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Kickstarting taxation

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The Starbucks and Googles of this world will always find tax loopholes. We need to link taxation once again to civic virtue and demonstratable social impact. We'll get them on the spirit of the law, not the letter.

Josh Booth
3 May 2013

George Osborne is cracking down on tax avoidance. After a scandal in which it has emerged that some major multinationals have paid little or no UK corporate tax, the head of Britain’s Treasury has announced his mission “to turn concern over tax avoidance into a catalyst for change”. Osborne, formerly known as the City-boys' puppet in power, has turned into the Great Enforcer, riding his “new agenda of transparency” into Ethiopia, Kenya, Ghana, Uganda and Tanzania.

But the domestic scandal over tax avoidance - the outraged bluster of Margaret Hodge’s mock trial of the Great Avoiders before the UK Public Accounts Committee; David Cameron’s barely-veiled threat at Davos to corporations who needed to “wake up and smell the coffee”; UK Uncut’s shop-floor protests - has done little damage to its targets. Even Starbucks, which felt compelled to donate £10 million to the Exchequer, apparently because it had listened to customers' concerns, has ended up paying remarkably little in public contributions. 

More worrying still is that the focus on tax avoidance and tax enforcement has been a distraction from the dysfunctionality of our tax system. This is unfortunate. It’s unfortunate because the institutions that govern public contribution in the UK are premised on a set of principles that inevitably benefit the already wealthy in unintended ways. Strengthening these institutions - and helping other, “developing” countries to strengthen these institutions too - is an admirable crusade that will surely bring huge benefits, both to these countries' citizens and to Osborne’s reputation. But an excessive focus on enforcing tax law could prevent the establishment of effective systems better-suited to encouraging public contribution - systems that have emerged from and succeeded in the developing world to which the Treasury is so keen to offer assistance.

Tax in Utopia

After the slow transition to democracy in Brazil in the late 1980s an innovative institution for municipal governance was established in the southern city of Porto Alegre. In 1989 a city-wide scheme of participatory budgeting began, giving every citizen a voice in directly deciding municipal expenditure on capital projects in a year-round series of town-hall meetings. There is evidence to suggest that, over the twenty-five years of its operation, the opportunity to participate directly in local politics has resulted in lower levels of tax avoidance among wealthier middle-class residents. But whilst such a political system has operated successfully in Porto Alegre it seems unlikely that it can or will be transposed to other settings, let alone other scales. It may be a “real utopia” but for most political settings it will remain an unattainable one.

Still, there is something in this idea of participation - in the idea that people may give because they, and everyone else, can see how their money is being used. Last summer I spent a month in Siena, home to the wild and famous horse race “Il Palio”. Siena is a peculiar and peculiarly beautiful place, its delicately spiralling cobbled streets opening out in the folds between hills like the pages of a popup book. To stop yourself getting lost, as in other medieval cities, you have to lay map-like mental images to one side and focus on the details: you must remember to turn left at the carving on the corner of this house, right when you glimpse the clock tower. This enforced attention to detail is built into Sienese political institutions. At the lowest level of municipal government, the city is still managed by its medieval patchwork of contrade, neighbourhood-based collectives that raise money to be spent on local projects, including the lavish feasts that run for days after a contrada’s horse has won the Palio. In Siena you are born into a contrada as you are born into a family, and your commitment to it is almost as strong. Defection to another contrada is a form of betrayal.

A few days after the Valdimontone contrada won the Palio last August, some friends and I walked to the contrada’s neighbourhood centre, perched at the tip of a hill with the city unravelling below, and sat down in the shade to enjoy the view. Still experiencing the hospitable glow that victory bestows, a contradiolo came out to us carrying a tray of glasses filled with Aperol. He sat and drank with us, talking with pride about the medieval system that had brought his contrada the glory of the Palio. I asked him about money: how is it decided who contributes to the contrada’s funds, and how much each pays? “Each pays what he can”, he replied. “If they are wealthy, we encourage them to pay more”. At this level of intimacy, where everyone in the contrada knows everyone else and everyone can see the goods to which each has contributed - a bursary given to this child to attend school, the restoration of this carving on the corner of this house - it’s not difficult to see how transparency really does enforce contribution.

There was something of the republican ideal of civic virtue expressed in that conversation on Valdimontone’s hilltop perch - a glimpse of a level of Italian political functioning that rarely comes across in news media obsessed with the theatrics of Berlusconi-era national politics. It would be easy, after a only a month in this strange modern-medieval world, to idealise Siena’s contrada-based politics, about which what you most frequently hear as a visitor is that “no outsider can understand it”. Nonetheless, loyalty, obligation, visibility, intimacy and detail all function here to make public contribution a matter of civic responsibility, and a prerequisite of maintaining local reputation. Even Monte dei Paschi di Siena, the oldest surviving bank in the world, whose headquarters dominate the hilltop to the northwest of Valdimontone, has funded capital projects including biotechnology research labs on the city’s outskirts. Monte dei Paschi’s recent financial troubles aside, there has been a sustainability to this system that contrasts uncomfortably with the crumbling national tax system over which Osborne presides.

Taxable virtue

Google’s Eric Schmidt is unlikely to deliver Aperol to our tables and tell us about the virtues of contributing to a feast celebrating a horse that has run three times round a track of clay and volcanic ash. But the self-presentation of corporations such as Google is not too far away from that of the upstanding medieval republican citizen. In each polity in which it operates, Google trades on the image of a benevolent benefactor that just happens to make profit on the side - a model of republican virtue. The importance of this image shouldn’t be underestimated: it’s integral to Google’s success, and Google would willingly pay to maintain it.

What indignation about Google’s tax strategy misses is that public tax avoidance hardly damages this image at all. Everybody knows that tax systems are somewhat arbitrary, few people willingly pay their taxes, and most would probably go out of their way to avoid them. It is precisely because very few of us are compelled to pay tax by a sense of obligation - most of us pay because we have to - that multinational corporations can get away with simply sticking to the letter of the law. As citizens in our twenty-first century nation-states, they behave no worse than the rest of us. (See the comments at the foot of this Spectator article for some idea of how many view corporate tax avoidance as a justifiable practice.)

We might think that any system that attempts to establish obligations once and for all in a set of rules is bound to fall short of its aims. Circumstances change: the state’s wars, which were the original reason for the establishment of many modern tax systems, come to an end. At some point after the wars have ended, the spirit of the law will get lost, and the moral case for adhering to anything but the letter of the law will become muddied, blurred. And at that point it will be those who best understand precisely what the letter of the law says and what it doesn’t - or those who can afford to employ experts who understand this - who will benefit most. It’s Google and Starbucks who really benefit from a rule-based system of public contributions whose institutional resources are focussed on reinforcing the letter, rather than the spirit, of the law.

Porto Alegre’s experience suggests that constant reaffirmation of the republican spirit in which taxation is imposed helps to promote compliance. Tying the payment of taxes - or their non-payment - to specific projects and municipal needs means that the letter of tax law is not left hanging, uncoupled from the spirit on which it was originally encased, vulnerable to being skirted around by the wealthy. But in this case, reaffirming a republican spirit depends on a hard-won set of quasi-republican political institutions.

Given that what has been implemented in Porto Alegre is unlikely to be implemented by a state, how can governments get corporations to pay according to a republican spirit? What kind of institutions could be established that would exploit Google’s self-proclaimed republican virtue and hold it to task if it failed to live up to its own image?

Scandal and the spirit of the law

Ironically it may be that Starbucks, another Christmas tax-evasion villain, can provide us with the answer. On December 6th last year, in what The Economist referred to as a “pioneering effort to transform tax into a marketing expense”, Starbucks decided voluntarily to give £10 million to the UK Exchequer. Many saw this as a feeble tactic to distract public attention from the paltry £8.6 million it has paid in UK taxes over the last 14 years. But maybe we should allow our attention to be distracted for a moment. Look past The Economist’s cynical description of its donation as a “marketing expense” and you can detect a similar motivation to that which keeps republican virtue in check. Yes, this donation was made to patch up a damaged corporate image; but that doesn’t exclude the possibility that it also resulted from a sense of obligation.

Whether it was or wasn’t simply a marketing expense, the important point is that the scandal that blew up around corporate tax evasion provided the opening for Starbucks to fulfil its obligation. What created this opening for Starbucks and not Google was thespecific nature of Starbucks' evasion: whilst it was telling a story of profitable success to its investors in private calls, publicly - and to the UK’s tax authorities - it was declaring losses. Starbucks' apparent dishonesty stood in contrast to its competitors' honesty, damaging its image as a “citizen” like any other. Google’s transparent tax evasion, on the other hand, could be presented as consistent with its image as an honest upstanding citizen that behaves as any other honest, upstanding citizen would, doing its best to make as much money within the law’s constraints. Google was doing nothing worse than many other multinational companies, including its competitors Facebook and Amazon.

Because of the ease with which it could be suggested that everyone is involved in tax avoidance, this became a scandal whose outcome was not a renewed commitment to contributing to society, but rather a renewed commitment to honesty. By contrasting Starbucks' actions with those of corporations in a similar position, it was made clear that Starbucks could have been more honest had it chosen to: in specific, identifiable situations, it could have behaved better than it did. But no-one could point directly to the good that Google was failing to do by avoiding tax - no-one could say “look, Starbucks gave money that helped build ten schools and five hospitals, and you contributed nothing”, partly because Starbucks didn’t give any more money (and nor did many other corporations), and partly because connecting tax contributions directly to outcomes just isn’t possible with our tax system. The republican spirit of contribution couldn’t be reaffirmed because the reasons underlying this spirit are too opaque to be identified.

Kickstarting tax

Perhaps what’s needed, then, is some kind of institution that transparently connects contributions to particular public goods - one which allows us to create scandal when one corporation falls down in its contribution when compared with others. This institution would exploit not the letter of the law - which is multinationals' plaything - but rather its spirit, exploiting corporations' self-image as citizens exhibiting republican virtue. It would, in other words, be something like a national Kickstarter, allowing corporations to “market” themselves as virtuous by giving to specific projects with tangible, and tangibly good, outcomes.

As an online, open crowdfunding platform, Kickstarter’s main virtue is that it links contribution directly to outcome in a public way: it provides the institutional framework for the spirit of giving to become as compelling as the letter of the law that underpins regular financial transactions. A Kickstarter-based system running in parallel to existing tax institutions would provide a transparent, national marketplace for corporate philanthropy where the contributions of various corporations could be compared directly with each other - a marketplace which would provide the evidence for effective scandal to be created around failure to contribute fairly to a common good.

Were this a reality, our indignation could be directed not at Starbucks' tax avoidance - which is probably not going to end, and around which it is difficult to create a scandal that has any effect. Instead it could be re-directed at the size of the donation that Starbucks chose to make voluntarily. Is this enough for a corporation that took £197.2m in net revenue over 2012? Is a £10 million donation consistent with Starbucks' corporate self-image? And is it acceptable that when Starbucks has given £10 million, the religiously pure Google has given nothing?

The republican model of Porto Alegre’s participatory budget may be unrealisable, but there is no reason why a transparent institution that embodies some of its republican spirit can’t be created in parallel to the tax system. (Though there is evidence to suggest that in the Democratic Republic of Congo, much poorer in GDP per capita terms than Tanzania, “mobile participatory budgeting” can successfully - and in some cases dramatically - reduce tax evasion. The World Bank observed a 16-fold increase in tax compliance after it piloted mobile participatory budgeting in Ibanda.) At the time that participatory budgeting was established in Porto Alegre, Brazil was, of course, a “developing” nation. Much richer than George Osborne’s chosen targets for his “new agenda of transparency” perhaps, but developing nonetheless. Its administration’s focus on institutions that reaffirm the spirit of the law through participation and not just its letter could be something that Osborne and his fellow tax crusaders would do well to heed.

This piece is part of the Democratic Wealth series, hosted by OurKingdom in partnership with Politics in Spires.

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