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Richard Murphy on tax and economics
Updated: 17 min 3 sec ago

Fining banks is yesterday’s punishment. Make it personal, and include bars

40 min 12 sec ago

Barclays is expectng to be fined £500 million for rigging foreign exchange markets.

So, it's another day and another massive fine for a bank. Put it in context: this is twice the amount Tescos lost and no one bats an eyelid.

And that's now a problem. The banks are happy to be fined and the economy suffers because what this means is that banks have reduced capital as a result of the loss made and so banking regulation requires that they reduce their risky lending to entities like SMEs who need bank money to keep the economy moving.

The policy of fining does not work any more. Banks rake in some more cash from elsewhere to pay – much of that from QE spiked speculative trading – and the real economy suffers as bankers still walk free.

All three components of that equation are problematic, but the solution is in the last point. Bankers need to suffer personally for these frauds. Then regulation would have impact. Right now bankers still think they are beyond the law. That's what has to change.

 

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Today at the PAC Conference

Thu, 10/30/2014 - 07:50

The House of Commons Public Accounts Committee is holding what is, I think, the first ever conference staged by such a committee today, looking, almost inevitably, at tax and its reform.

There is a wide panel of speakers schedule for the day. I am taking part in a debate this morning on the need for national and international reform tax reform. I suspect that what I say may be influenced by discussion that has already taken place during the morning, but I usually prepare a few notes in advance of such events even if I ad lib it when it comes to actually standing up. So, in case they do not get used later these are those notes:

1) International tax reform is essential

a) For all the bluster not much has happened yet

b) The OECD has to deliver

c) Yesterday’s information deals have to provide data – and competence to use it has to created

d) AIE will fail unless we have real beneficial ownership data and it’s not at all clear we are going to get it

e) Country by country reporting is not on public record – and unless it is we will have no way of knowing that any reform will have happened – making most of what we in civil society have demanded pointless

f) And through all that there’s the fact that we still have an international tax system that is built on the absurd assumption that groups of companies don’t exist and that free markets do – neither of which are true. You can’t build a good tax system on the basis of a lie

2) National tax reform  

a) But all that being said at least we have progress internationally

b) The UK situation is dire

c) HMRC is being stripped of resources – 40,000 staff are going have gone and the latest plan is for many more to go. The capacity to use any data AIE created is being destroyed

d) The tax gap is massively under-estimated: it assumes anyone not submitting a tax return has no income – how absurd is that?

e) Company regulation has all but collapsed – 400,000 companies disappear without any questions asked each year

f) HMRC fail to collect tax returns from 1,000,000 companies a year – and assume that’s because they’re dormant

g) We have to change this – because this is creating massive distortionary effects in the UK economy and unlevel playing fields in our markets

h) That’s why applauding those who are trying – as the Fair Tax Mark does – and SSE are here – is important

i) And why it’s vital now that tackling the tax gap – including calculating it properly – is absolutely key to UK tax reform and to creating new economic prosperity in this country – which is only possible, I believe if we tackle this issue to beat off austerity and help balance our budget

j) Why isn’t every politician queueing up to do this backed by every honest business in this country?

Or in diagrammatic form (which is how I write such things):

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Can we close the tax gap? (Answer: yes, we can)

Wed, 10/29/2014 - 09:48

I was in debate with Heinz Zourek, the Director General of EU taxation yesterday at an event I have already mentioned.

During that debate I was somewhat surprised to hear him say it was not worth investing to close the tax gap, including that in the UK, which the latest EU VAT estimate would suggest to be 10.4% for that tax alone so I took that issue up with him and he made clear that what he meant was it was not worth eliminating the while tax gap because that could never be cost effective, but the UK clearly had a long way to go and could at least halve its tax gap.

I accept that point. There is no way we will ever close the tax gap – but it is vast, and much bigger than HMRC estimate. The question is. Then, how much could be recovered?

Start with this table from the EU, published last week, showing their estimate of EU VAT gaps:

 

The UK loss is a little over 10%. That in the Netherlands is 5%, as it is in Finland. Slovakia, Slovenia, Denmark, Luxembourg and Portugal (rather surprisingly) apparently also do better than us.

In that case it is very clear that we are a long way from being close to our optimal tax gap rate.

If we closed half the HMRC tax gap we would recover £17 billion. That has to be the minimum targeted objective.

If we closed half my estimate we would get £60 billion, which I accept is as good as it might get.

HMRC based estimates are far too low, however. I think the goal has to be much higher than that because it is impossible to think that tax evasion is as low as HMRC say it is. In that case a realistic goal for now might be less than half way between the mid point of the two – make it £30 billion.

Then we’d really be making a difference. And this is, most definitely, possible. Finland and the Netherlands prove it is.

 

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Tackling offshore tax abuse is great. Now can we tackle it at home as well?

Wed, 10/29/2014 - 07:47

George Osborne is in Berlin today to sign a new deal that will make automatic information exchange from some tax havens a reality.

As I understand it from information discussed by the Director General of EU taxation yesterday 44 countries will sign the fast track deal to commit to full automatic information exchange of data on account holdings, whether in the name of individuals or of the companies and trusts that they control or benefit from in tax havens, by 2017. Because the UK will be signing for the Overseas Territories and Crown Dependencies 52 jurisdictions may be covered and more are committed to join the process in 2018. The EU has played a role in adapting the European Union Savings Tax Directive to cover the new need and US FATCA requirements all at the same time to save admin cost.

I do, of course, warmly welcome this and have to give credit to this government for doing it, which represents a major change in heart at the Treasury. It was following a meeting at the Treasury in June 2009 during which I was basically told that automatic information exchange would not happen in my lifetime however much I lobbied for it that I wrote this paper. Now it is going to happen, and I can reasonably expect to be alive to see it. Times have changed.

But welcome as this is there remain issues of concern. Some token gestures towards developing country involvement will be made, but I am not expecting any serious progress in this direction, and that is a massive problem when so many of these countries have suffered so badly from abuse based in tax havens.

More importantly, the system will be far from comprehensive: there is a long way to go as yet before anyone can say the era of the tax haven is over. There is a great deal of uncollected money out there still and boltholes still exist for it.

Third, and as important as tax haven abuse is (and I will never say otherwise) it is a fact that tax haven abuse is a very long way from being the most important cause of tax loss to HMRC. I estimate the tax haven loss as being of much more significance than HMRC do, but still only put it at less than £5 billion out of total UK tax evasion of around £80 billion. It’s right to get the £5 billion if we can, but nothing like as important as tackling the home grown abuse.

And the absurd fact is that in 2017 HMRC will be in possession of more information on the UK owned companies that UK owned banks supply services to in Jersey, Cayman and the British Virgin Islands than they will with regard to UK owned and registered companies that UK banks supply services to in Portsmouth, Newcastle, Aberdeen, Aberystwyth and Derry. That’s because there is no automatic information exchange within the UK from our banks to our tax authority. As I argued in my report ‘In the Shade‘ earlier this year, there is a pressing need for UK banks and other financial services providers (including accountants and lawyers) who have a duty in money laundering law to identify the ownership of the companies for whom they act to be required to report to HMRC and Companies House at least annually the identity of all the companies for whom they act that have bank accounts or other indications of trade, with bank account numbers being supplied. That way we could really identify all the companies that trade in the UK and who owns them and begin to take action on the real tax evasion crisis in the UK – which is happening onshore, right here in our own communities.

So I welcome new automatic information exchange rules with tax havens, of course. But I want full automatic information exchange at home too. And I want HMRC to have the staff resources to handle all this information or all this is a pointless exercise.  Then I will know he is serious about tax evasion and the tax gap. Right now I am not convinced, by a very long way.

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Ways to create a more redistributive tax system

Wed, 10/29/2014 - 06:49

I am taking part in a debate on tax justice at the Class conference this coming Saturday at TUC Congress House in London.

This session will have a pretty lively panel made up of Margaret Hodge, Ann Pettifor, Prem Sikka and me, with Stefan Stern giving the unenviable task if chairing us.  The debate is scheduled to cover these issues:

·       What concrete policies are needed at national and international level to ensure corporations and the 1% pay their dues?

·       What would a new and more redistributive tax system look like and is it realistic?

·       How much can be achieved quickly?

I have no idea what my friends and colleagues on the panel will say but I can give some indication of what I will suggest, given I will only have a few minutes.

Three concrete policies first of all:

1) The UK needs to abolish the domicile rule  – a rule designed solely to benefit the 1% living in the UK. There is no excuse for continuing this policy which increases inequality in this country. Tax should never be based on an accident of birth.

2) Invest heavily in HMRC. We cannot beat tax abuse without having some of the best brains on the government’s side, and like it or not that does not happen right now.

3) Create a proper General Anti-Tax Avoidance Principle instead of pale apology of an anti-abuse rule we now have that we have to get the permission of the tax profession to use, and make it applicable to tax treaty abuse.

Having dealt with my opener, what would a more redistributive system look like?

1) First, the bias against labour income that provides consistently lower tax rates on capital would be removed. That means either merging income tax and NIC – which would create enormous problems, especially relating to pensions – or instead creating an investment income surcharge of 15% to replicate the NIC charge paid by labour on income such as rents, dividends and interest. And yes we would have to give an extra allowance to pensioners but this could still raise billions and level a playground field.

2) Second, we have to charge capital gains to tax at the same rate as income and reduce the absurd allowances for so called entrepreneurs – none of whom need this incentive because entrepreneurs are born and are not created by the tax system.

3) We need wealth taxes, on land via LVT, on dealing via a financial transactions tax, and in wealth itself by a proper gifts tax – that would also eliminate for ever the abuse created by trusts and corporate tax shelters beloved of the wealthy and their advisers.

When could this be done?

That’s the easy but: I have concentrated on tax changes deliverable in the first two years of a parliament.

I assure you, these things could easily be done. The only thing needed is political will, clear thinking and robust arguments. Saturday’s panel can provide the second and third attributes by the bucket load. It is political leaders who must deliver the first.

Do they gave the willingness to make this happen?

That is the question. Those debating the issue at Class Conference on 1 November may want to suggest answers.

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The problem of the free movement of people is a neoliberal creation

Tue, 10/28/2014 - 09:34

My friend, colleague and co-author Colin Hines has been working on ideas on what he calls progressive protectionism for several years. In typical style he was doing so long before the relevance of the idea was obvious. Now it might be more so as politicians on the left, in particular, come to terms with the apparent rise of nationalist fervour in the face of open borders that appears to be driving many people towards the political right.

In the piece that follows, first published on Left Foot Forward, but shared here with Colin’s permission, Colin argues that this rightward shift is completely illogical since it is the dedication of the neoliberal right to the free movement of capital and labour (which it has always perceived as a mechanism to control wage rates) that has created the problems we have, and that this political logic can never as a consequence provide a solution.

The issues Colin raises are difficult, but the time to shy away from them has gone, and that’s why I am sharing this piece.

———–

The free market fulminations of Angela Merkel, Jean-Claude Juncker and Jose Manuel Barroso over Conservative and UKIP politicians daring to call for controls on EU migrants is sadly often echoed by those on the left, centre and greens. They hold their hands up in surrender at any proposals to change the EU Treaties to allow nation states to regain control of their borders.

They have become brainwashed into chanting that the free flow of goods, services, money and people has the unchallengeable, carved in stone permanence of the Ten Commandments. It will thus never be overturned by European member states. Ironically this is a ghastly example of kowtowing to Margaret Thatcher’s most corrosive legacy TINA – there is no alternative.

Such a stance completely ignores the huge rise in pan-European public support for parties wanting to take back control of their borders to limit migration. The Labour and the Greens have been wrong footed by this and shown themselves out of step with public opinion by their support of open borders to the free flow of people.

The only way to see off the otherwise inexorable rise of anti-EU and often extreme right-wing parties is to start a debate about a radical new direction for Europe.

The latest pro-free market argument of ‘shut up, support open borders or it’s Brexit’ must also be challenged as it denies the possibility of a return of public support for an EU with a very different end goal. Non-market fundamentalist parties like Labour and the Greens must promote alternatives to the failings in the European model, but in a way that takes the public with them.

Their present support for the free flow of people is undemocratic, as it ignores the wishes of the majority, increases pressure on overstretched public services and is deeply non internationalist. Look at how the rich countries of Europe have stolen a third of Romanian doctors and how the UK is scouring poorer countries for staff to prop up the underfunded NHS.

What they should be calling for is a more progressive Europe that would allow countries to limit cross border flows not just of people, but also of money goods and services. This would allow countries instead to prioritise the protection and rebuilding of local economies and so provide a secure future for its people.

This is not such a huge step since free trade critics amongst the left and the greens correctly identify the underlying cause of today’s economic, environmental and social malaise as economic globalisation.

Yet they have with no detailed ideas or programmes on how to tackle the entrenched worship of international competitiveness and export-led growth. Today’s open borders in the EU are the interconnected, joint battering rams of neoliberalism and unless all are tackled at once the powerful will continue to increase their grip on the world’s share of wealth.

Indeed it is the EU’s open market that is rarely recognised root cause of the present European crisis. It allowed for example German banks to lend to Greeks to import German cars they couldn’t afford, and then the national debts that resulted are being dealt with by taking money from pensioners and the less well-off.

Meanwhile, the flow of migration and the inability of countries to control their borders under the single market are increasing tensions across the continent.

So the key is to address these downsides of the free flow of money goods, services and people. This will be helped by the fact that people aren’t just worried about uncontrolled EU immigration. Concern is also growing about the free flow of foreign capital buying up for example domestic housing, about foreign service companies pushing for privatisation of the NHS and the loss of UK industry to cheaper labour countries in the EU.

So what is to be done?

Political activists and Labour and the Greens should immediately begin discussions with their political partners in Europe, themselves under pressure from the extreme-right over immigration, to work to curb the EU’s open markets.

Replacing that with an emphasis on rebuilding local economies, rather than forcing all countries into a competitive race to the bottom, will be popular with the public and have the additional advantage of dramatically lessening the need for people to emigrate in the first case.

In short what is required is to change the Treaty of Rome into a Treaty of Home, thereby transforming the EU from an anathema to a positive answer to voters concerns. Cross border issues like responding to Putin and the Middle East, climate change, pollution and crime would still require intra-European cooperation and so would become the main purpose of a newly popular European Union.

Such a sea change is likely to happen first in Europe as its populous has become the first to vote in ever larger numbers for parties opposing one aspect of open borders -the free flow of people. Those not wanting to see the growing power of such right-wing parties should consider urgently starting a debate about the need for ‘progressive protectionism’ policies that allow local economies to flourish.

This would have advantages beyond our European shores. There is already growing worldwide opposition to the rising inequality inevitable under globalisation. To build on this requires rejecting an international open borders trading system that accelerates inequality and instead turning to an approach that increases economic security across the globe.

 

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Cameron’s appalling example

Tue, 10/28/2014 - 07:12

Those who read this blog will know that I am am not deeply impressed by David Cameron. He’s not the only politician for whom I have little regard, but Cameron comes high on my list of those politicians who do not just promote policies I do not like, but are incompetent as well.

Take his attitude towards paying the additional payment demanded by the EU from the UK. The terms under which this are due have been signed up to by the UK. They were known about. Warning of the increase was given. The obligation had been noted by the Treasury. The payment due is an obligation and not an option. But because he hadn’t thought through the consequences of the UK’s so called growth and because he has no attention for detail Cameron was caught out on the issue and so went deeply red, screamed and shouted, threw toys out of his pram and is now in the embarrassing position that sometime soon he will realise he is now on the naughty step with no chance of any outcome bar a humiliating climb down.

If he’d really believed in the strength of the UK economy and the growth he’s so keen to talk about (which none but a few see the benefit of) he’d have trumpeted this as a success. And he’d have made the point the UK can afford to pay when others can’t. And he’d have promoted that as being all down to his economic policies. But he didn’t so I have to come to three conclusions.

First, he does not believe in the growth.

Second, he does not understand the consequences of his economic policies.

Third, he remains at his core the Bullingdon boy who thinks that as a member of an elite he can bully his way out of any situation he gets himself into that he does not like simply by stamping his feet and using his social status to dismiss obligations as things that need only bother ‘the little people’.

He’s wrong, of course. Europe does not recognise the Bullingdon. They have contempt for his social skills. They think, quite rightly, that the rules they’ve made were put in place by agreement and that they have to be complied with. And they can treat him like a fool because they know they have the power of law behind them, and unlike in the UK, being in the elite will not put Cameron above the law in this case – much as he clearly thinks that is the normal course of events.

Cameron’s been rumbled as the incompetent bully he really is. For that we have to thank the EU.

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The EU’s role as a catalyst for tax reform

Tue, 10/28/2014 - 06:43

I am presenting a paper on the EU and tax at a seminar at the House of Lords today organised by GREEN, which in this case stands for Global Re-ordering: Evolution Through European Networks. This is a research project by fifteen universities. I have been invited to be the protagonist in this session by Copenhagen Business School.

The paper I’ve written, which is intended as nothing more than an overview to stimulate debate over a wide range of potential issues, is here (and does include a couple of annoying typos). The key elements of the summary, which I suspect I will actually talk about as the paper is far too long to be discussed in detail in the time available, focus on what the EU can do on tax now.

The EU is not a tax authority and does not have a single universal currency. Tax law is devolved to state members and is fiercely protected by them. Progress on tax issues is frequently difficult because of the requirement that EU decision-making on the issue be unanimous.

Despite that the EU has had some notable tax successes including the European Union Savings Tax Directive and the EU Code of Conduct on Business Taxation as well as measures on tax cooperation and information exchange and mutual assistance. VAT is an EU wide tax whilst broader opportunities for action in accounting, corporate and competition law if the will for action exists.

There is up to €1 trillion to won by action on tax abuse, but 85% of the gains are domestic evasion, not international avoidance. The focus on international tax abuse has been important in putting this issue on the agenda, and the EU has dimensions of that agenda it needs to address, particularly relating to transfer pricing within the EU, tax competition issues, EU based tax havens and abusive tax arrangements, but to ignore more fundamental issues would now be a mistake when these other areas of concern are already the subject of OECD attention.

The key issue for the EU is revenue raising to close deficits. If that is the case the EU has to lead the way in finding that money: this is the boldest statement of aims that it can have for its tax policy. This requires:

• A proper estimation of tax gaps
• Investment in tax authorities
• Vastly improved regulation of companies, trusts and other structures that facilitate abuse
• Effective domestic information exchange from banks to tax authorities
• The creation of greater transparency in the economy from multinational corporations downwards to expose those cheating tax systems
• The creation of new tax reporting standards for the declaration of business income to remove the opportunities for tax and accounting arbitrage that undermine effective competition now and which provide a platform on which fair competition is built
• Enhancing tax system design to reduce the boundaries within and between systems that encourage abuse.

To put it another way, there is an enormous exercise in new thinking and design needed which the EU is ideally placed to lead to be run in parallel with a pragmatic exercise in enforcement to create the level playing field that has always been the basis of the European dream.

In other words, for all its weaknesses, the EU can play a major role in taxation.

The Director General  of EU Taxation will be present to take part in discussion. It should be an interesting afternoon.

 

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Tax justice at the Class Conference on Saturday

Mon, 10/27/2014 - 20:33

The Class Conference on Saturday includes the following session:

 

Tax justice at the heart of a fair economy

Time: 2.15 – 3.30pm

Venue: TUC Congress House, 23-28 Great Russell Street, London WC1B 3LS

Chair: Stefan Stern

Speakers: Prem Sikka; Margaret Hodge MP; Richard Murphy; Ann Pettifor

The brief for the session says:

 

If we are to achieve a fairer economy it is clear that progressive taxation it is urgently needed. Action is needed to combat tax avoidance and worse, tax evasion. Big corporations are avoiding their civic duty to pay tax, and the millions they withhold could make a significant contribution to funding our public services. Yet the main concern of many politicians is to outbid their rivals with tax cuts for the rich and engaging in a race to the bottom on corporation tax. How do we reverse this pattern and build a fair tax system that supports the many and not just the few at the top?

This session will debate:

• What concrete policies are needed at national and international level to ensure corporations and the 1% pay their dues?

• What would a new and more redistributive tax system look like and is it realistic?

• How much can be achieved quickly?

 

I gather tickets are still available, here. See you there?

 

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The EU VAT gap estimate for the UK is £1 billion more than the UK admits to

Mon, 10/27/2014 - 09:38

The EU published new VAT gap data last week for all 28 member states.

The UK summary is here (click the image for a bigger version):

 

The EU think that in 2012 the UK VAT gap was 10.4% of total potential VAT payable. At 2012 exchange rates the value was £13,428 million (£13.4 billion). The EU says this is very close to the UK estimate.

There’s just one problem with that claim: the latest UK estimate of the VAT gap is for 2012-13 (so near enough the same period) and is for a gap of 10.9% at a cost of £12.4 billion. I don’t think £13.4 billion is close to £12.4 billion: it is £1 billion.

One of these estimates is better than the other. I know which I am inclined to believe because it was not prepared by the tax authority publishing it, and that’s precisely why I say HMRC should not be responsible for monitoring the tax gap.

Note: Updated at 14.30 on 27 October because an incorrect exchange rate was used in the first version

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Why don’t politicians hear that what people are saying it ‘it’s unfair’ and do something about it?

Mon, 10/27/2014 - 09:20

Politics is in a mess. The Tories are relying on immigration hysteria to rally support, and are tearing themselves apart in the process. Labour is tearing itself apart in Scotland. The Lib Dems face annihilation in 2015. The spectre of UKIP hangs over debate. Politicians are loathed. Russell Brand tells people not to vote in protest whilst Hong Kong fights for the right to political representation. Scotland almost left the Union. And our Prime Minister fulminates on EU contributions that he plainly should have known about in a way that can only be designed to spread our internal confusion into a wider arena.

Through all this there is, although politicians appear not to have noticed, an economic crisis going on. Real wages are falling. House prices are increasingly unaffordable. A younger generation are being saddled with debt if they go to university, and they do so because their work prospects are poor if they don’t and not much better if they do. Maybe 5 million people are unemployed, under-employed or say they are self employed but appear to be making little income and are paying almost no tax as a result. Those on benefits for any reason are despairing. The NHS is out of money and no politician is saying how they will fill the gap. Protest in Parliament Square is oppressed and the national media mysteriously ignore it, leading to quite reasonable questions about independence. Growth, such as it is, is not reaching most people and is anyway not expected to last, but the rich are definitely getting richer and the stock market has had a go at breaking its all time high.

It does not take rocket science to see these events as connected. They are. People are completely disenchanted for good reason. We all get fed up when no one appears to listen to us, or they say they do and then completely fail to understand what we have said. And that is exactly what most politicians – including UKIP (who simply say nothing of substance) are doing to all those who address them.

What those politicians are universally ignoring is the message people are sending that they do not think what is happening is fair. Any parent will be used to hearing that message from a protesting audience for whom they are responsible. Frequently it is wise to admit that things aren’t fair because that is the only way to retain credibility, and in the case of children that may, very often, be as far as the matter goes, because the unfairness is about the unequal relationship between carer and child that sometimes means the carer’s wish has to prevail, come what may. But in the case of politicians addressing adults the admission that the world is not fair (usually described as “we hear your concerns”) cannot then be followed by an absence of action because the people of this country, rightly, feel that they have the right to be treated as equals, and that politicians are treating them with contempt when they fail to acknowledge that fact. Just reward is now being delivered for that failure to respect the electorate.

So what is unfair?

Globalisation and the unjust reward of companies is unfair.

Income and wealth distribution is increasingly unfair.

The political system is unfair, as is access to it.

Job prospects are unfair.

The terms of employment are unfair.

The benefits system is unfair.

Housing is unfair.

The tax system is unfair.

The burdening of the young with debt is unfair.

Forcing people to borrow because wages are too low is unfair.

To be blunt, the bias of the whole economy towards rewarding some especially well at cost to most is unfair.

The role of the media in relying on advertising that promotes unattainable wants for many whilst revealing lifestyles that only highlight the unfairness that exists reinforces the whole message of unfairness.

And the result is anger. And a blame game that the Right have turned onto an innocent party, because that is what they always do, making immigration the focus of concern when it is a symptom of the malaise, has resulted.

So what is the malaise? That’s our whole economic system. We cannot continue with an economic system that is predicated on employing fewer and fewer people on lower and lower wages to increase productivity to thereby increase the return on what is described as capital of which there is less and less being invested because those who own it do not wish to take the risk of their wealth being used productively in case it is lost, meaning that they prefer short term speculation instead of long term wealth creation, which is a choice that only deliberately exacerbates wealth and income divides.

So what are the choices? The right would have it that the market is the solution, even though it is thirty five years of market based solutions that have created this crisis. The right are, therefore wrong. There is no market based solution to a crisis of market failure. Let’s not pretend that there is, because it cannot happen.

The only solutions are to be found in alternatives to the mess that markets have delivered. As Scottish Labour are rightly saying, this requires a profound shift to the left. There is no other choice.

The state has to invest in the economy when no one else will.

The state has to build houses because no one else will.

The state has to build the infrastructure that no one else can.

The state has to liberate the underused resource of this country – the capacity of it’s people – to build the prosperity that people want and know they deserve.

The state has to make clear that its vision of prosperity cannot be based on a consumer boom: the prosperity we need is not based on a quick fix of a move in a decimal place in quarterly GDP. The prosperity we want is all about security, of jobs, of incomes, of services for all, of pensions, of healthcare, of access to education, of security when things go wrong and environmental security.

That said, there are people who very definitely need more right now – because there is real poverty in the UK. So the state has to deliver redistribution too.

And the state has to finance this. The money exists: we bailed out banks. We can bail out economies. The money comes from borrowing, from Green QE, from a levy on new pension fund contributions in exchange for the tax relief given, from a financial transactions tax, from a wealth tax, from progressive income tax, and from collecting taxes that are due. And all are important, for funding, policy and political reasons.

And the state could do more. It could give its staff pay rises.

It could promote union rights to counter corporate power.

It could provide decent state pensions and remove people’s well-being from the casino of the stock exchange.

It could commit to the NHS and say tax will be raised to pay for it.

All of this could be done. But it is not being done.

No wonder people are angry.

 

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Why auditing fails us all – or an explanation for Tescos

Mon, 10/27/2014 - 06:32

I was distracted last week and so did not find the time I needed or wanted to discuss the audit issues arising at Tesco, and elsewhere.

I want to cut to the chase: auditing has failed in the UK and that is entirely the fault of the auditing profession and the firms that dominate it and the way that they have changed (or, perhaps more provocatively, manipulated) auditing and accounting standards to suit their purposes over recent years.

UK auditing standards are the responsibility of the Financial Reporting Council, which I do not consider a body independent of the auditing profession because of revolving doors. In practice it says that the purpose of an audit is defined by International Auditing Standards (called ISAs as illogically they are officially International Standards of Auditing) . ISA 200 summarise this purpose as follows:

Now this is really important because most people think that an audit is about forming an opinion on whether the accounts show a true and fair view. And that is not the case according to this standard. Instead the requirement is to say whether or not the accounts are free from mis-statement as defined by the relevant applicable accounting reporting framework, which is for the purposes of all UK based multinational companies International Financial Reporting Standard.

There is, of course, a problem with IFRS: they too are a construct created by the accounting profession to suit its purposes and which now effectively over-ride the requirements of the Companies Acts in most cases, which deem compliance with IFRS to be company law compliance.

So, not to put too fine a point on it, the profession make up accounting rules and then say they have complied with them when they form an audit opinion.

Now, this appears to conflict with section 393 of the Companies Act 2006 which says:

So there does appear to be a need for a true and fair view. But what is true and fair? The Financial Reporting Council has published notes on that, the most recent in June 2014. The key paragraph is this:

Note that last sentence: they are saying that if you disclose what IFRS requires and follow its standards then you have a true and fair view.

There is just one slight problem with that. As Tim Bush of PIRC has argued (and I reproduce with permission)

The core issue at stake is whether accountants should do what Parliament has intended them to do, or whether they have, literally, made up a set of rules to suit themselves?   What is the “true and fair view”, the basic legal test that accounts must reach, actually for?  

As Tim then noted:

PIRC has compared what earlier key legal opinions that the FRC obtained in 1983, 1984 and 1993 actually say with an academic paper from 1993 by PwC professor of accounting at Royal Holloway College, Christopher Nobes FCCA, purporting to cite those opinions, and a 1993 Financial Times article citing David Tweedie CA (then at the FRC, and a former academic) that does likewise.  Remarkably there is a fundamental mismatch between what the law actually is and what Tweedie and Nobes said it was. Nobes is explicit that what true and fair view means (“signifies”) changes according to accounting practice, i.e. it is a dynamic concept with changeable meaning.  

But as Tim argues, this is wrong:

However the 1983, 1984 and 1993 opinions clearly state that true and fair view is fixed in meaning, for compliance with the Companies Act (which includes directors’ solvency duties). Given that function, the content of accounts to attain that standard can change in a dynamic way over time, but the meaning is anchored by the law.

So, Tim suggests:

After the 1993 publications large swathes of the accounting profession ran with the line that the meaning of true and fair view can also change according to what accountants wish it to mean.

 But that is wrong:

True and fair view is a dynamic concept that means the same it has since 1947: it is the test to comply with company law, which above all is a solvency act.

In other words, the reality is not that true and fair means that IFRS has been complied with (as no doubt David Tweedie who went on to chair IFRS would have liked) but is a fixed concept that requires the auditor to appraise whether or not the company fulfils a very basic test, which is that the company is solvent. How do we know this? Because section 830 says so by requiring that dividends of any company can only be paid as follows:

There are no exceptions, including for banks, although auditors like to say there is.

And the basis for determining solvency for this purpose is the accounting data of the company. So, IFRS can require what it likes with regard to revaluations, market values, and anything else. A company has, ultimately, to have realised profits available to it (which means cash is available, or likely to be available as a consequence) or it cannot pay a dividend and that is the bottom line test every aiuditor knows their accounts must be used for and so that is what true and fair means in law.

But the accounting profession says otherwise.

And they’re wrong.

And because they have forgotten this basic test, and that cash is therefore king, and this test has implicit in it first a stewardship obligation to shareholders and second a requirement that the director’s protect creditor’s interests the IFRS claim that the purpose of financial statements is also wrong. They say that purpose is (their emphasis):

Stewardship is sidelined then, and as for solvency, ne’er a mention.

In other words, we have accounts that are prepared without taking into consideration the legal purpose for doing so and which are audited against a false objective of complying with a set of financial reporting standards that do not recognise the true purpose of accounting.

And you wonder why Tescos could make such a mess of their reporting? I don’t. If you make it up as you go along that’s what happens because no one knows the rules. And that’s precisely where we are now when it comes to accounting and auditing.

It’s time to go back to square one and prepare accounts in accordance with the law for the purpose the law intended taking into consideration the users the law has in mind.

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The Fair Tax Mark is what Russell Brand’s Revolution should look like

Sun, 10/26/2014 - 09:57

The main Observer editorial today discusses corporate tax avoidance. As it says towards its conclusions:

Last Monday, SSE, one of the big six energy companies, became the first FTSE 100 company to be awarded the Fair Tax Mark, a scheme launched in February that holds companies to account over their tax affairs. SSE has nine million customers. Last year, SSE was fined £10.5m by the regulator Ofgem for misleading customers with false statements about the gas and electricity charges of rivals. Now, the company sees a commercial advantage in rejecting tax avoidance schemes and the use of tax havens.

It’s a point not lost on the Observer, who then note:

Even as international regulations tighten, some multinationals will be devising new ways to pay less tax. In the UK, corporation tax, levied on the profits a company makes, is set at 21%, one of the lowest in the world. Yet, still, many global corporations exploit loopholes. The public, however, has a potentially lethal tool in its hands – its consumer power.

On Thursday I will be discussing whether all the government initiatives to tackle tax avoidance have had much impact as yet at a conference organised by the Public Accounts Committee (PAC). My argument will be that all of them are trailing in the wake of consumer, NGO and PAC pressure. The Fair Tax Mark builds on that consumer pressure for change when the reality is that for all its rhetoric this government is going out of its way to encourage international tax abuse by introducing territorial taxation into the UK, by cutting the tax rate, by almost destroying controlled foreign company legislation, by slashing tax staff and by introducing measures such as the patent box.

If Russell Brand wanted to say what Revolution looked like, this is it. This is the way people can take back power. More companies need to do it though.

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Have new government tax rules made any difference at all?

Fri, 10/24/2014 - 08:41

The title asks a good question.

Channel 4 News web site had Margaret Hodge and me discussing the issue yesterday.

We'll be doing it again at the Public Accounts Committee conference next Thursday at the Guildhall.

 

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Why a zero rate corporation tax is about undermining tax systems and democracy

Thu, 10/23/2014 - 16:55

I was asked today by a journalist why there might be problems with a zero rate corporation tax – which is an idea many on the right are now promoting. I replied that zero corporation tax creates many problems.
 
The first is that companies would then make no contribution at all to society despite the enormous privileges they enjoy, including limited liability, which literally means they can dump their losses on the rest of us.
 
Second, such a tax rate means companies would not pay for the services they use paid for by taxation  and there is no obvious reason why they alone should get this advantage. Do we really want to subsidise in such arbitrary ways?
 
Third, zero corporation tax would let anyone with excess income shift it to a company and have it accumulate tax free, so increasing the already massively problematic income and wealth inequalities  in society.
 
Fourth, tax authorities are the main and most effective regulators of companies. Without tax being  due no one would really look at company’s accounts at all and fraud and crime using companies would escalate.
 
Fifth, the burden of tax would then all fall on labour and not capital – leading to massive economic distortions.
 
Sixth, if companies were not taxed most significant capital gains would then also fall out of tax, so undermining another tax.
 
The list could go on, but the fact is zero corporation tax is actually about undermining the effectiveness of the tax system, the cohesiveness of society, the ability of the government to deliver the services expected of it and so eventually the rule of law and democracy itself because it would declare some income outside the scope of that law and the need to contribute to society. If you want to tear our society apart this is the way to start doing it.

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Reinventing the economy, and claiming back control of tax

Thu, 10/23/2014 - 07:16

I spoke at a conference on Reinventing the Economy in Glasgow last month. This is what I had to say:

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The October Taxcast from the Tax Justice Network

Thu, 10/23/2014 - 07:15

In the October 2014 Taxcast from the Tax Justice Network: never mind social welfare, how much is corporate welfare costing us? Across the US they’re going to start publishing the tax breaks and subsidies, and we take a look at the latest research in the UK.

Also: Ireland announces it’ll abolish the so-called ‘Double Irish’ tax dodge after the EU Commission finds Apple’s tax deal is ‘illegal state aid’. But what will they replace it with?

Australians discover the true state of the tax contributions made by their top companies and Tax Justice Network Africa makes history by taking the Kenyan government to court in an unprecedented case over a treaty with the tax haven of Mauritius.

Featuring: Tax Justice Network Director John Christensen, Greg LeRoy of Good Jobs First and the University of York’s Dr Kevin Farnsworth. (Dr Farnsworth’s research on direct corporate welfare in the UK has not yet been released but as soon as it is we will give further details).

Produced and presented by @Naomi_Fowler for the Tax Justice Network.

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Normal service will be resumed

Wed, 10/22/2014 - 07:24

But everyone needs a day off once in a while, me included

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Should nation states ‘compete’? A call for papers

Tue, 10/21/2014 - 06:06

I am on the organising committee for this conference and so encourage submissions ons in response to this call for papers:

SHOULD NATION STATES ‘COMPETE’?

City University, London, 25th / 26th June 2015

The 2015 research workshop co-organised by the Association for Accountancy & Business Affairs,i City University,ii and the Tax Justice Network,iii will explore the notion of national ‘competitiveness’. This opens up possibilities for papers on a wide variety of themes, including tax wars (tax ‘competition’), the dynamics of ‘beggar-thy-neighbour’ politics, regulatory degradation, regulatory arbitrage, policy responses to ‘competitiveness’ pressures, the impact of ‘competitiveness’ policies on home countries and third party countries.

Other related themes are likely to emerge as the workshop programme develops.

Offers of papers are especially welcome and early submission of an abstract of no longer than 300 words is encouraged. All submissions will be considered by the organising committee.

This workshop will bring together researchers, academics, journalists, policy staff of civil society organisations, consultants and professionals, elected politicians and/or their researchers, and government or international organisation officials.

The purpose of the workshop is to facilitate research through open-minded debate and discussion, and to generate ideas and proposals to inform and shape the political initiatives and campaigns already under way.

There will be a small charge for attendance at the Workshop. Participants are usually expected to finance their own travel although applications from students and others with limited means for bursary support will be considered.

More information about this workshop is available from: John Christensen, Tax Justice Network, john@taxjustice.net.

 

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Towards a progressive fiscal policy: work in progress

Tue, 10/21/2014 - 05:53

My friend and co-author, the economist Howard Reed, had a powerful article on the Compass blog yesterday in which he trailed work we are proposing to do over the next few months.

Having dealt with Labour’s policy on the deficit first of all (with an analysis with which I concur, and which I recommend you read) Howard moved on to the measures that he and I think need to be taken to deliver fundamental change during the course of the next parliament. As he puts it:

Of course, it is very easy to criticise; but what should Labour’s policy be instead of the current Tory-lite offering? A full policy analysis and ‘alternative manifesto’ will have to wait until my forthcoming Compass report with Richard Murphy in early 2015. Here I offer only a few guiding principles.

Firstly, there is a desperate need not only to stop, but to reverse, most of the spending cuts made since the Great Recession of 2008/09. With spending cuts set to account of over 90% of total fiscal consolidation compared with only 10% tax rises, it is clear that many of the poorest and most vulnerable families – particularly low income families in work – are bearing the brunt of austerity. This pattern needs to be reversed and fiscal consolidation should be rethought from scratch, with the aim that poorer families should be spared any pain if at all possible. Labour’s proposed ‘zero-based spending review’ should be recast as a ‘spending convention’ – analysing each and every spending cut undertaken since 2010. At the central government level, all cuts with a regressive distributional effect should be reversed unless a more progressive alternative policy can be implemented at the same or lower cost instead of a simple reversal. Meanwhile, cuts to local government funding should also be reversed and similar enquiries into the impacts of cuts undertaken in each locality. Participatory budgeting techniques, as seen recently in Paris, could be used at both local and national level to advise on the biggest priorities for additional expenditure.

The ‘spending convention’ should be accompanied by a tax and social security commission which over a period of (say) 18 months should draw on a wide range of expertise from academia and the third sector to design a more progressive – and simplified – tax and benefit system. The key features of this new system would be: (1) a basic income payment for all families sufficient to reach an acceptable minimum living standard; (2) merging the national insurance and income tax systems into a comprehensive income tax; and (3) replacing council tax, stamp duty and other taxes on capital and property with an annual wealth tax and a land value tax. All these taxes would be designed to be steeply progressive. The new system could be introduced 2 or 3 years into the next parliament alongside the reversal of many of the spending cuts, and should be designed to raise enough net revenue to ensure a balanced current budget at revised spending levels when the economy is at full employment. At the same time, given that the economy is still very weak at the moment – despite a return to modest growth in 2013 – there is ample opportunity to use Quantitative Easing to provide extra funds for public spending as Britain makes its way through a long and drawn-out recovery. This approach, which combines a refreshed, progressive tax-and-spend fiscal policy with a radical monetary policy – will ensure that the people who got the economy into the mess of 2008/09 should pay for it, and not the impoverished innocent bystanders.

The third plank of policy should be aimed at rebalancing the economy in the medium term to stand the UK in much better stead in the event of further financial turmoil in future. This includes better financial regulation, a green new deal to make the UK economy much more sustainable and resilient, a rebalancing of the the economy away from the City and financial services to reduce the likelihood of another crash, and a decisive shift away from the industrial feudalism of the plc and private equity dominated neoliberal economy towards a social economy which foregrounds worker-managers, cooperatives, social enterprises and crowdfunding. Compass’s recent report on the economy, Building Blocks, offers some excellent initiatives in this vein.

It looks like we have some work to do over the next few months.

 

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