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.

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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.

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Tax Avoidance

Tax avoidance is sometimes differentiated from tax evasion. Avoidance often applies to legal means (such as loopholes and clever accounting techniques) to avoid paying the full amount of tax, whereas evasion is often applied to more criminal forms of not paying tax.

As tax expert Richard Murphy notes , tax evasion and tax avoidance can happen on the same transaction for different taxes in different places and often involve elaborate trails involving more than one person, company or organization.

How much potential tax revenue is lost through off-shoring?

Tax Justice Network reports that because tax authorities continue to be mainly limited to powers within their own countries, the result has been a massive loss of tax revenue. As a result, based on the $11.5 trillion above, they estimate that $255 billion is lost each year to governments around the world because of the no or low taxation of funds in offshore centers . Importantly, they reiterate, this estimate does not include tax losses arising from tax competition or corporate profit-laundering.

What is profit laundering?

Profit laundering is the moving of profit from the countries in which it was earned and where it would incur tax, into tax havens. It is only possible to do this if there is secrecy to avoid the tax authorities noticing it.

Interestingly, Christian Aid notes that:

Not only is globalization not really global, but a large chunk of world trade may include laundering of profits.

This is one reason you may occasionally hear of mispricing. Some examples Christian Aid noted included how:

• Some TV antennas from China could be under priced at US$0.04;
• Rocket launchers from Bolivia could be under priced at US$40; and
• US bulldozers could be under priced at US$528

But other items could also be over-priced, for example:

• German hacksaw blades priced at US$5,485 each;
• Japanese tweezers at US$4,896; and
• French wrenches at US$1,089.

How much profit laundering is there?

Christian Aid reported in 2005 that the total estimated dirty money flowing into the global banking system is $1 trillion . Breaking that down:

Amount siphoned from the developing world

$500 billion

Amount of profit laundered by multinational companies

$200 billion

Amount of profit laundered by individuals and criminals

$250 billion

Amount lost through corruption

$50 billion

What is Tax competition and why is it bad?

In short, tax competition is about countries out-competing each other to offer the lowest taxes possible to attract foreign investment.

Tax Justice Network describes the negative impact that Tax Competition has on developing countries:

Where did the idea of tax competition come from?

Tax Network Justice summarizes:

But the Network goes on to mention that this is fundamentally flawed as a development strategy because it limits the control any country can have over taxation policies and creates harmful distortions.

In addition to being anti-democratic the notion of making nations compete with other this way does not make sense for its citizenry (though it does for multinational companies who can have a choice of which country to invest in.)

How did tax avoidance come about in the first place and who are the main actors?

Tax Justice Network provides a decent summary in the same report mentioned above (see chapter 3). In short, the main players who promote what they call tax injustice are:

• Accountants
• Lawyers
• Banks
• Transnational corporations
• Tax haven governments
• Tax avoiders and tax evaders

In addition, the Network says that this whole idea probably started with the US and the British Empire. The offshore phenomenon probably began in the US when states such as New Jersey and Delaware realised that they could lure businesses from more prosperous states by offering tax advantages on condition that they register in their states. And then, The first real cases of international tax planning occurred in the British Empire in the early twentieth century when wealthy people started to use offshore trusts established in places like the British Channel Islands to exploit the curious British phenomenon of the separation of taxation residence and domicile.

In the 1920s, the UK found new ways for the internationally mobile person to avoid tax when a UK court ruled that a company incorporated in the UK was not subject to UK tax if its board of directors met in another country and it undertook all its business overseas. At a stroke, the concept of the separation of the place of incorporation of a company and its obligation to pay tax had been created. This concept survived in UK law until the 1990s, by which time it had become the basis for the operation of most tax haven corporations throughout the world.

In the 1930s Switzerland offered internationally mobile people residency, only requiring them to pay a fixed, pre-agreed amount, each year, not varying with income, and not disclosed. This concept has been widely copied the Network also noted.

The Network continues by adding that the other major Swiss contribution to tax injustice is banking secrecy, a concept which they developed at the time of the French Revolution (for the benefit of the French aristocracy) but which became enshrined in Swiss law in the 1930s. The Swiss believed at the time that it provided them with a competitive advantage as a small, land-locked state in a hostile European environment.

This all happened not by chance, but, as the Network also notes, by plan: They were thought up by lawyers and accountants and were exploited by them and their bankers for commercial gain.

Tax avoidance undermines capitalism

As Christian Aid notes, tax avoidance distorts markets, undermining capitalism:

Tax avoidance undermines democracy

Today, of the 72 tax havens, almost half are British territories, dependencies or Commonwealth members. Britain alone loses some £100 billion (approx. US $170 billion) a year in avoided taxes. Even for a wealthy nation, this is a reasonable sum when public funds are scarce and people are reluctant to see the government spending more money on various programs.

In effect then, tax avoidance is also a threat to democracy, according to Prem Sikka, a professor of accounting at the University of Essex, UK:

Transfer Pricing — Intercepting Wealth

Transfer pricing provides a multinational corporations’ tax-avoiding dream. It allows the ability to set up offshore accounts and paper companies through which most transactions occur, without having to pay as much taxes. Internal accounting and costing is therefore adjusted to minimize the costs and maximize the profits.

Much needed revenue for social needs in a country is therefore lost this way.

The following quotes summarize this quite well:

(Note in the above quote at the sheer amount of intra-company trade as a percentage of world trade. Bear this in mind the next time corporate-media talk about the growing trade and prosperity for all.)

As an example of corporate evasion, the following is about Rupert Murdoch’s News Corporation:

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Privatizing profits, socializing costs

One of the quotes above, is from J.W. Smith. There he describes the cost of transfer-pricing. He goes on to explain quite well the effects and points out that both high-wage and low-wage countries lose out as the wealth is siphoned to offshore accounts to avoid taxes. This is historical mercantilism to perfection by intercepting both the foreign country’s wealth and one’s own.

However, as he goes on to point out, there is a difference in that today’s corporations don’t have any loyalty to any nation, due to greed.

The last 20 years has seen the wealth of the United States reduced as corporations seek out cheaper and cheaper places where wages are less and environmental, safety and other regulatory measures are less or non-existent. (This has the effect of depressing wages and labor rights in industrialized as well as developing countries and therefore affects the wealth of those countries.)

Disparities between the wealthy and poor continue to rise, in the most powerful nation as well as all other countries. As Smith continues to point out,

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Tackling the problem, or pretending to do so?

While Smith wrote the earlier piece in 1994, it is applicable today as well, with wave of news about corporate crime around the start of 2000 and fascination of some CEOs and other executives as some major American companies have faced bankruptcy or have collapsed.

Yet, the media, while offering an outpouring of news and analysis have by and large concentrated on individual characters and looked for scapegoats (CEOs being the current flavor!). The impacts of the underlying system itself has been less discussed and when it has, often been described as basically ok, but just affected by a few bad apples. As media critic Norman Solomon describes,

In some countries, the business community shouts a lot about government interference (in their profits) and recommends that the government be reduced in bureaucracy. While many governments are plagued with inefficiency, some is due to the powerplay of groups including various industries.

However, without the various governments, entire industries and market economies wouldn’t have got started in the first place. In the US, for example:

• The pharmaceutical industry received research and development funds from the US government.
• The Internet was created with public funds, but is now handed to corporations to profit from.
• Most major industries receive some support or bailout, including:
  • Energy industries
  • Agriculture
  • Biotechnology
  • Information Technology
  • Telecommunications
  • Weapons/arms/military industrial complex
  • and so on.

While the private companies profit, any costs, such as social problems resulting from environmental degradation, resulting social degradation and so on, are all socialized. Privatizing profits, socializing costs is a common phrase heard in critical circles.

And politics has gotten even murkier since the aftermath of the September 11, 2001 terrorist attacks on the U.S. Some industries have used the September 11th incident to say that has led to loss of business and to try and ask for government assistance as a result. While it has surely had an effect, for example, in the airline industry, as the UK’s BBC 24 news program on September 27, 2001 at about 8:30pm in an interview, said that before the tragic terrorist attacks some of the airline companies such as British Airways were already suffering quite badly, and this tragedy provided an excuse to get out of it.

Of course, this doesn’t mean all companies were using the excuse, but it does highlight the difficulty of addressing these issues during highly emotional times. Companies are understandably going to try and use this to their advantage, if possible.

Economist and professor at MIT, Paul Krugman highlights this with the case of the highly publicized Enron collapse, in a piece that appeared in the New York Times, quoting here at length:

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Rich country governments finally acting because it now affects them?

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More Information

I have not even scratched the surface of this issue here, at it is large and complex. Since the September 11 tragedy, this issue has ballooned incredibly and I have hardly discussed any of the issues arising since then. However, there are a number of organizations doing more research on this, and critics have pointed out these issues for a long time. You could start off at the following links to learn more:

• Tax Havens; Releasing the hidden billions for poverty eradication, Oxfam Policy Paper, June 2000.
• Global Shell Games; How the corporations operate tax free, by U.S. Senator Byron Dorgan.
• Corporate Welfare and Foreign Policy from Foreign Policy in Focus looks at the US roles in corporate welfare, providing statistics and a collection of articles.
• Essential Information has a lot of information on all sort of issues relating to corporate accountability.
• EnronGate from Alternet.org news web site is an example of many sites providing articles on Enron-related issues
• Explosive Revalation$, from In These Times magazine, provides a look at a banking system that secretly moves trillions of dollars around the world.

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