coffers were boosted by almost $85 million from the Securities and Investment industry – essentially Wall Street – and $19 million from non-profits.[15.  Top Industries, federal election data for Hillary Clinton, 2016 cycle, opensecrets.org, Center for Responsive Politics, accessed 1 August 2017] The TV, Music and Movies industry donated more than $16 million to Clinton groups.

Such vast expenditure and reach, aimed at influencing politicians and the policy and regulatory decisions they make, is unquestionable crony capitalism. It doesn’t matter which side of the partisan divide it comes from. This is the real threat to prosperity for all. As John Kerry said in his farewell speech to the Senate:

“The alliance of money and the interests it represents…is steadily silencing the voice of the vast majority of Americans who have a much harder time competing, or who can’t compete at all.”[16.  Text of John Kerry’s farewell speech, Boston.com, 30 January 2013]

The time and energy spent on hating the Koch brothers and their Libertarian politics would be better spent on breaking the stranglehold of big business and big unions; on taking the Kochs at their word and destroying “corporate welfare”. Now that really would be a win for the “disadvantaged”.

***

FURTHER READING AND LISTENING

Stephen Dubner, ‘Why Hate the Koch Brothers? (Part 1)’, Freakonomics, podcast, 21 June 2017

Stephen Dubner, ‘Why hate the Koch Brothers (Part 2)’, Freakonomics, podcast, 22 June 2017

Charles Koch Opens Up About Politics, Business Innovation and Climate Change, Fortune interview, 11 July 2016

Jane Mayer, ‘Covert operations. The billionaire brothers who are waging a war against Obama’, The New Yorker, 30 August 2010

Kenneth Vogel, ‘How the Koch network rivals the GOP’, Politico, 30 December 2015

Given the utter drivel produced by the populist left and right, there’s certainly a market for a transformative, yet non-extreme, policy agenda. For instance, try this little list from Jeremy Cliffe, the Berlin bureau chief of the Economist. Alongside some very distinctive proposals – such as Britain sharing Trident with Germany – there are some positions that most radical centrists would see as fundamental to their position.

Two in particular stand out: “abolish the immigration cap” and “higher inheritance taxes and lower income taxes.” On one level the combination of open borders with wealth taxes makes a lot of sense. Both are consistent (just as closed borders and inherited wealth are inconsistent) with equality of opportunity – the core principle of radical centrism.

And yet, on closer inspection, a serious inconsistency becomes apparent. Pratik Chougule of the American Conservative explains why:

“High net worth families—those positioned to pass down millions of dollars in assets to their children—are different not only in their means, but also in their outlooks. More so than in previous eras, families who are poised to build and maintain intergenerational wealth are defined by a single characteristic: a penchant for mobility. They are distinct in their willingness to move their livelihoods and their assets in search of opportunity.”

As Chougule points out, a high proportion of these high net worth families are immigrants. For instance 17 of America’s billionaires under the age of 40 are immigrants, as are more than 10 per cent of the Forbes 400 (richest people in America) – “a group comprised disproportionately of tech entrepreneurs who arrived in the United States in the early 1990s.”

This, of course, supports a key argument for open borders, which that immigration is a driver of economic growth. Consider the following, for instance:

“A third of publicly-traded venture-backed companies in the United States between 2006 and 2012 were founded by immigrants, up from just 7 percent before 1980.”

And yet the cross-border mobility of people – especially the most talented and enterprising of individuals – goes hand-in-hand with the cross-border mobility of their accumulated wealth:

“The wealthy are more than the beneficiaries of globalization; they are promoters of it. The global rich are a major reason why ‘connectivity’ has become, like liberty and capitalism, a ‘world-historical idea.’ As Parag Khanna assesses in his book Connectography: Mapping the Future of Global Civilization, connectivity is ‘reengineering the planet to facilitate surging flows of people, commodities, goods, data, and capital.’”

Whether from an immigrant background or not, the wealthy often own property in several countries – not just an investment, but as a way of pursuing a global lifestyle:

“Half of the world’s ultra-wealthy individuals own at least two homes, and one in ten own five or more properties. The demand for these homes, according to a recent Warburg & Barnes report, is driven not only by the global demands of business; so too does it reflect the desire of the wealthy to send their children abroad for educational and professional opportunities, and to pursue leisure activities regardless of proximity…”

That’s all delightfully footloose and fancy free, but the opportunities for “tax-efficient citizenship” and “transnational succession planning” are equally enjoyable. Indeed, countries are already competing to attract the global elite on that basis:

“…even Canada, often stereotyped as a high-tax, second-rate version of the United States, in fact offers high net worth immigrants an unusually attractive tax regime. Canada has no estate or gift taxes and requires minimal taxation for wealthy families immigrating to the country during their first five years of residency.”

Any shift towards wealth taxation is therefore likely to hit the deplorably un-globalised, not-so-rich instead. As the Soviets discovered, if the aristocracy flits off, you can always expropriate the Kulaks.