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The economics of LICE. How do we deal with parasite taxation ?

January 10th, 2019

LICE – Luxembourg, Ireland, Channel Isles, Estonia  we could add others and play alphabet soup, but the basic premise is the same small countries which live well by diverting the tax revenues of their larger neighbours. These are parasites not in the derogatory sense but in the biological sense of entities which live off others. This is not new, tax havens have been around for centuries but largely as an irritant to those next door. However in the last two decades things have changed.

Increasingly it is the corporate sector and multinational corporations (MNC) in particular which is exploiting loopholes in the rules to shelter profits from taxation. Recently the IMF  estimated tax avoidance costs around $600 billion a year in lost taxation worldwide. The true number sits in a grey area but the trend has only been in one direction – upwards.

In times of tight budgets and with growing costs governments of large nations and their electorates are increasingly asking why this should continue. And this is of course a valid stance. MNCs get all the benefits of trading in countries where they avoid paying their fair share of taxation. They get stable currencies, the rule of law, access to millions of consumers and reliable infrastructure to pursue their businesses. All this of course has to be paid for and increasingly it is consumers and domestic businesses who are being forced to pick up the tab.

It’s an unequal fight. A coterie of lawyers and tax advisers keeps  the MNCs ahead of the game. While tax authorities struggle to close off the last loophole the next one is being opened and  governments are left chasing their tails. Businesses with turnover bigger than countries have an interest in keeping it that way.

Elsewhere in the smaller economies the picture is different. Low taxation rates aimed at attracting overseas companies generate jobs, income, tax revenues which otherwise would not exist and keep local tax burdens much lower than they otherwise would be.

Even better the smaller countries avoid some of the costs larger countries must bear like defence – Luxembourg the richest country in the EU pays 0.55% of its spending on defence. That’s up from 0.38% in 2013 and against a target of 2% for all NATO members. Ireland spends 0.3% safe in the knowledge that the yanks and brits will keep them from harm. All in all like a parasite living off its host the smaller economies do very well off their larger neighbours.

For the large nations this is becoming a situation which needs to be addressed. Already moves are afoot to recover lost revenues. Trump’s tax reforms were the first shot in the US recovering around $60+ billion of missing taxation each year. Germany and especially France are likewise pushing to get greater tax equalisation across the EU.

Governments across the world have discussed setting up a common approach to reduce avoidance, but the pace of progress is slow and it’s more like countries will pursue their own immediate and tangible tax recovery programmes.

In the UK there is anywhere from £6-11 billion to be recovered annually depending on whose figures you chose to believe and that’s corporate tax avoidance not evasion. That’s like a 3p tax cut or 100,000 units of social housing each year or half of Mrs May’s NHS funding boost for free. The question is therefore how long will our politicians hold off from addressing the issue ?

The business lobby will of course claim there are benefits and seek to delay change, but this is getting ever harder to prove. This is a time when big business is getting further away from ordinary people, voting itself large salaries and letting funding for services be socialised on to the electorate. The situation is probably at its most  blatant with the Tech MNCs which have tried every trick in the book to minimise their tax bills. But increasingly this may be their weakness, they have plucked the revenue goose to the point when it is starting to hiss.

For the UK this is a real issue just why do we want to impoverish our own people so overseas corporations can walk away from paying their obligations? Why do we need to subsidise Jeff Bezos to empty our tax paying high streets?  In a similar vein why do we  take a benign view of small rich countries which occasionally like to nip in and eat our lunch? In biological terms have the parasites now got to a stage where they are endangering the host?

While Parliament self flagellates on its Brexit fetish, there is some real work to be done and perhaps rewards to be had for those MPs still interested in the day job. The problem is are there any of them left ?

If you want to get a quick overview you can read more about it here.

Alanbrooke