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Tax Avoidance and Tax Havens; Undermining Democracy

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We might not like the idea of paying taxes, but without it, democracies will struggle to function, and will be unable to provide public services. This affects both rich and poor nations, alike.

Individuals and companies all have to pay taxes. But some of the world’s wealthiest individuals and multinational companies, able to afford ingenious lawyers and accountants, have figured out ways to avoid paying enormous amounts of taxes. While we can get into serious trouble for evading payment of taxes, even facing jail in some countries, some companies seem to be able to get away with it. In addition, if governments need to, they tax the population further to try and make up for the lost revenues from businesses that have evaded the tax man (or woman).

Why would companies do this, especially when some of them portray themselves as champions of the consumer? The reasons are many, as this article will explore. In summary, companies look for ways to maximize shareholder value. Multinational companies are in particular well-placed to exploit tax havens and hide true profits thereby avoiding tax. Poor countries barely have resources to address these — many have smaller budgets than the multinationals they are trying to deal with.

Yet, companies and influential individuals also pour lots of money into shaping a global system that they will hope to benefit from. If the right balance can’t be achieved, not only will attempts to avoid taxation and other measures undermine capitalism (which they claim they support) they will also undermine democracy (for even responsible governments may find it hard to meet the needs of their population).

This web page has the following sub-sections:

Corporate Welfare

Corporations and corporate-funded think tanks, media and other institutions are often the ones that loudly cry at the shame of welfare and the sin of living off the government and how various social programs should be cut back due to their costs. What is less discussed though is the amount of welfare that corporations receive.

Corporate welfare is the break that corporations get both legally and illegally through things like subsidies, government (i.e. public) bailouts, tax incentives and so on. Corporations can influence various governments to foster a more favorable environment for them to invest in. Often, under the threat of moving elsewhere, poorer countries are forced to lower or even nearly eliminate certain corporate taxes to these large foreign investors.

This distorts markets in favor of the big players. As such influence spreads globally, it contributes to a form of globalization that seems less like true free market capitalism that they talk of, but more like a modern form of the unequal mercantilism that prevailed during colonial and imperial times.

Corporate Crime

When we talk about crime, we think of the violations of law caused by individuals, some of which are horrendous. However, almost rarely talked about (especially in corporate-owned media) is

the level of crime caused by corporations. Such crime includes evasion of taxes, fraud, ignoring environmental regulations, violating labor rights, supporting military and other oppressive regimes to prevent dissent from workers, including violent crime against workers, and so on.

In the US, for example, back in the mid-1990s it was estimated that corporate crime cost the country about $200 billion a year .

Side Note

Since writing the above two paragraphs originally when this page was created, the issue of corporate crime, in the U.S. particularly has taken on a whole new dimension. Events after September 11, 2001, have highlighted massive corporate failures and controversies all the way up to the President. While for now it is beyond the scope of this page to discuss all those issues (though some points are made below, as well as additional links), Benjamin Barber, professor of Political Philosophy is worth quoting, as he highlights an important issues:

But business malfeasance … arises from a failure of the instruments of democracy, which have been weakened by three decades of market fundamentalism, privatization ideology and resentment of government.… The truth is that runaway capitalists, environmental know-nothings, irresponsible accountants, amoral drug runners and antimodern terrorists all flourish because we have diminished the power of the public sphere. By privatizing government functions and refusing to help create democratic institutions of global governance, America has relinquished its authority to control these forces.

Barber is highlighting that even in the most freest of societies, the United States, corporate influences have been so strong as to undermine fundamental democratic principles.

Before and since September 11, various companies and ordinary employees, shareholders and others have suffered because of accounting irregularities being highlighted, that showed that inflated stocks and other estimates of the company’s status were seriously wrong. More than just a few “rotten apples” that various economists and business elite tried to describe as the cause, is the system itself. As the previous link also points out, the systemic problems had long contributed to inequality and other problems, but now that even other aspects are being affected, it is now highlighting the deeper problems even more:

The crisis is not the result of a few bad apples. The entire barrel is rotten. In this case, the barrel is the framework of rules and regulations for business. Not every executive is a fraud or cheat, but if the system permits cooking the books, defrauding investors, overcompensating executives, rigging prices, polluting the environment, breaking unions and abusing workers, then it puts pressure on every business to move in those directions. The failures of the much-vaunted U.S. model of deregulated cowboy capitalism were already evident in growing inequality and insecurity and a declining quality of life. Now even much of the positive side - growth, profits, new businesses, productivity, soaring stock markets - has been called into question as an accounting chimera. It’s time to question the whole model - lock, stock and barrel.

Category: Bank

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