Brexit, don’t forget how we got here

12 June 2017

Jamie Morgan - Department of Economics, Analytics and International Business, Leeds Beckett University

Understanding Brexit requires us to consider the political economy of tax justice and the abuse of wealth protection

At a time when a general election has dominated the press for the last two months and Brexit has been a shadow of anxiety – a most remarkable event that the political parties have been steadfastly refusing to remark upon in any meaningful way – it is important to recall just how we got to the current state of affairs; a state that Craig Berry refers to as ‘undemocracy’.  A narrow majority decision based on (at best) limited information has become a fait accompli empowering government to pursue a position regarding which the populous are still in ignorance.  It is difficult to see what kind of mandate follows from this, but it is not difficult to see that the longstanding problem is one of increasing separation between citizenry and those who they elect to represent them.

Photo by Elyse Chia on Unsplash

Disintegration, distrust and any number of additional alliteratively phrasable and parsable terms and concepts have general and specific causes.  If we are to understand how we got here there is a political economy to be considered.  Financialisation has also meant the accumulation of financial assets creating wealth stocks and income flows for the few far more than for the many. Inequality is a process based on asymmetrical ownership of such assets.  This has been both a product of and a contribution to the difference between a 1% and the 99%.

One important general cause has been the capacity of elites to capture, concentrate and protect wealth from other claims.  This has been facilitated by the conflation of wealth creation and wealth capture, and a general absence of a coherent concept of rent in mainstream economics, both in national income accounts and in analysis of economic sectors.  As many central bankers now acknowledge, money creation is understood by few. Commercial and investment banking look quite different when considered as a circuit for money creation that mainly feeds and feeds off asset bubbles.  As many post Keynesians, including Michael Hudson, have argued the modern policy language of progress has actually been the reversal of the progressive policy age in which national governments were committed to reducing income inequality, preventing social polarisation and supporting productive investment, particularly through infrastructure.  The language of free markets has colonised the terrain of free expression and liberty in the name of growth linked to trickle-down, but has more-often-than-not led to delegation of control to oligopoly and to oligarchy.   The discourse that has emerged around rebalancing in the UK since the financial crisis has not altered this.

Wealth capture raises important issues regarding how this capture is achieved and whether we consider the ways in which it is achieved just, socially acceptable and broadly economically beneficial.  In order to express this in international political economy theory, Leonard Seabrooke and Duncan Wigan have introduced the concept of global wealth chains.  The specific problem of tax avoidance is one that can sit within this concept and within the general problem of how inequality is produced.  Tax avoidance is not a subject that typically provokes academic excitement, but its consequences are a main cause of cynicism with political systems.  As general international politics journals, such as International Politics and Globalizations are increasingly recognizing, it is too important to be ignored.  The European Commission estimates tax evasion and avoidance within the European Union to be around €1 trillion per annum. Kimberly Clausing estimates global tax avoidance at more than $280 billion per year and more than $77 billion for just the US.

Despite some important policy initiatives, such as country-by-country reporting, developed through the OECD and G7 sponsored Base Erosion and Profit Shifting project the problem of tax avoidance persists.  More comprehensive solutions, such as unitary taxation, also exist.  The work of expert activists remains extremely important. Richard Murphy’s work (including for SPERI on tax spillover analysis with Andrew Baker) and website provide useful resources. Murphy is one of the original prime movers behind the Tax Justice Network as is Sol Picciotto.  Picciotto has also done important work highlighting the contribution of tax avoidance to the dark side of globalization for the International Centre for Tax and Development working paper series.

According to Seabrooke and Wigan, Brexit has changed the context in which global wealth chains will enable wealth protection.  Like all countries, the UK confronts a tension between motives to ensure that taxes are collected, the tax base is maintained and a general commitment to the tax system is reproduced amongst citizenry, and the divisive inter-governmental tendency to try to attract corporate investment in ways that also facilitate dubious practices for the reporting of corporate income.  Brexit creates more pressure for the UK to engage in tax competition and to augment its tax haven status.  Britain is set to leave the European Union at a time when it has become increasingly obvious that a problem like tax avoidance can only be addressed collectively.

The European Union is the basis for a unitary tax solution to corporate tax avoidance termed the Common Consolidated Corporate Tax Base (CCCTB), which was relaunched in 2017.   It is perhaps ironic that the main sponsor of the CCCTB has been the European Commission rather than the European Parliament or member states. Some on both the left and right argue that Brexit is a response to the lack of democratic accountability in Europe.  At the same time, if Brexit is an attempt to return sovereignty to the UK one must ask sovereignty for whom?  This returns us to Berry’s ‘undemocracy’.  Wealth capture requires also a capture of the common sense of economics and of policy.  Continued tax avoidance within a financialised system encourages the shifting of tax onto the income of employees and onto VAT.  Corporations, meanwhile, benefit from roads, utilities, and an educated and healthy workforce that they resist paying for (whilst claiming that wealth creation produces the wages that pay for these – a point that easily reverses – the labour of workers creates the scope for wealth that is captured without paying a share).  In a strange sense the distance of the Commission has enabled it to support the CCCTB and take the position of all citizens in ways individual states have been reluctant to do, though as the Diem25 movement makes clear, reform in Europe is still important.      

Once the initial furore surrounding the general election subsides Brexit will once again emerge as a fundamental issue.  It is important to realise that Brexit must eventually mean something beyond the meaningless mantra of self-referentiality and aspirations to get the best deal.  Tax competition between states that enables tax avoidance by multinational enterprises in particular is economically harmful and undermines the legitimacy of the state.  How this is addressed will be in many ways a barometer for the contemporary nature of the state.    

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