Taxing the Population for Private Profit

by Manfred Davidmann

CONTENTS

Summary

Introduction

Exporting Employment (Importing Unemployment) at Taxpayers' Expense

Taxing the Population to Benefit Corporations

Reducing Public Spending to Benefit the Rich

Channelling Taxpayers' Moneys into Private Profits

Condoning Tax Avoidance by the Rich

Appendix 1: The Social Costs of Unemployment

Notes <..> and References {..}


Relevant Current and Associated Works

Relevant Subject Index Pages and Site Overview

SUMMARY

This report shows how taxpayers' moneys are used in different ways to enlarge the profits of companies (corporations) and thus of their owners. Companies (corporations) are in effect allowed to tax the population and are also allowed to pass large parts of their operating costs to the taxpayers.

Moneys saved by spending less on social security for those in need and gained by collecting more tax from the working population, is apparently being used to reduce the taxes collected from the rich and from corporations.

INTRODUCTION

This is one of a series of four studies which were undertaken to obtain a better understanding of why people have to struggle throughout their adult lives, in all countries and organisations, at all levels, to maintain and improve their standard of living and quality of life.

We know what people are struggling to achieve {15, 16} and so these studies explore why people have to struggle by looking at what they are struggling against.

The main report 'What People are Struggling Against' brings together the work reported in the four component studies by extracting and rearranging key findings from them.

To get an overview, it would be best to read the main report first. If you want more information on particular aspects of interest, you could then go to the component studies (See Relevant Current and Associated Works).

EXPORTING EMPLOYMENT (IMPORTING UNEMPLOYMENT) AT TAXPAYERS' EXPENSE

Corporations (Companies)

• Import goods and services which originate in low-wage countries, into a high-wage home country.
• Transfer manufacturing and service work from a high-wage home country to low wage countries.

The mark-up between buying or producing in a low-wage country, and then selling in a high-wage country, is often enormous <3>. Large additional profits result. Unemployment increases in the home country. There are many costs associated with unemployment such as social security payments to the newly unemployed. {5}

It is accepted as a principle of economics that social costs have to be paid by those causing them, so that the social costs of unemployment have to be paid by the enterprise which caused the unemployment in the first place {3}.

The different costs to individuals and community which result from unemployment are listed in Appendix 1. The social cost of unemployment to the community is the total cost to the community, is the sum of all the items listed there.

Companies, however, are not made to pay the resulting costs of unemployment, are allowed to pass these operating costs to the community and are thus making large profits at the expense of the community. {5}

In the UK, an individual was in 1998 reported to have been jailed for seven years for only threatening to contaminate a food if the producer did not pay him GBP 30,000 {7}. If he had carried out his threat the social costs would have been considerable and so he was jailed, presumably both as a punishment and to deter others from similar activities.

On the other hand, companies and corporations threaten to make people unemployed, and carry out these threats actually making hundreds and thousands of people unemployed with massive consequential social costs <1>. They also do so for the sake of private profit but no action is taken to prevent them from doing so by recovering the social costs from them, or to punish and deter by punitive sentencing.

All for the sake of profit, for personal gain of wealth, power, influence and control over others, for 'empire building'.

TAXING THE POPULATION TO BENEFIT CORPORATIONS

A multinational company can minimise its liability for corporation tax by transfer pricing, that is by making book entries which transfer profits to the country with the lowest corporation tax. This tax avoidance is legal and governments have not legislated to prevent this practice. {4}

Say a multinational has increased its profits by tax avoidance. The government's income from taxation has decreased accordingly. As the government's expenses have not changed it must make up this shortfall elsewhere. Usually from its other taxpayers, say from its citizens. So its citizens pay more tax, the government can now spend the same amount as before, the multinational's profits have increased.

In other words, the multinational's increased profits arise from money which is in effect collected by the government by taxation from its taxpayers.

The multinational, and this means the owners and directors of the multinational, are thus in effect taxing the people and in this way increasing the multinational's profits and thus their own incomes and wealth.

REDUCING PUBLIC SPENDING TO BENEFIT THE RICH

The government spends for the community the money it receives from the community, collecting it through taxation. Questions which need to be answered {9} are:

1. 'How much money has to be collected to provide for the community's needs?', including the level of social security and health services people need and would like to have.

2. 'Who contributes how much?' to see how the tax load is being shared among different income groups (including income from all sources).

3. Who ought to contribute more, and who less?

4. 'What effect will proposed changes have?' on the standard of living and quality of life of the different income groups.

'Appropriate Pay' {6} discusses such questions at some length, illustrating them by changes which took place in the United Kingdom over a period of ten years.

When owner-serving governments 'reduce income tax' for individuals and corporations, it is the rich who gain much, the working population hardly benefits. This becomes obvious when instead of looking at percentages one considers the purchasing power of the amounts. One then sees that the amounts contributed by the rich are being drastically reduced. The rich also gain much from other government policies which transfer moneys to them. And there are likely to be ways for tax avoidance (legal) and tax avoidance would be condoned. {9}

To claim in such circumstances that government expenditure on public services has to be cut so as to make ends meet, appears to be very one-sided.

In 1994, a British newspaper reported {10} that

the Swedish Social Democrats looked like replacing the ruling right-wing coalition in the coming election. The Social Democrats policies included increasing taxes on income, capital gains, share dividends and wealth.

Just before the election a newspaper article by the managing directors of four well-known companies 'was interpreted as an attack' on Social Democrat policies. A top-level owner-industrialist stated that his family might move some of its companies abroad 'unless the Swedish government made deep cuts in public expenditure'.

The economic policies of a British conservative government, for example, in effect reduced the tax the rich were paying and so reduced the contribution from the rich towards government expenditure. The conservative government then attempted to make ends meet by firstly collecting more money from the lower paid and from the poor by substantially increasing VAT (by 50%), and secondly by drastically cutting social services and social insurance payments and benefits including expenditure on education and on the health service. {1}

Such reductions seem to aim also at reducing the social security of the working population in areas such as unemployment benefit, health insurance payments, social security benefits such as supplementary payments, and pension rights. For example, it has been reported that in Britain's national health service the number of hospital beds has steadily declined over a considerable number of years while the number of admissions has increased. {2}

CHANNELLING TAXPAYERS' MONEYS INTO PRIVATE PROFITS

Employers should pay wages which will provide a good life for employees and their families. But the lower the wage paid, the higher the profit. And there will be employers who are more interested in their own profits than in the welfare of their employees.

Some employers may then pay wages which are so low that employees are forced to work long hours merely to survive. A government may then make up such wages with means-tested income support benefits to a poverty-existence level. Which is apparently what happened in the UK while minimum-wage requirements ceased to be applied.

In such ways taxpayers' moneys are used to subsidise the profits of companies (corporations), of their owners.

Taxpayers' moneys are also used to subsidise the profits of companies (corporations) when a government pays a subsidy to a company for every new employee. This is so regardless of whether the subsidy is paid as a single payment or whether it is paid for a limited period as part of the employee's wage.

Eton, a British establishment's exclusive 'public' boarding-school was, in 1997, reported to have about 1,260 pupils most of whom paid fees of about GBP 13,400 each year. Apparently nineteen of Britain's prime ministers were educated at Eton. The annual fee is close to the average annual British wage and Eton apparently had assets of about GBP 130 million without including buildings, 350 acres of grounds, and much else. {11}

But this wealthy and exclusive enterprise is registered as a charity. As far as I know this means that annual fees can be paid in accordance with a written covenant <4>, that is by stating in writing one's intention to make regular payments, which enables the college to recover the income tax paid on those sums and so reduce the level of fees.

And this means that the government, that is the working population, is subsidising Eton college by something like GBP 6 million each year. This figure is based on its income from fees alone and it appears to have additional 'investment income of millions'.

There are a considerable number of 'public' schools in the UK which appear to be almost exclusively educating a very small and rich section of the population.

Here taxpayers' moneys are in effect used to subsidise without means-testing the income and lifestyle of the parents. Can we afford to give away such large sums to benefit almost directly only a small number of people who are not in need?

Overall, the amounts channelled in such ways into private profits seem large. There may be investment grants, depreciation allowances, grants in aid, tax allowances, tax-free benefits, loans at favourable terms or other ways of financial support to various enterprises in industry, agriculture and the service sector. {9}

Very large amounts are apparently handed over yearly to increase the wealth and power of a small number of people without any corresponding return to the community. They are generally given without any obligation to repay, without a corresponding transfer of ownership and control to those who provided the money, to us. {9}

No banker, no financial institution, no shareholder would dream of giving away their capital without making sure of retaining ownership and control over this money, through the transfer of corresponding securities and ownership rights, and of direct and indirect participation in the resulting profits. {9}

So how come a democratically elected government can hand over public moneys to owners of companies (corporations) without getting corresponding ownership rights in return?

And how come public moneys can find their ways into private profits in such ways?

CONDONING TAX AVOIDANCE BY THE RICH

It has been reported {12-14} that the amount of assets hidden in Britain's offshore tax havens totals more than GBP 350 billion. Apparently companies and trusts are placed in tax havens to avoid paying taxes, appear to be asset-holding rather than trading. It seems they do not have to file proper public accounts nor do they need to reveal the identity of their directors, that is of those who own and control them.

The amount of tax lost to the British government from allowing tax-free status to these offshore islands has been estimated in the absence of reliable information as possibly being of the order of GBP 20 billion {13}, a large amount. One would like more comprehensive information but this estimate indicates a possibly staggering amount of tax-avoidance (legal) by those who are rich.

There would seem to be no good or valid reason for condoning tax-avoidance by those who are rich.

What stands out is that in such ways the rich are apparently allowed to avoid paying a fair share of the tax load. Condoning tax-avoidance increases the tax load on the working population.

We saw <2> that

A multinational company can minimise its liability for corporation tax by transfer pricing {4}, that is by making book entries which transfer profits to the country with the lowest corporation tax.

A unitary taxation system can overcome this tax avoidance by assessing the actual profits being generated by a multinational in a particular country. American state governments have tried to install systems of unitary taxation but, as far as I know, multinational corporations have been able to dissuade state governments from applying such systems.

Studies published in the USA {8}, for example, tell us much about the extent to which multinationals can avoid paying tax on their profits. These present a disturbing picture. It seems that at times some top companies pay no federal income tax or obtain an overall rebate. Tax allowances appear to add well over USD 100 billion each year to the accounts of US corporations, and are thus given to owners and directors.

The ways in which taxation can be used to shift the tax load between income groups are numerous and often hide behind fine-sounding phrases.

Companies (corporations) have to distribute yearly a 'Funds Flow Statement' to their shareholders which states in plain language where moneys have come from, and what they have been spent on, for a particular year.

We should get similar independently audited statements from our government stating what moneys they have received and what these have been spent on. Stating in plain language who provides how much, for different income groups, showing types of taxes referred back to these income groups, and what the moneys have been spent on. Including and showing direct and indirect payments and transfers to the income groups, as well as showing what taxpayers received in return for the taxes collected from them.

And we should get a funds flow statement for the country's operations as a whole.

Appendix 1:

THE SOCIAL COSTS OF UNEMPLOYMENT

The social costs of unemployment {5} to people as individuals, to their families, and to the community as a whole, are {5}:

INDIVIDUALS

Poverty, lack of spending money

Frustration, despair

Young people without full-time work experience

Social disillusionment

Ill health

Reduced life span

Mental illness

Increasing suicide rate

Drug abuse, crime

FAMILIES

Increased family breakup

Homelessness

Domestic violence

COMMUNITY

Higher and rising crime rates

Brutalization of lifestyle

Lost Income:

(1) Loss of income tax from those now unemployed.

(2) Loss of National Insurance contributions which would have been received from both employees and employers.

(3) Loss of Value Added Tax as the unemployed reduce their spending.

Increased Expenditure

(4) Increased cost of Unemployment Benefit (Among developed countries, the British rate of benefit appears to be one of the lowest).

(5) Increased cost of Social Security support payments.

(6) Increased costs for Health Service, Police and Prisons.

Note that persistent lack of care and consideration towards its members leads to a view of society as being hostile and unrewarding {15}. We now see this taking place and see its effects.

The social cost of unemployment to the community is the total cost to the community, is the sum of all the items listed here.

NOTES AND REFERENCES

NOTES

REFERENCES

Relevant Current and Associated Works

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Copyright    ©    1998    Manfred Davidmann
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History
11/12/98 Completed
03/01/99 To Website
07/02/99 Main report published. Reference added.
02/06/02 Added 'Relevant Current and Associated Works'

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