If Apple won’t pay tax what hope is there for civilisation?

Paul Sweeney:  Multinationals owe responsibility to a wider group than their shareholders. 

As the Apple tax case moves towards the European Union courts, €13 billion has been transferred to Ireland. The implications of the case will effect how multi-national companies implement taxes across Europe.
Brussels has been accused of “bending the rules” in its pursuit of Apple for €13 billion in taxes it says should have been paid in Ireland. But in truth it is the multinationals and their corporate lawyers and accountants who have twisted the rules on taxation almost out of existence.
The tax system had been “captured” by the tax avoidance industry. Multinationals were paying less and less tax and states were reduced to tax wars against each other in failing efforts to attract them.
The public needed a champion to restore some order on the chaos and it got it in Margrethe Vestager, the European commissioner for competition. Under her the directorate general for competition did what the directorate general for taxation and directorate general for economic and financial affairs were unwilling or unable to do.
I was a dissenting member of the government advisory group that recommended the low 12.5 per cent rate of corporation tax in the early 1990s. I dissented because I believed that the rate should only be reduced to 20 per cent from the 35 per cent nominal rate then prevailing. I believed if it was only 12.5 per cent after legitimate deductions, companies might only pay an effective rate of 6 or 7 per cent.
I was so naive. Today some companies pay nothing and too many pay very little. Apple paid a mere 0.005per cent on its European profits in 2014.
It is too easy for multinationals to pay what they like in taxes, aided by globalisation, technology, multitudes of subsidiary companies in different jurisdictions and none, armies of tax-avoiding lawyers and accountants and by regulatory capture,
In a recent article on Apple’s dispute with the European Commission, Liza Lovdhal-Gormsen (the director of the Competition Law Forum) draws on the quote by Judge Wendle Holmes: “I like to pay taxes. With them, I buy civilisation.”
Lovdhal-Gormsen argues that certainty of law is central to this contract, but if the world’s biggest and most profitable company is reluctant to pay taxes and aggressively uses an array of subsidiaries to avoid tax, what hope is there for civilisation?
Lovdhal-Gormsen is correct to say that people are losing faith in EU institutions, but we are also angry when profits are untaxed and when public services are failing. Indeed Vestager has restored some faith in the EU with her ruling regarding Apple.  

Bending the rules

The EU is accused of the “aggressive use of state aid rules to pursue its corporation tax agenda”. But it is the multinationals who are bending the rules, because they can, in the globalised world. For them corporate social responsibility means their fiduciary duty is only to their shareholders and it excludes all others.
The commission did not apply these state aid rules to tax subsidies for many years. If it had, it may have lessened Ireland’s collapse because it might have stopped the many tax subsidies thrown at property investors by governments from the mid-1990s. Tax “incentives” are subsidies and are at last included in the determination of state aid.
The Apple tax case is not undermining the OECD efforts to bring order to the international tax system, but is complementing it. Lovdhal-Gormsen correctly says the corporate tax system needs reform. But she claims that state aid enforcement is not the appropriate tool. On the contrary, it has to be an integral part of the system. For example, suddenly giving a 100 per cent write-off in year one to a new hotel can wipe out existing hoteliers who did not have such a subsidy.
Tax competition or tax wars between countries is promoted as “good” by the tax industry and our Government. However, tax wars are won by tax-avoiding multinational corporations (MNCs) but are ultimately lost by sovereign states.

Indigenous industry

We do not know the truth of her prediction that “this ruling will make companies more wary of investing in Europe”, but is abundantly clear that Ireland also needs to seriously address indigenous industry.
In recent years, the proportion of sales MNCs make outside their home states is falling, as are their profits, and the flow of new multinational investment has been declining relative to GDP, according to the Economist (January 28th).
The issue is much bigger than the €13 billion tax to be paid by Apple under this ruling. Ireland has been one of the greatest beneficiaries of globalisation. MNCs have contributed much, but globalisation is under threat. One reason is that the little people are angry that big companies are not paying their fair share of tax. What is “fair” is debatable, but paying virtually zero on big profits is not fair.
Apple makes wonderful products, employs many in Ireland (unlike some big tax avoiders). However, its bosses see tax minimisation, which is easy in today’s world, as a core objective. They need to move back to the stakeholder model of corporate governance where companies owe responsibility to a wider group than its shareholders. Then civilisation will survive.

Paul Sweeney is Chair of TASC's Economists' Network.
This article was first published in the Irish Times  2 February 2017

On Apple tax, State must side with its citizens

Paul Sweeney: It is widely agreed that globalisation has bought immense benefits. But it is also recognised that these benefits are not equally distributed. Last week’s Apple decision demonstrates the complexity of the issue of distributing the benefits of globalisation. The Irish Government, faced with a windfall of some €13 billion, appears to have sided with the world’s largest and most profitable company against the welfare of its citizens.

Bringing Balance to Imbalance

Tom McDonnell: The results of the EU Commission's review of macroeconomic imbalances can be seen here. Andrew Watt attacks the partiality and findings of the report here.

The Unhelpful Mister Rehn

Tom McDonnell: Mr. Rehn's recent open letter on fiscal multipliers; the effects of discretionary fiscal consolidation; and the relevance of economic theory and evidence, was a truly dispiriting and perplexing intervention.

It is easy to understand why the handling of the Euro crisis has been such an unmitigated shambles with people like Mr. Rehn running the show. We deserve better.

The Commissioner is taken to task by Jonathan Portes here and by Karl Whelan here. Both contributions are well worth a read.

Confidence indeed.

Are things getting better, or worse?

Michael Burke: The EU Commission Spring 2012 economic forecasts have just been published. It is likely that the downgrading of current growth forecasts will receive some media attention. The EU Commission is now forecasting just 0.5% real GDP growth for Ireland in 2012, followed by 1.9% in 2013. These are significant reductions made from the Autumn 2011 forecasts. Then, growth of 1.1% was projected for this year and 2.3% for 2013.

No doubt, supporters of government policy will point to the fact that there is some growth forecast at all. Even this meagre level of increased activity is better than the average for the Euro Area as a whole, which is expected to contract by 0.3% this year. Surely, this means that the ‘austerity’ medicine is working in Ireland, if, strangely not elsewhere? Well, no.

Back in Spring 2010 the Commission’s initial forecast for Irish GDP in 2011 growth was 3%. It is now estimating that growth was less than one quarter of that level, just 0.7%. Similarly, the initial forecast for 2012 growth was just 1.9% (made in Autumn 2010). Again, it is now expected to be about one quarter of that growth rate, at 0.5%. The outlook for growth is getting worse, not better.

As is well known, the GDP data can be misleading. As Ireland is a weight-station for overseas profits booked to avail of low taxes, other indicators are needed to gauge real activity. In Spring 2010 the Commission was forecasting that both employment and domestic demand would expand, by 0.4% an 2% in 2011. It now expects the latter to have contracted by 3% and to continue to do so over the forecast time horizon (til 2013). Employment was initially expected to grow by 0.4% in 2011. It is now assumed to have contracted by 2.1% and will not expand til 2013, according to these forecasts. Altogether the Commission expects that one in seven jobs will have been lost during the Irish Depression, even if its forecasts do not prove to be overly optimistic once again.

But what of the sole indicator which is now said to be targeted by the government and the Troika, the judge and jury of all economic policy, namely the structural (or cyclically-adjusted) budget deficit? The EU Commission now forecasts that this structural deficit (SD) will rise in 2013 to 7.9% of GDP, from 7.8% in 2012. This compares to a SD of 7.3% of GDP in 2008, when ‘austerity’ began.

In terms of the actual, measured deficit this is now expected to be 7.5% of GDP in 2013, compared to 7.3% in 2008. Even this miserable performance has been achieved by the simple expedient of cutting government investment. In 2008, in the dog days of the previous government the level of state investment was equivalent to 5.2% of GDP. It is now projected to fall to 2.3% of GDP. Without this decline, the actual deficit would be 10.4% of GDP.

The economy is not improving. Domestic activity is contracting and jobs will continue to be lost. Government finances are not improving- they are deteriorating. Apparently, An Taoiseach and others are ‘keen to talk about investment’ with the new French President. But it is only by the disastrous method of cutting investment in Ireland that a new sharp upsurge in the deficit has been temporarily postponed. Even so, both the SD and the actual deficit are rising.

‘Austerity’ isn’t working, even in terms of deficit-reduction.

The structural deficit just got worse

Michael Taft: The latest EU Commission projections are out and, if anything, they show an even higher structural deficit than what the Government is projecting. This provides a perspective on what additional austerity might be in store for us under the Fiscal Treaty.

The EU Commission’s Spring Economic forecasts shows Ireland‘s structural budget balance to be far and away the highest in the Eurozone – at 7.9 percent for 2013. The Eurozone average is 1.8. We are much higher than Greece (4.5 percent), Spain (4.8 percent) and Portugal (4.6 percent).

The EU projection compares unfavourably to the Government’s own projection of 6.9 percent for 2013. In nominal terms, the EU is projecting a structural deficit over €1.6 billion higher than the Government for next year.

What is particularly noteworthy is how sluggishly the deficit is falling. Between 2011 and 2013, factoring in €7 billion worth of fiscal adjustments, the structural deficit falls by a mere 0.5 percent. The Government is hoping for a fall of 1 percent.

The EU doesn’t make projections outward to 2015. However, if we were to take 2013 as the starting point and use the Government’s pace of deficit reduction, we’d find a structural deficit of 4.5 percent for 2015. If this holds, the structural deficit has deteriorated and the gap between the EU projection and the Fiscal Treaty target has now widened to €7.2 billion. The Government estimated that it would be €5.4 billion.

To date, the Government has refused to engage with this issue. Instead, it insists that increased investment and micro-economic reforms will raise our productive capacity and that this will be enough to close the structural deficit gap without any further fiscal adjustments. However, whatever about the talk of growth and investment, the Government is doing the exact opposite as discussed here.

This is, of course, all a bit speculative as we don’t have EU projections out to 2015. But, with the new EU projections, we could now be facing into a higher structural deficit than that projected by the Government with a much slower decline. All things remaining the same, this means that the gap between the structural deficit and the Fiscal Treaty target just got larger. And, potentially, the amount of austerity needed just got greater.

EU Commission forecast

Paul Sweeney: The European Commission today published its economic forecast for the European Economy including the Eurozone members (different colour on the linked map) for this and next year. It is a positive but guarded outlook for Europe.

On the map in the link you can see how each country has done in 2008 and ‘09, and is projected to do this and next year. The data covers growth (GDP), inflation, unemployment, the deficit and the current account balance.

Ireland is the worst performer by most, though not all, measures. Our unemployment has soared from just over 4% to 13.4% these days. It has “stabilised”, they say, happily? This rate is substantially less than Spain. Lithuania, Latvia or Estonia. But this is thanks to mass flight from the country and many staying at home and in education.

The Commission says that “The economic recovery is underway in the EU, although it is set to be a gradual one.” It says that the recession technically came to an end in the EU in the third quarter of last year. However, it also says that this was largely due “to the exceptional crisis measures put in place under the European Economic Recovery Plan,” but also owing to some other temporary factors.

The Commission says “the speed of recovery is forecast to increasingly vary across EU countries, reflecting the extent of the housing-market correction needed (massive in our case!), the size of the financial-services sector (also super massive in our case) and the degree of internal and external imbalances (not so good either)".

Ireland still off course on deflationary path to nowhere

Slí Eile: The assessment by the European Commission makes for chilling reading.
It states:

… Despite five consolidation packages adopted since mid-2008, these developments have also produced a dramatic deterioration in the Irish public finances, with the general government balance moving from a surplus position in 2007 to a double-digit deficit ratio in 2009 and government debt exceeding the 60% of GDP reference value in 2009.

The statement goes to confirm the need to reach a Government deficit of less than 3% of GDP by 2014. The Irish authorities are urged to press ahead with measures to raise taxes or cut spending or both. Either way, it is a position of continuing deflation as GDP – and with it tax receipts – are in freefall. Yes, freefall. The real value of GNP in the third quarter of 2009 declined by 15% in real terms compared to the total for the same quarter in 2008 (Deflation can be as great a danger as our surging deficit). With public spending set to rise or hold its own simply due to demographics or social welfare payments arising from increased unemployment Irish macro-economic and fiscal policy is not in a pretty place.
The Commission give an important clue about what we might expect in the next budget (which could be any time between June 2010 and December – I would guess closer to the June end unless there is a general election in the meantime). It states:

With a view to improving the long-term sustainability of public finances, reforming the pension system is another important challenge.

There you have it. Pensioners survived the 2010 Budget relatively intact (OK the Christmas bonus went). Next time it is their turn. Nothing is ruled out including:

• Further cuts in nominal public sector pay
• Further cuts in social welfare payments and tightening of rules
• Further cuts in capital spending and cancellation or postponement of major projects
• Further cuts in programme spending with implications for health care, education, research, local services
• Further ‘levies’ and service charges (water etc)

And yet, all of this may not be enough to placate the market gods. Moreover, all existing projections assume (naively):

• (explicitly) significant early turn round in the world economy(i.e. no double-dip)
• (implicitly) no major recapitalisations of our glorious banks
• (implicitly) emigration as a safety value to contain social discontent (and the high fiscal costs of unemployment and associated social costs)
• (implicitly) widespread social acceptance of this purgatory as a necessary evil to bring us to a better place.

The latter assumption will only hold true as long as most people take the view ‘I don’t agree with it; I don’t like it; but what can we do?; there is no alternative.
TINA
But, when people begin to realise that the strategy – if it could be called that – is not working and is not delivering jobs, remission of debt but is, instead, piling up debt and permanent loss of human skills and dignity – then there will be serious trouble and serious questioning of all that we assumed and relied on up to now.
At some point, someone, somewhere in high authority is going to say ‘this isn’t working’ – the deficit is stuck at such and such a percentage well above the 3% target set of the EU and agreed by the Government, here. Moreover, there will be political realities to address including noisy people on the streets. Large surplus & capital-lending countries will find it near impossible to back down.
I can’t see any chance whatsoever of Government, Unions and EU commission agreeing on an approach to reducing pension liability – which is what the coded quotation, above, is about.
In common with the Dublin consensus, Brussels sees the achievement of competitiveness as the key to recovery. This will be made up of cuts in wages, cuts in public spending (and therefore services) and investment in skills, R&D and new infrastructure (the sugar on the pill).
I am not clear on what is meant by the following sentence: ‘a modest package of stimulus measures to support economic activity of 0.7% of GDP in line with the European Economic Recovery Programme (EERP).’
However, it is clear that given the overall deflationary stance of fiscal policy since late 2008 talk of a stimulus is not in accord with what is going on. Rather, some redirection of spending within the overall total may be viewed as a stimulus. But, I would like to see more transparency around that claim.
The commission estimate that the (negative) impact on GDP arising from fiscal adjustment was 3.25% in 2009 and 2.5% in 2010 (page 7)
The Commission points to lack of appropriate data on many aspects of the consolidation programme. In particular, they go on to point out that the revenue and expenditure projections in the outer years are of an indicative nature and the consolidation efforts in these years are not underpinned by broad measures.