We are constantly told on television by pundits that to grow our economy we need to slash taxes for the large firms. What does that really mean and how is that supposed to work. What is the reality? I will explore these whilst keeping language simple and easy to understand.
The false narrative
So keeping things simple, this is how it is supposed to work. Government does everything in its powers to make things easy to buy and sell… i.e. make the country attractive for business to come and set up, hiring hundreds of thousands. And what could be more efficient than attracting a few hundred large employers to the country?
Give them Corporate Subsidy, remove workers rights, loosen environmental, financial, planning, health & safety regulation, reduce checks and balances, frequency of inspections, reduce fines… even pay transaction fees on the behalf of the exporters in the form of EU ‘Club fees’. Without membership, the individual large corps would have had to pay transaction in the form of exchange rate. Government is also supposed to facilitate markets… improve information, increase competition, remove monopoly powers where they exist.
The theory goes, as once the businesses are set up, they will then invest in R&D, raise skill levels, invest in machinery & technology increasing output per worker in the economy. This is referred to as ‘productivity’. The tax revenue too rises. This in turn is used for government spending which through the mechanisms of Welfare State and ownership of key industries & sectors ensured that money transacted round the economy, generating economic activity, wealth & higher living standards for all. So the government serves big businesses who in turn serve the economy that then benefits all of us. That’s what the theory suggests… some call it Trickle-down Economics … other ‘neo-liberalism’… neo = new…. liberalism …. free (& fair) markets … again the idea behind markets (act of buying & selling) is that the ‘invisible hand of the market’ (i.e. self-interest of each buyer/ seller) will ensure that the outcome is much superior than that achieved by government intervention. The result is elegantly arrived with minimum disruption!!
So what has actually happened since the 1980s?
So let’s start with how much the economic pie of the whole country has grown and how much has the share of that pie per individual grown. Now to maintain the same share, both should have grown at the same rate. That’s obvious. But look what’s happened. Since 1980s, the average weekly earning has barely moved!! So who has benefitted from all the economic growth since the 1980s?
Well, I mentioned the pie…. at its most basic it gets divided up between 4 main interests (probably 5 if you include foreign interests):
- Landowners – owners of Land
- Large & Small businesses – owners of Capital (capital here is that which enhances economic activity – improved process, innovation, increases efficiency)
- Employees & household – Providers of Labour
- Banks – Lenders of Money
Now it is obvious to see that 3 of these categories have done really well. However, even within two of those categories, the large corps and the wealthiest landowners have done disproportionately well compared to the smaller business owner and small landowners. Large corporations, often foreign, but not always, have used aggressive forms of tax avoidance/ evasion measures for instance using ‘Transfer Pricing’ and other such mechanisms (will cover this in another blog post). See below Starbucks method:
Again, without going into too much detail, there is something called ‘Fractional Reserve Banking’. Basically, they do not hold assets to back up their lending activity. So a typical bank has 3% reserves …. for every £100 it lends, it retains just £3!! If over the weekend, if 4-5% deposited amount were to be withdrawn, the high street bank could collapse. As we saw with Northern Rock and Bradford & Bingley!! However, the banking system has been printing money out of thin air, then lending it in line with the above mentioned theory. Bankers, who facilitated these wheeling dealings have benefitted enormously too. Typical bonus in the City annually have been around £19bn collectively!!
Click here – http://www.dailymail.co.uk/news/article-401028/City-bonuses-soar-record-19bn.html (sorry to have to share the DM link)
Worse still, the whole system is built on speculation & high leverage. For instance, for every 1 physical barrel of oil that can be ‘mined’, 188 barrels were being speculated on the futures markets. In the foreign exchange markets, the daily trade value is in excess of £5 trillion. Only 2-5% is actually used to import and export goods! UK has 12% of this market globally.
We all could buy £100,000 houses some time back with a £10,000 deposit. Mortgage too is a form of leveraging. If the price rises by 10% in one year, you have doubled your income. Hence the lure of buy-to-let. Again with looser regulation, an increasing number of individuals are gambling away hard-earned family wealth playing the ‘Forex’ … a game even our reserve banks can’t play on their own any more. If anyone of you is trading, please stop. It will ruin you. Just don’t do it even if you have a billion in your bank account!
Now coming back to our trickle down model. All this wealth would still have benefitted our economy if relevant correct taxes were imposed on these and were then collected and distributed fairly!
Wealth has been accumulated by just a small section that has found a way to repeat their actions again & again to generate obscene amounts of wealth. The top 1% more than doubled their wealth since 2008!!
And this – http://www.businessinsider.com/95-of-income-gains-since-2009-went-to-the-top-1-heres-what-that-really-means-2013-9?IR=T
I mentioned the daily Forex market of which UK has 12% share. Did you know just a 1p transaction tax (FTT) in every £10 traded on that market could generate up to £100bn for the treasury each year? Again, following the same mantra, government has done nothing despite the 9 largest property developers hoarding 600,000 plots rather than building on these to alleviate the housing crisis. We see the same with our railways, Post Office and other utilities. We saw with the purchase of the banks such as Lloyds and also its return to private shareholders. Government made loss in selling back rather than holding for a few more years and banking hundreds of billions of pound profit! We now see the ‘invisible hand’ reaching for our NHS!
Again, according to many estimates, HMRC is not collecting up to £120bn a year from large corps and wealthy individuals. According to HMRC’s own estimates it is not collecting about £30-40bn. To give just one example, Vodafone made a whopping $130bn from selling its 30% stake in Verizon. At 26% Corp Tax at the time, it should have netted govt about $33 bn! They paid zilch… this is plainly wrong… now wonder how much tax revenue is foregone given the number & size of these transactions amongst & by the largest corporations in the UK!
So to summarise, whilst the government has been bending over backwards to keep large businesses happy, incurring huge national debts in the process & making our economy more risky & our society less healthy & happy, the rigged system keeps the 95% of us working longer and longer for less now in terms of our living standards and less in the future whether it is our pensions or the future of our kids. This really needs to stop. We have been taken for a ride. Enough is Enough.
It is time for change & we must grab this moment to reverse the nightmare of the last few decades, restore the rise in real wages, incomes & wealth of the 95% and right the wrongs built up over the decades.
It can be done now politically and it must be done before it is too late for our economies.
( @GaurangMorjaria – WeThePeople )
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