Tuesday, March 29, 2016

Trust and Taxes

Of the life's two great certainties - death and taxes - we have not been doing very well with the latter. For an increasingly squeezed Middle Classes, facing declining real income, uncertain job prospects, costlier health-care and education and the very real possibility of never being able to retire, the fact that the rich does not pay much taxes may occasionally shock, but not paying taxes has indeed become one of the key signals of being rich. The newest metaphor of business - the cloud - is not just about technology, but of de-materialisation of taxes too.

Obscure as it may be, the fate of taxes, and its consequence, may be one of the best ways to understand the global economy. Consider the two seemingly opposite conversations trending in the news in the last few weeks. One is that the Indian cabinet is considering imposition of a 'Google Tax', or, more correctly, an 'Equalisation Levy', an uniform charge on revenues made in India for all corporations not having an entity in India. The point of such levy, initially mooted in Britain after the outrage about Google, Amazon and Starbucks not paying taxes in Britain, is to challenge the notion of a Cloud Corporation that claims to be outside any jurisdiction despite doing business on the ground.

The other, seemingly opposite, conversation is about George Osborne's recent proposal of wanting to reduce Capital Gains taxes dramatically - from 28% to 20% for top rate taxpayers - alongside reduction of tax credits, among others, on account of the ongoing austerity programme. The strange economics of such cuts, at a time when capital gains are rising and real incomes for most people are falling, made the inevitable opposition claim, that the Tory government is for the rich, of the rich, by the rich, credible. The Chancellor had to drop the proposals to withdraw tax credits rather unceremoniously, citing a mistake in calculation, but still fighting to justify why Capital Gains Tax reduction makes sense.

All this points to something McKinsey has already claimed, the 'Age of Ever Lower Taxes', the trend since the Thatcher-Reagan years of the 80s, may be finally over. It is indeed very difficult to justify why large corporations and their wealthy bankers would escape paying taxes, just when the middle classes, the very people who led the shift away from Welfare State, are squeezed out of the benefits of economic expansion. This, particularly since the illusory feel-good afforded by easy credit vanished after 2008, combined with resurgent economic nationalism across the emerging nations, ensures that the era of extraordinary corporate profits may be over.

This is what it should be. There is an anti-tax sentiment among the business executives trained in American-inspired business schools across the world, a collective ethic which has not moved beyond that of the raiders of tea ships at the Boston Harbour. And, despite the general shift away from Friedman's ethic of 'business of business is business', none of them seem to notice the irony when businesses claim to do good and change the world, and yet go all the way to exploit every minutiae of tax codes to evade taxes and spend millions on locating themselves in dodgy tax heavens and lobbying politicians and media to keep this quiet. However, the carefully cultivated story, that lower or no taxes allow businesses to stay and create jobs, is rather nonsensical: Businesses stay only if there is a consumer opportunity to stay. Dare any business to leave the Indian consumer market on account of higher taxes (which has all sorts of consequences, including allowing Indian companies to gain traction locally and becoming stronger to compete globally) and the bluff will be exposed - a fact that the Indian government knows and has now decided to act upon.

George Osborne spins a similar story, and that may have particular resonance in Britain, which is essentially an open, export-facing, service economy. In that sense, Britain is peculiar, though it would lose most of that advantage if it chooses to leave EU in June. However, many of my British colleagues assiduously avoid Starbucks - a habit now growing on me just because they would not meet me there - because they failed to pay UK taxes for several years despite doing a lot of business there. Such small defiance indeed have significant impact on business practises - Starbucks did decide to pay UK taxes eventually, though it was nearly not enough - and the collective impact of consumer action is what is tipping the balance on tax regimes, despite pliant politicians.

One must distinguish the modern taxes, imposed by democratically elected governments for purposes approved through representative methods, from the king's and tyrant's levies or colonial duties. Boston Tea Party was not about 'No Taxes' but about 'No Taxes without Representation'. In fact, 'No Taxes' motto of businesses undermines democracy. I have heard of businesses in Asia which do not pay taxes because the governments are unjust, and rather make voluntary contributions to causes they believe in, mostly backing fundamentalism and extremism: Businesses that avoid taxes in the developed world undermine their governments, and the principle of democratic governance in general no less than these.

So, we are perhaps ready for a Boston Tea Party in the reverse: Next time you buy from a brand, ask them where they pay their taxes. This is not very different from 'Buying British', just more intelligent (indeed, many of those making a lot of being 'British', may not pay British taxes). One could trust a brand more if they are engaged enough to pay the local taxes, and conversely, trust those less who refuse to make commitments and engage socially.

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