$36 trillion, that is how much money the world’s companies have made in profits but sits offshore, not paying much corporation tax.
There is a major conference kicking off in London today, looking at global tax transparency. Truth is, this is a disaster that has to be tackled, because it takes us to the core of one of the most burning issues of our times.
Apparently, the total value of global corporate profits sitting off-shore avoiding corporation tax is $36 trillion, twice the level of US GDP. Roughly $2.1 trillion relates to US companies.
It also turns out that OECD average corporate tax has fallen from 50% to 25% in recent years. We also hear that the general feeling is that there is an acceptance of the lower tax rate, but that companies must not avoid paying tax at the new rates.
Meanwhile, the UK and US and with other countries surely to follow, seem to be in a race to the bottom – or a race to see who can charge the lowest corporate tax rates.
This is a much bigger problem than is commonly realised and cuts right to the core of what’s driving social discontent, manifesting itself in worrying electoral decisions.
Right now, there seems to be a very real prospect that democracies across the world will repeat the errors of the 1930s, and in attempt to grapple with a sense of dissatisfaction over -perceived inequality and the view the benefits of growth are not trickling down, pull up drawbridges, turn upon immigrants, and reverse the trend to globalisation. In the long-run, this is in no one interests, with the possible exception of maniacs and megalomaniacs.
The core problem is not immigration, evidence that immigration boosts a country’s economy is overwhelming. The core problem is not globalisation, international trade, which is the product of globalisation, makes the world a more prosperous place, and has lifted one billion people out of poverty in recent years. But the problem may be automation. Research from the US Center of Economics and Social Research from the State Ball University, found that 85% of job losses in US manufacturing during the first 15 years of this century can be explained by technological change.
This is such a serious topic that even the governor of the Bank of England, Mark Carney, hardly a political radical, has called for redistributing some of the profits from automation, and to a lesser extent globalisation, to support the losers from these forces.
There is a real risk, that as technological progress accelerates, and maybe even goes on some kind of exponential path, possibly even heading towards some form of technology singularity, we will create a world of such inequality that it will make Victorian inequity, and its solution to the problem of unemployment, namely the workhouse, seem mild.
In the US, corporate profits to GDP stand close to an all-time high, as this graph, taken from the book iDisrupted, co-written by the, err hum, author of this article, shows.
Start-ups are good, they help erode the power of the corporate giants. Technology may have led to increased automation, but it has also lowered barriers to entry. Smaller entrepreneurial businesses may be the means by which the increasing stranglehold on GDP by larger companies is broken.
But to reduce corporation tax paid by the world’s largest companies makes no sense, it is the precise opposite of what is required to fix the problem of lack of trickle down. Indeed, evidence from the noughties, when George Bush cut corporation tax, is that rather than investment rising, as we might have hoped, we saw more mergers and acquisitions and share buybacks.
Ironically, in the long run it is not even in the interests of the larger companies – for it to be self-sustaining, capitalism needs aggregate demand to grow at the same pace as productive potential, and that cannot happen without ensuring labour enjoys a high share of the GDP cake, and that growth in median wages matches growth in GDP.
So, the answer is not to respond to the issue of $36 trillion sitting off-shore avoiding tax by cutting tax, the solution lies with global cooperation and may ultimately lie with some kind of minimum global corporation tax, of at least 25 per cent of profits in excess of $10 million, and which all members of the World Trade Organisation must agree to or they will be expelled.
Agreeing to such a deal may seem like mission impossible, but the alternative is that this decade mirrors the 1930s, and ends in much the same way.
