Taxing Times – OpEd


By Jamal Harwood

Several large multinationals were embroiled in a tax scandal this past week as executives from Starbucks, Amazon and Google were hauled before the Commons public accounts committee for interrogation. As expected with the best tax accountants and lawyers on the payroll it is not difficult for multinationals to take advantage of generous tax laws in Britain.

Andrew Neill of the BBC put it best on the Daily Politics (13 Nov) when saying that there is something seriously wrong with a tax system in which the above companies (and Facebook) could generate over £4 Billion of sales yet only pay corporation taxes of £13 Million (0.3 of 1%). In his testimony to the committee the UK Chief Financial officer of Starbucks (Troy Alstead) lamented that his company after a presence in the UK of 15 years still has “profitability problems” – they have generated a profit in only one of those 15 years. In the last year they paid no corporation tax on £398 Million of sales!

The reason for this state of affairs is quite straightforward. Due to the complexity of tax law which was designed by lawyers who then later work for the largest companies, there are many loop holes and basic inconsistencies. Multi-nationals legally transfer profits offshore via transfer charges and fees which effectively move the profits to low tax paying jurisdictions. So Amazon has its European operations situated in low tax Luxembourg and Starbucks pays high “brand charges” to its parent which negate its UK profits, leading to nil or low taxes to the UK Treasury.

The UK Treasury is caught in a difficult place. The tax system has developed over hundreds of years and is extremely complex, geared towards large companies rather than individual taxpayers (to attract foreign investment to the country) and to engender consistent returns to the Treasury, hopefully in good times and not so good times. In times of recession, the tax take drops, and in a globalized world there is strong competition amongst nations to attract the largest companies who will boost employment and tax take for the host country. However, the opposite side of the “multinational” coin can be seen with aggressive tax planning which will reduce Treasury revenues. It is noticeable that the Public accounts committee chose service based companies such as the above rather than manufacturing companies like car makers Nissan or Toyota who could more readily move their business to other countries taking away thousands of jobs in the process. Whereas to take the coffee, book and search businesses away from the UK makes no economic sense to those multinationals as it would reduce their global earnings.

The question of fairness of tax is raised by this practice. In austere times to see large companies “getting away with it” gives all the wrong messages. David Gauke, a Treasury minister, said last week: “If there is a perception that big business does not pay its fair share, that will make it all the harder for those of us advocating a competitive tax system”. Compliance in paying tax and motivation for growing the economy is of paramount importance, but highly unlikely when an us and them mentality is growing and the damage to confidence eroded. Tens of thousands of protestors recently marched in London and Glasgow to protest against austerity cuts and tax unfairness. Campaign groups like UK Uncut are planning further actions to shame the corporations and swell public opinion against planned government spending cuts.

The Financial Times has highlighted that a more general sales tax could be in the offing, but that will hit all companies including the exclusively UK based who do pay their share of corporation tax. A new sales tax would also need to be adopted internationally, in the European Union there are restrictions as VAT is the only currently allowable turnover tax.

A consistent view of tax

The inconsistencies, complexity and downright unfairness of much of the system turns off not only the individual taxpayer but also many entrepreneurs with small companies. With tax changes every budget, and obvious exploitation of the system by large companies or those that can hire the best lawyers and accountants it is little wonder that compliance throughout the system is suffering. Radical new principles are required to bring confidence to a deteriorating system. Western policy makers could learn much from the Islamic state’s (Caliphate) approach to business taxes and tax in general.

Rather than adding new complexities the most important principle is one of consistency (unchanging over millennia) and simplicity. If taxes are not easily understood and consistent year to year, the public will lose confidence in the competence of the authorities. Is the system fit for purpose?

Wealth not income or consumption tax

Income or profit based taxes sound straightforward but this recent fiasco over multinational tax avoidance highlights the problems in defining income and profits. The myriad of allowances and deductions add to confusion and the practice of a range of tax rates at distinct income/profit levels encourages tax planning around those income/profit plateaus. We have the absurd situation in the UK of parents now deciding whether both will work or to limit themselves to part time work in order to qualify for child benefit and tax credits. Perceived unfairness coupled with generous benefits at low levels of work encourage an “entitlements” culture which is not helpful for society, and will have lasting long term consequences.

Consumption taxes are just plain wrong. They hit the poor proportionately more than the wealthy and in difficult times they hit spending – the opposite of what is needed.

Contrast these with wealth taxes, which encourage spending – one is only taxed if one is accumulating wealth beyond one’s basic needs. Furthermore if one tax percentage (proportional rate) is used then all can understand and appreciate its fairness. A person paying 2.5% on £5,000 unused wealth will pay far less than someone paying 2.5% on £500,000. Whereas 20% of income tax from a low income earner is far harsher than 40% for a higher earner who has little earned income but vast wealth put aside.

“In order that it does not merely make a circuit amongst the wealthy”

Policymakers are missing the opportunity of a positive tax policy which will encourage investment and wealth circulation rather than the taking of money out of the system as driven by the out of control banking system. Following unprecedented debt creation over the past decade the financial crisis brought on the onset of the greatest credit contraction in the history of mankind. Banks are still deleveraging (trying to unwind their positions) and money lending is now scarce. Banks, the traditional conduit for lending, are rebuilding their balance sheets and trying to survive their enormous gambling (derivative and loan loss) debts, so it is little wonder that the credit crisis continues 4 years after it started. Whilst significantly worse, this recessionary cycle is typical and the result of the capitalist obsession with interest (usury) and free reign handed to banks to manage much of the wealth of the world.

It is a great irony that central bankers and governments around the world have been driven to constantly lower their official interest rates until they are virtually zero to try and encourage lending and investment. For decades we have been told that the Islamic – complete prohibition of interest – is unworkable and will never happen in the “modern” world. It is happening but is restrained by banks taking (zero rates) but not giving (zero rates) to their customers and with the great de-leveraging dominating markets.

Against this backdrop would it not make sense for governments to encourage investment and circulation of wealth by taxing the money that is taken out of the system and sits idly on bank, business, or individual balance sheets awaiting the current recession/depression storm to pass before surfacing again? The vital and delicate balance between investment and work incentives, versus the tax take is out of shape. Wealth oriented taxes encourage circulation of wealth and fairly take a proportional element

The Caliphate taxes unused wealth at 2.5% per annum (zakat) beyond the level of (currently) £3,000. For businesses there is no income or profit taxes, put a small proportional tax on cash, financial assets, inventories and trading merchandise (all 2.5% per annum). Farming communities will be levied a small percentage of certain crops produced (kharaj) and 2.5% of livestock. Land which is not used will be allocated to those prepared to use it. Money and financial assets which are not being put to use attract the yearly 2.5% levy, thereby encouraging full investment of wealth. With interest prohibited the community focuses upon equity/partnership/company investment and capital raising. Risks and rewards are fairly shared amongst investors rather than being dictated to by the banking system.

“In order that it does not merely make a circuit amongst the wealthy among you” [Translation of the Meaning of the Quran: Surah Hashr 59:7]

Jamal Harwood is a regular contributor to New Civilisation.  He is a lecturer in Finance, and a member of the UK Executive Committee of Hizb ut-Tahrir Britain.

New Civilisation

New Civilisation is an online political journal which provides a unique source of insight and critical analysis regarding the pressing political, economic and ideological issues of the time. Its motivation is to provide an authentic alternative to the standard analysis often found in mainstream outlets – opening a channel for advocates of alternative Islamic political models to present their critiques of other understandings and put forward their own opinions while allowing them to be discussed and challenged within an environment of informed and respectful discourse.

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