Sunday, June 30, 2013
Set A Pirate Capitalist to Catch A Pirate Capitalist – Running Down the Tax-Dodgers
Most inspired political-economic idea of the week: Irish blogger Jason O’Mahony proposes updating a centuries-old idea to capture taxes from offshore corporate tax-dodgers. Governments should privatise the hard-to-land tax liabilities at auction and let the hungriest privateer capitalists harry the behemoths. Memo to Danny Alexander: it may sound like a joke, but how better to harness innovation?
“Back in the day, governments used to issue letters of marque to ships, permitting them to engage in legal piracy against the vessels of other specified countries. Privatising sea war. Hence the phrase ‘Privateers’.Some privatisations make sense. Some don’t. I quoted Conrad Russell a couple of months ago on how Liberals need to think more carefully about them than Tories or socialists do: what will work? What’s the empirical case economically? Socially? Will it reduce or boost monopolies? I read about two privatisation ideas this week that reminded me of such tests and prompted more: is it politically bat-shit-crazy? And can it do something the state can’t?
“Hoist the Jolly Roger, and set sail for Starbucks!”
Tuition Fees Again? Danny, Please, No
First, and with no pleasure at all, as part of the Coalition Government’s latest spending review, Danny Alexander announced this week that they’re privatising the Student Loan Book. It’s a tiny change to promote off-the-book borrowing that makes little economic and no social sense, and will probably have adverse consequences for students and ex-students. For those reasons alone, Danny shouldn’t have touched it with a barge pole. But in his role not as Chief Secretary to the Treasury but as a senior Lib Dem MP and, having known him for twenty years, a person with a sharp brain, there’s a much more political reason why rather than agreeing to it Danny should have retorted, ‘Are you fucking kidding me?’
I disagree with plenty of Simon Titley’s you-have-to-have-been-on-my-side-in-Liberal-Party-infighting-in-1982-for-your-views-to-count school of Lib Dem commentary, but there’s no doubt he got it bang on the money here:
“What political genius thought of this? Yes, let’s pick at some old scabs, shall we?The tuition fees fiasco was by common understanding the most politically disastrous single action for the Liberal Democrats since the party was formed (and arguably the most damaging to the British Liberal family since the First World War and Lloyd George’s egomania). The economic effects of this new change are minimal, giving the Tories very little leverage to insist on it as part of the wider plan, but the political effects are pure poison. Why on Earth are our ministers reminding everyone of this Lib Dem suicide pill?
“…reopening the issue of student loans makes no political sense either. That issue has become a byword for mistrust of the Liberal Democrats. So why revive the controversy?”
However, while student loans are a very straightforward and easy form of debt for the government to recover – another reason, of simple inertia, not to sell them off – there are other liabilities that it’s a lot harder for governments to recover, and for those, having established the principle that you can sell off government debts just as you split off banks’ ‘toxic assets’, there’s a brilliant case for privatisation…
Labour Government By Debt and Tax-Dodging
Another piece of my reading in the last week – which deserves my coming back to on its own, but just in case, here it is as an aside – is Nick Thornsby’s table of “UK tax revenue and public spending 1997-2012”. Sounds boring, doesn’t it? But – shockingly – in the last 15 years, UK governments have only balanced the annual budget once, relying on massive borrowing in every other year while lying about “prudence”, and dating from a full decade before Labour could blame the international crisis. The thirteen-year-Labour Government’s sole credit year: +£16bn. Biggest debt year: -£186bn. No wonder the deficit’s taking a while to fix.
Labour simply decided that it was better to make people happy with a public and private credit boom, spending oodles of money that they didn’t have long before the financial crisis – in their ten years of power before the storm hit, nine of them were already on tick. That’s the problem with Keynesianism: the broad idea makes simple economic sense, but no-one ever practises it because of the politics. Borrow in a downturn? Absolutely. Run a surplus of taxes when the economy’s doing well? Nah, we’d rather not. And part of Labour’s long-running credit-fuelled feel-good factor was that they laudably wanted to pull in jobs from multinational corporations, so they let them get away with dodging taxes by the supertanker-load.
It’s only since the Coalition came to power that the UK Government’s focused on tax-dodging – partly because the Lib Dems insisted it be a priority, partly because the Tories realised that (for all they wanted to) they couldn’t get away with sucking up to big business like Labour did, and partly because, as even Labour admitted (though not of course that it’s their fault),
But some of the tax that’s been dodged is very hard to get hold of indeed.
From Privatisation To Privateers
As an innovative way of prying taxes out of the biggest avoiders, it’s time to look again at the empirical case for privatisation. Will it work? Does it make economic sense? And can it do something the state can’t? The oft-quoted reason for many Thatcherite privatisations, even those that set up new private monopolies that logic suggested would be worse than public ones, was that even when there was no boost to competition, privatisation would automatically lead to ‘innovation’ and so ‘efficiency’. Sometimes this was true, sometimes not. One where it sounds more than worth a try is a case of very ostentatious state failure – the power of massive multinational corporations to avoid paying taxes. And so I come to my second and far more exciting piece of privatisation reading this week (though it was actually published the previous week, before you correct me).
Jason O’Mahony is a former Progressive Democrat and, if he counts himself as any sort of cousin to the Liberal family, is definitely at several removes from me (let alone Simon Titley). But, cover me in advertising and call me a Thatcherite, I think his “here’s a mad thought” blog post “Want to tax multinationals? How about privatising their tax liabilities?” is a brilliant notion.
“One of the challenges of taxing large multinationals is the fact that corporate taxation is like a war at sea. The fronts keeping changing, and you’re fighting on many different fronts at once. On top of that, the fact is that multinationals, because of the huge sums involved, pay huge money to their tax advisors, and so tend to attract the best. Tax authorities, on the other hand, get quietly competent but under resourced people…And he’s quite right about the counter-argument – people would scream that we’re “losing some of that tax revenue” to “mercenary taxmen”. That’s the tax revenue that we’re not getting. Half of something still being better than all of nothing. Because that’s the beauty of the idea – you only auction off the tax liabilities that you’ve already failed miserably to get hold of. And this way, you don’t have to pay all the lawyers to do battle in court and board the boardrooms. The auction-winners do that. You don’t need to sell off the lot – perhaps just some of the worst, pour encourager les autres – and you can set a ‘reserve price’ at the auction to prevent too big a disparity between liability and profit, or bar the dodgers from bidding on their own debts, or whatever… But it can’t be beyond the wit of government to set rules that are both lucrative for the public purse and exciting for innovators.
“Auction off their tax liabilities to the highest bidder, as a legally recoverable asset, in the same way banks are selling off distressed, toxic assets. If company X owes state Y a nominal €100 million, auction it off. The state gets a chunk of money with ease, and the asset, the tax debt, becomes a private liability.
“Sure that’s mad, says you. Sure, who’d buy that debt? Some entrepreneur would, at a knock down price, and would pay hotshot young lawyers out of the finest universities in the world big fat bonuses for figuring out ways of recovering the debt. In short, we’d fight rogue tax dodging capitalists with the most innovative, hungry force on Earth: other capitalists.”
If it doesn’t bring in much money for the privateers, governments will already have had their cash up front by privatising the risk, and few will cry about it. If it brings in a lot of money for the privateers, the multinationals might be forced to settle with governments instead and agree to a binding international system of tax in future. And if the privateers’ lawyers hit on innovative arguments that spike the dodgers’ guns and set legal precedents, then government lawyers can move in and capitalise on those to rake in all the other liabilities.
So how about it, Danny? It would certainly bring in vastly more cash – and do far less political damage – than making more students walk the plank and keelhauling the Lib Dem vote.