Why are companies so rich and states so poor?

The state is broke, and democratic government ineffective, because big business no longer pays tax.

The state is broke, and democratic government ineffective, because big business no longer pays tax

Get ready for some big numbers.

According to Bloomberg, citing a report by Moody’s, the credit rating agency, the total amount of cash currently sitting in the bank accounts of listed US non-financial companies is around US$1.6 trillion, a sum roughly equal to double the US Federal deficit expected next year.

If the same is true of the UK, and the consensus in the City of London is that it is, at least roughly, the amount of cash on call to British non-financial companies would be around £200 billion. That is enough to run the NHS for two years. Alternatively, it would keep the government in surplus for the next five years.

Let’s err on the side of modesty and assume we have over-calculated. Let’s say the real figure for the UK is closer to £100 billion. If that sum were to be taxed at the going corporate rate of 20 per cent, a rate significantly lower than that paid by a typical teacher or nurse, the government take would be £20 billion.

By contrast, Ed Miliband and Ed Balls hope to raise a paltry £1.2 billion from their dirty, messy mansion tax. You can already see the Daily Mail ferreting out spinster sisters who will face eviction from the family home where they have dedicated their lives to caring… etc, etc.

Why are companies so rich and states so poor? And is it not the poverty of states that is leading to disenchantment with democracy and the increasing attraction of political weasels like Russell Brand and Nigel Farage?

The answer to the first question is relatively simple. Globalisation has allowed big business to move production to where costs are lowest and marketing to where growth is highest. Competition for jobs has kept workers relatively docile, while the deflationary impact of global markets has justified keeping wages and salaries stagnant.

But the expansion and deepening of multi-lateral trade agreements through the 1980s and 1990s (EU Single Market, WTO, Nafta etc) was never accompanied by comparable reform of bilateral tax treaties. Ireland, Luxembourg, Switzerland, to name a few, are allowed to join the EU, the EEA, the WTO, but are not required, as a due for membership, to do anything to their extremely business-obsequious tax laws. The same Bloomberg article cited above points out that the entire cash pile of big American business is held offshore, in tax havens.

Added to this, monetary policy, of which quantitative easing has been the current era’s instrument of choice, has kept the cost of capital lower than at any time since the Black Death. So big business pays no tax, while its cost of capital is heavily subsidised by central banks whose liabilities, of course, ultimately lie with the state.

The profits of globalisation and low interest rates are hoarded in offshore cash piles because there is little point investing in economies that are not growing. Alternatively, our economies are not growing because excess capital is being hoarded instead of invested.

Both sides of the argument are true, but the lack of investment is not due to lack of need. The need is there, as we all know, in health and social care, housing, education, youth employment, infrastructure renewal, security. The problem is allocation, or misallocation. Capital is not being transferred from the private to the public sector because the normal transmission of corporate taxation has fouled up.

When a vote once every five years decides little more than the 2 – 3 per cent difference at the margin of the health service budget, we should hardly be surprised that democracy is seen as pale and pointless compared to the sweeping bravado of Brand, Farage, Marine Le Pen, the Tea Party, the Occupy Movement, even of Islamic State.

If listed companies were made to pay proper taxes, governments would have the resource to make meaningful decisions, and political parties would have the opportunity to present real, even dramatic choices. Democracy would be restored, at least in part, on the simple principle: no representation without taxation.

Leo Schulz is a freelance journalist and author

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16 Responses to “Why are companies so rich and states so poor?”

  1. Aldi

    Simplistic view of the flow of capital and the state’s role in the reproduction of corporate power. Ludicrous lumping together of Occupy Movement and Islamic State, Russell Brand and Nigel Farage, Obama with Osama and Chiang Kai-Shek with Louis Walsh.

  2. guidofawkes

    Why has no one thought of this before?

  3. GO

    “Let’s say the real figure for the UK is closer to £100 billion. If that sum were to be taxed at the going corporate rate of 20 per cent, a rate significantly lower than that paid by a typical teacher or nurse, the government take would be £20 billion.

    By contrast, Ed Miliband and Ed Balls hope to raise a paltry £1.2 billion from their dirty, messy mansion tax.”

    Huh? There’s no comparison. The mansion tax will raise £1.2 billion or more *every year* as properties continue to rise in value and their owners continue to earn high incomes (whether from those properties or not). But you couldn’t raise £20 billion pounds *every year* by taxing accumulated wealth at 20%, because the pot would keep shrinking. It would be a one-off windfall.

    You can certainly make a case for levying more tax on wealth, but you can’t skim anything close to 20% off some self-replenishing pot every year. When a Land Value Tax is proposed, for instance, the suggested rate is usually 5% or less; it’s intended to be payable out of the income generated by the land/wealth, not by handing a portion of the land/wealth to the state.

  4. Guest

    Great, I’m sure you have, but what about the article?

  5. blarg1987

    Probably have, however a politician is not going to jeopardise any future job offer by shafting the people who fund them or their future job prospects.

  6. George Laird

    Dear All

    A question was asked:

    “Why are companies so rich and states so poor?”

    I have decided to post the answer which is that politicians have been bought off, however that doesn’t explain it fully away, there is a lack of talent plus others have their eye on directorships of companies.

    Hope this helps.

    Lucky that we can see the evidence in the members register of interests, not a new problem by any means.

    Yours sincerely

    George Laird
    The Campaign for Human Rights at Glasgow University

  7. Norfolk29

    What “No representation without taxation”. I remember a country, the USA I think, actually used a similar slogan (no taxation without representation) that as an excuse for a war of Independence. If, and its a big if, only companies that paid at least 30% tax on their gross profits were eligible for government contracts and Investment Grants, we might get some progress. However, even Gordon Brown never managed to achieve this and I doubt if George Osborne would upset his paymasters by suggesting it.

  8. Anna Syngellakis

    Could you, please, give a link to the Moody’d report or at least to the Bloomberg report? it is useful to be able to go to the source of the info and make a first hand judgment.

  9. mdjcole

    The British state owns a property which yields a gross revenue of nearly $3tn per year. From that it extracts a profit of about 40%, or in the region of $1.2tn. It has furthermore secured large debts against this property, which monies it has also spent.

    By what standard can one describe this behemoth as poor?

  10. The_Average_Joe_UK

    Anyone seen an article on this site, or Labourlist on how wealth could be created to make the poorest better off

    No you haven’t. The left have no idea how. The left is all about classwar and jealousy.

  11. Leo Schulz

    The £20 billion would be tax due on company profits that have been siphoned into tax shelters. On that basis, the 20% rate is correct. It would to an extent be a windfall as the money has accumulated over several years. The comparison with the mansion tax was to give a sense of scale. £20 billion, as stated, is a fairly conservative estimate. It could be as much as £40 billion or more. That is a huge, huge amount of money, and it is legitimately owed to the Exchequer. The mansion tax would take decades to yield as much and would throw up all kinds of unfortunate anomalies because it is a tax on family homes regardless of income.
    Corporation tax is ongoing. The reason these sums are accumulating is that the transmission system has fouled up, as discussed in the post. An indication of the amounts we are losing year by year might be seen in the recent case of Facebook. eMarketer estimates they made £310 million. The due tax would be £65 million, but the money was siphoned to Ireland and Facebook was instead paid £185,000 by HMRC. If every business in the FTSE100 paid, on average, an additional £65 million, that would be £6.5 billion – 5.5 times the mansion tax. If every company in the FTSE350 paid as much, that would be £22.8 billion every year.

  12. Bradley Allsop

    We’ve been trying that for a while- a lot of people are still pretty fucking poor

  13. Guest

    Neoliberalism is to make the rich rich, not the poor rich.

    Too rich for your blood, though, yea.

  14. Guest

    Keep blaming the left for your views, as you engage in your usual PC bigotry and explicitly want the poorest to be far, far worse off.

  15. David Davies

    A question on Sybil Fawlty’s Specialist Subject?

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