Evasion of Tax and Other Responsibilities

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  • by Anup Shah
  • This Page Last Updated Wednesday, September 14, 2005

As various corporations improve their profits and become increasingly wealthy and powerful, the owners and leaders naturally wish to ensure ways to protect and continue the systems that have given them these possibilities. Throughout history, powerplay and politics have resulted in the elite of the time instituting policies that will allow them to benefit. Often, it will not benefit the majority, and if it does, it is only because it does not impact the elite negatively. Trade wars, cold wars and hot wars have resulted over the acquisition of wealth and resources and the maintenance of the hegemonic structures. The Cold War, for example, was partly about maintaining old centers of capital against other rising centers. World War I and II were also wars between imperial powers over wealth and resources.

Today, some multinational corporations wield considerable wealth, power and influence. Indeed, some of the larger corporations have more power and influence than many nations.

Corporate Welfare

Corporations and corporate-funded think tanks, media and other institutions are often the ones that loudly cry at the shame of welfare and the sin of living off the government and how various social programs should be but back due to their costs. (Usually the poorest of the poor are recipients of some sort of government assistance, if it exists at all. It is usually not enough for most people. In developing countries, for example, harsh IMF, World Bank-imposed structural adjustment policies mean even more cut backs on public expenditure, where the poor get hit the hardest.) What is less known though is the amount of welfare that corporations receive.

Corporate welfare is the break that corporations get both legally and illegally through things like subsidies, government (i.e. public) bailouts, tax incentives and so on. Corporations can influence various governments to foster a more favorable environment for them to invest in. Often, under the threat of moving elsewhere, poorer countries are forced to lower or even nearly eliminate certain corporate taxes to these large foreign investors. (This does not help lead to the level playing field that pro corporate-globalization advocates claim.)

Corporate Crime

When we talk about crime, we think of the violations of law caused by individuals, some of which are horrendous. However, almost rarely talked about (especially in corporate-owned media) is the level of crime caused by corporations. Such crime includes evasion of taxes, fraud, ignoring environmental regulations, violating labor rights, supporting military and other oppressive regimes to prevent dissent from workers, including violent crime against workers, and so on.

In the US, for example, one professor estimates that corporate crime costs the country about $200 billion a year.

Side Note

Since writing the above two paragraphs originally when this page was created, the issue of corporate crime, in the U.S. particularly has taken on a whole new dimension. Events after September 11, 2001, have highlighted massive corporate failures and controversies all the way up to the President. While for now it is beyond the scope of this page to discuss all those issues (though some points are made below, as well as additional links), Benjamin Barber, professor of Political Philosophy is worth quoting, as he highlights an important issues:

But business malfeasance ... arises from a failure of the instruments of democracy, which have been weakened by three decades of market fundamentalism, privatization ideology and resentment of government.... The truth is that runaway capitalists, environmental know-nothings, irresponsible accountants, amoral drug runners and antimodern terrorists all flourish because we have diminished the power of the public sphere. By privatizing government functions and refusing to help create democratic institutions of global governance, America has relinquished its authority to control these forces.

— Benjamin R. Barber, A Failure of Democracy, Not Capitalism, New York Times, July 29, 2002

Barber is highlighting that even in the most freest of societies, the United States, corporate influences have been so strong as to undermine fundamental democratic principles.

Before and since September 11, various companies and ordinary employees, shareholders and others have suffered because of accounting irregularities being highlighted, that showed that inflated stocks and other estimates of the company’s status were seriously wrong. More than just a few “rotten apples” that various economists and business elite tried to describe as the cause, is the system itself. As the previous link also points out, the systemic problems had long contributed to inequality and other problems, but now that even other aspects are being affected, it is now highlighting the deeper problems even more:

The crisis is not the result of a few bad apples. The entire barrel is rotten. In this case, the barrel is the framework of rules and regulations for business. Not every executive is a fraud or cheat, but if the system permits cooking the books, defrauding investors, overcompensating executives, rigging prices, polluting the environment, breaking unions and abusing workers, then it puts pressure on every business to move in those directions. The failures of the much-vaunted U.S. model of deregulated cowboy capitalism were already evident in growing inequality and insecurity and a declining quality of life. Now even much of the positive side - growth, profits, new businesses, productivity, soaring stock markets - has been called into question as an accounting chimera. It’s time to question the whole model - lock, stock and barrel.

— David Moberg, 10 Lessons from the Corporate Collapse, In These Times, August 16, 2002

Tax Avoidance

Through offshore tax havens and fraud, and through transfer pricing, billions of dollars go untaxed. Estimates range from $50 billion to $200 billion of revenue losses. For example, an Oxfam report on tax havens, makes a “conservative estimate, [that] tax havens have contributed to revenue losses for developing countries of at least US$50 billion a year. To put this figure in context, it is roughly equivalent to annual aid flows to developing countries.” And they stress that this is a conservative estimate as it “does not take into account outright tax evasion, corporate practices such as transfer pricing, or the use of havens to under-report profit.”

Individuals too have been involved in huge amounts of capital diversions. For example, former dictator of Nigeria, Sani Abacha, and his associates are said to have diverted over $55 billion to private accounts in foreign banks — Nigeria currently suffers a $31 billion external debt burden.

Why is tax revenue important?

Some may wonder why taxation is important. One perspective is that less tax paid to the government means more for individuals, who are best placed to make appropriate use of it, and thus contribute to the economy. That may work well for rich nations and wealthier segments of society. But for poor countries, they have another situation to deal with: the political pressures from rich countries:

Tax is an obvious source from which countries can generate cash to fund human development. It is also one of the means by which they can begin to free themselves from dependence on handouts and the punitive conditions often attached to aid. Tax can help countries determine their own route out of poverty.

— The Shirts Off Their Backs; How tax policies fleece the poor (PDF Format), Christian Aid, September 2005, p. 6

Why don’t poor countries raise sufficient tax revenues?

It is not by accident that poor countries have been unable to increase the amount of revenue they raise through taxation. There are three specific tax strategies that have hindered them:

  1. Tax competition between countries means poorer nations have been forced to lower corporate tax rates, often dramatically, in order to attract foreign investment.
  2. Trade liberalisation has deprived poorer countries of taxes on imports. In some cases, these had yielded up to one-third of their tax revenue.
  3. Tolerance of tax havens has helped wealthy individuals and multinational companies (as well as criminals, corrupt leaders and terrorists) move their wealth and profits offshore to avoid paying tax.

… As taxes on the profits of business, on the earnings of wealthy individuals and on trade have diminished, VAT [Value-Added Tax, also known as sales tax, or goods and services tax] has increased. This is regressive and shifts more of the burden of taxation onto the shoulders of poorer people. Moreover, VAT has not replenished tax revenue lost elsewhere. According to the International Monetary Fund (IMF), in low-income countries, for every US$1 lost in trade taxes, only 30 US cents has been recovered in sales and consumption taxes.

— The Shirts Off Their Backs; How tax policies fleece the poor (PDF Format), Christian Aid, September 2005, pp. 4, 5

What are the impacts of tax havens on poor countries?

There are a number of impacts of tax havens on developing countries as Tax Justice Network reports:

  • Secret bank accounts and offshore trusts encourage wealthy individuals and companies to escape paying taxes
  • The ability of transnational corporations to structure their trade and investment flows through paper subsidiaries in tax havens provides them with a significant tax advantage over their nationally based competitors. In practice this biased tax treatment favors the large business over the small one, the international business over the national one, and the long-established business over the start-up. It follows, simply because most businesses in the developing world are smaller and newer than those in the developed world and typically more domestically focused, that this inbuilt bias in the tax system generally favors multinational businesses from the North over their domestic competitors in the developing countries.
  • Banking secrecy and trust services provided by global financial institutions operating offshore provide a secure cover for laundering the proceeds of political corruption, fraud, embezzlement, illicit arms trading, and the global drug trade.
  • The offshore economy has contributed to the rising incidence of financial market instability that can destroy livelihoods in poor countries. Offshore financial centers (OFCs) are used as conduits for rapid transfers of portfolio capital in to and out of national economies which can have a highly destabilizing effect on financial market operations.

Why have tax havens in the first place and who benefits?

A number of reasons including the following:

  • The main appeal of tax havens come from their inherently secretive nature;
  • Tax havens imply low- or no-taxes to be paid;
  • This makes it easier to avoid paying tax.

Christian Aid also is worth quoting:

Tax havens have allowed multinational companies, rich individuals, corrupt leaders, criminals and terrorists to keep their wealth away from the prying eyes of national tax authorities. In the words of one tax expert, “I have never come across any reason for people to set up an offshore trust [in a tax haven] other than to avoid tax.”

— The Shirts Off Their Backs; How tax policies fleece the poor (PDF Format), Christian Aid, September 2005, p. 10

As noted by the Tax Justice Network (an organization working for international tax co-operation and against tax evasion and tax competition) in a report titled Tax us if you can, just “one per cent of the world’s population who hold more than 57 per cent of total global wealth use these havens to escape taxation.”

How much money is held in offshore tax havens?

It is not clear, but it is estimated that there is at least US $11.5 trillion held offshore in wealth and yet as the Tax Justice Network adds, “this does not include the laundered profits of businesses which operate through offshore tax havens to avoid tax. Nor does it include the financial assets of those whose wealth amounts to less than US$1 million. The total sum of money currently held offshore is not known.”

How much potential tax revenue is lost through off-shoring?

Tax Justice Network reports that because tax authorities continue to be mainly limited to powers within their own countries, the result has been a massive loss of tax revenue. As a result, based on the $11.5 trillion above, they estimate that $255 billion is lost each year to governments around the world because of the no or low taxation of funds in offshore centers. Importantly, they reiterate, this estimate does not include tax loses arising from tax competition or corporate profit-laundering.

How much profit laundering is there?

Profit laundering is the moving of profit from the countries in which it was earned and where it would incur tax, into tax havens. Christian Aid reports that the total estimated dirty money flowing into the global banking system is $1 trillion. Breaking that down:

Amount siphoned from the developing world
$500 billion
Amount of profit laundered by multinational companies
$200 billion
Amount of profit laundered by individuals and criminals
$250 billion
Amount lost through corruption
$50 billion

What is Tax competition and why is it bad?

In short, tax competition is about countries out-competing each other to offer the lowest taxes possible to attract foreign investment.

Tax Justice Network describes the negative impact that Tax Competition has on developing countries:

Faced with the pressures of the globalisation of capital movements and the threat that companies will relocate unless given concessions on lower regulation and lower taxes, governments have responded by engaging in tax competition to attract and retain investment capital. Some states with limited economic options have made tax competition a central part of their development strategy. This inevitably undermines the growth prospects of other countries, as they attract investments away from them, and has stimulated a race to the bottom.... a recent empirically based study in the United States has found:

There is little evidence that state and local tax cuts – when paid for by reducing public services – stimulate economic activity or create jobs. There is evidence, however, that increases in taxes, when used to expand the quantity and quality of public services, can promote economic development and employment growth.

If this conclusion applies to a relatively high tax economy like the United States, it is even more applicable to economies in south Asia and sub-Saharan Africa, where social and economic development is held back by under-investment in infrastructure, education and health services. Proponents of tax competition have never answered the crucial question of how far it should be allowed to go before it compromises the functioning of a viable and equitable tax regime. Taken to its logical extreme, unregulated tax competition will inevitably lead to a race to the bottom, meaning that governments will be forced to cut tax rates on corporate profits to zero and subsidise those companies choosing to invest in their countries. This is already happening in some jurisdictions. The implications of this for tax regimes and democratic forms of government around the world are dire.

— Tax Us If You Can (PDF Format), Tax Justice, September 5, 2005, p. 5

Where did the idea of tax competition come from?

Tax Network Justice summarizes:

Many in business and pro-business political actors argue that nations should compete with one another to attract inward investment from international business by offering:

  • lower tax rates on profits
  • tax holidays
  • accelerated tax allowances for spending on capital assets
  • subsidies
  • relaxation of regulations
  • the absence of withholding taxes
  • other forms of tax inducement

This process, called tax competition, has been widely adopted across the world and has become a key element in shaping world-wide investment flows. The IMF, World Bank and EU have all, in varying ways, encouraged developing countries to compete in this way for resources.

— Tax Us If You Can (PDF Format), Tax Justice, September 5, 2005, p. 17

But the Network goes on to mention that this is “fundamentally flawed as a development strategy because it limits the control any country can have over taxation policies and creates harmful distortions.”

In addition to being “anti-democratic” the notion of making nations compete with other this way does not make sense for its citizenry (though it does for multinational companies who can have a “choice” of which country to invest in.)

How did tax avoidance come about in the first place and who are the main actors?

Tax Justice Network provides a decent summary in the same report mentioned above (see chapter 3). In short, the main players who promote what they call “tax injustice” are:

  • accountants
  • lawyers
  • banks
  • transnational corporations
  • tax haven governments
  • tax avoiders and tax evaders

In addition, the Network says that this whole idea probably started with the US and the British Empire. “The ‘offshore’ phenomenon probably began in the US when states such as New Jersey and Delaware realised that they could lure businesses from more prosperous states by offering tax advantages on condition that they register in their states.” And then, “The first real cases of international tax planning occurred in the British Empire in the early twentieth century when wealthy people started to use offshore trusts established in places like the British Channel Islands to exploit the curious British phenomenon of the separation of taxation residence and domicile.”

In the 1920s, the UK found new ways for the “internationally mobile person” to avoid tax “when a UK court ruled that a company incorporated in the UK was not subject to UK tax if its board of directors met in another country and it undertook all its business overseas. At a stroke, the concept of the separation of the place of incorporation of a company and its obligation to pay tax had been created. This concept survived in UK law until the 1990s, by which time it had become the basis for the operation of most tax haven corporations throughout the world.”

In the 1930s Switzerland offered “internationally mobile people” residency, only requiring them to pay a fixed, pre-agreed amount, each year, not varying with income, and not disclosed. “This concept has been widely copied” the Network also noted.

The Network continues by adding that “the other major Swiss contribution to tax injustice is banking secrecy, a concept which they developed at the time of the French Revolution (for the benefit of the French aristocracy) but which became enshrined in Swiss law in the 1930s. The Swiss believed at the time that it provided them with a competitive advantage as a small, land-locked state in a hostile European environment.”

This all happened not by chance, but, as the Network also notes, by plan: “They were thought up by lawyers and accountants and were exploited by them and their bankers for commercial gain.”

Today, of the 72 tax havens, almost half are British territories, dependencies or Commonwealth members. (Britain alone loses some US $170 billion a year in avoided taxes.)

Tax Shelters and Avoidance in the US

A PBS Frontline broadcast on tax shelters in the US revealed some important issues in the US alone.

The scale of the problem

Estimating how much abusive tax shelters cost the U.S. Treasury is very difficult. Some estimate the cost is in the tens of billions every year and a few deem it as high as $50 billion a year.

... Whatever the actual cost, former IRS Commissioner Rossotti says that abusive tax shelters are the “biggest single source” of a larger problem — the gap between taxes owed and taxes collected. The total uncollected tax gap, Rossotti says, is somewhere in the range of $250 to $300 billion per year — which, he says, is the equivalent of a 15 percent surtax on the honest taxpayer.

— Frequently Asked Questions; Tax Me If You Can, Frontline, PBS, February 19, 2004

In an introduction to the tax shelter report, Frontline notes that “The General Accounting Office estimates that illegitimate tax shelters cost the government more than $85 billion in recent years.” (It would seem that this number is a conservative estimate, if, as per further above, some deem a cost of $50 billion per year.)

Why a rise in tax shelters in the 1990s?

Bogus tax shelters in the 1970s and 1980s were shut down by the US government. In the 1990s, however, they started to proliferate. How did this happen? There seems to be two major reasons:

  1. Economic boom of late 1990s
  2. Effective marketing of tax shelters

The economic boom put pressure on companies to increase profits and keep stock prices up. As Frontline also noted, “One favored means was to drive down the tax line of their corporate returns. According to Harold Handler, former chair of the Tax Section of the New York State Bar, ‘What changed in the '90s was that the tax line of the financial statement became a profit center for many corporations.’”

The effective marketing was a major issue. Harold Handler also added that, Businesses started to do artificial transactions for the purpose of reducing tax only. Quoted at further length:

The other big change was in how tax shelters were marketed. Tax firms that previously responded to client needs, (i.e., reviewing business transactions to help minimize the tax implications) turned to pushing tax products that had no connection with the client’s business needs. “That’s bothersome,” says Handler, “because it changes the dynamic of what you’re doing. You’re no longer doing real things, but you’re doing artificial transactions for the purpose of reducing tax only.” Buck Chapoton, a treasury official in the Reagan administration, says many of the shelters of the 1990s were “sham transactions.... They simply were financial mechanisms for creating tax losses.”

— Frequently Asked Questions; Tax Me If You Can, Frontline, PBS, February 19, 2004

Corporations manage to reduce their tax burden

But these tax shelters were being promoted by powerful and wealthy institutions. “So-called ‘legitimate’ firms — accounting firms, law firms, tax investment firms — were the engine of these deceptions. They were the promoters, the designers [of] the marketing that went into them.”

Looking at just the top 250 US corporations between 1996 and 1998 only, the Institute on Taxation and Economic Policy discovered that “companies are paying less than half of what they’re supposed to”, roughly 15 to 20% of tax, compared to the corporate tax rate of 35%. Much of this was believed to be due to tax code loopholes, and shelters.

Former US Treasury Secretary, Lawrence Summers, noted in 2000 that while corporate profits rose 20%, tax revenue fell by 2%. The gap between what was reported to Wall Street and what was reported to the IRS widened. As Summers added, “The income to shareholders went up rapidly. The taxable income reported to the IRS stayed the same, and in some years, actually declined. It was pretty obvious that the reason had to be more shelter[s] and activity of various kinds.”

Some mega corporations were actually paying zero taxes or even getting refunds.

Powerful interests minimize Congress’s chance of tough action

Frontline looked into the challenges of doing something about this problem, as ordinary US citizens are the ones affected. The following highlights well the challenges involved:

[Asking former US Treasury Secretary, Lawrence Summers:] What was the chief obstacle? What was the sticking point? What was the obstacle to getting your proposals passed in Congress?

[Answer from Summers:] There’s a concentrated focused constituency for the tax shelter — the person who doesn’t have to write a check to the government, and the people whose livelihood depend on marketing those tax shelters in the accounting profession in particular. They were a strong constituency for tax shelters.

On the other side, you have a general national interest — and that’s always the challenge in Washington. [A] specific interest that’s prepared to invest a lot of money in a particular political issue will often beat the broader national interest, and that was our challenge. [Emphasis Added]

— Is Sweeping Reform Necessary?, Tax Me If You Can, Frontline, PBS, February 19, 2004

Sheer amount of money involved implies problem will remain

Frontline notes that some people argue that in the aftermath of Enron and other corporate scandals, companies will be less likely to use devices such as tax shelters to pump up their bottom line. Others maintain that the current lull in shelter activity is due to the current economic downturn and that the widespread use of tax shelters will flourish when the economy rebounds.

One question, however, is whether it is even a lull period at this time. Senator Charles Grassley, (Republican for Iowa) provides an answer when interviewed:

[Question:] Do we face another surge of tax shelters as soon as the economy goes back to booming again?

[Answer:] “All of the evidence we have from the hearings before my committee indicates that it’s just as big of a problem now as it’s ever been. The point being that you would think that with the exposures from Enron and WorldCom and all those other companies that have done such illegal, unethical things, that it would slow down the tax shelter business to some extent. Every indication we’ve had through our hearings is that it hasn’t slowed it down whatsoever.”

[Question:] Why not?

Big money. This industry of writing tax shelters produces big money, much bigger money than these accounting firms get from the usual auditing. That’s why it’s going to be very difficult to slow them down.

— Will the Shelter Problem Return?, Tax Me If You Can, Frontline, PBS, February 19, 2004

Transfer Pricing — Intercepting Wealth

Transfer pricing provides a multinational corporations' tax-avoiding dream. It allows the ability to set up offshore accounts and paper companies through which most transactions occur, without having to pay as much taxes. Internal accounting and costing is therefore adjusted to minimize the costs and maximize the profits.

Much needed revenue for social needs in a country is therefore lost this way.

The following quotes summarize this quite well:

The post-Second World War period witnessed not merely a rise in TNCs’ control of world trade, but also growth of trade within related enterprises of a given corporation, or “intra-company” trade. While intra-company trade in natural resource products has been a feature of TNCs since before 1914, such trade in intermediate products and services is mainly a phenomenon of recent decades. By the 1960s, an estimated one-third of world trade was intra-company in nature, a proportion which has remained steady to the present day. The absolute level and value of intra-company trade has increased considerably since that time, however. Moreover, 80 per cent of international payments for technology royalties and fees are made on an intra-company basis.

— A Brief History of TNCs, CorpWatch.org

(Note in the above quote at the sheer amount of intra-company trade as a percentage of world trade. Bear this in mind the next time corporate-media talk about the growing trade and prosperity for all.)

In this continuing battle over the world’s wealth, “transfer pricing” becomes a crucial aspect in the interception of the wealth of both Third World and First World countries. The multinationals either manufacture in a low-wage country or purchase cheaply from a local producer. The product, is then, theoretically, routed to an offshore corporation and invoiced (billed) at that low price. There the export invoice is increased to just under the selling price of local producers. However, the offshore company is nothing more than a mailing address and a plaque on the door. No products touch that offshore entity; even the paperwork is done in corporate home offices.

In 1980, there were eleven thousand such corporations registered in the Cayman Islands alone, which has a population of only ten thousand. [Many of these funnel a lot of money out of Central and South America] ... These corporations are doubly insulated from accountability. ...

These secret maneuvers of multinationals, and the huge blocks of uncontrolled international finance capital, make many of the statistics on world trade questionable. “If the sales of offshore American production facilities had been treated as exports, the 1986 American trade deficit of $144 billion would have become a trade surplus of $57 billion.” (Emphasis Added)

— J.W. Smith, The World’s Wasted Wealth 2, (Institute for Economic Democracy, 1994), p. 138.

And the above-mentioned PBS Frontline report also notes the importance of Cayman Island as a tax haven: “45 of the world’s top 50 banks have subsidiary or branch operations in Cayman, and in 2003 alone $415 billion in deposits flowed through this sandy resort.”

As an example of corporate evasion, the following is about Rupert Murdoch’s News Corporation:

In March 1999, the Economist reported that in the four years to 30 June of the previous year, News Corporation and its subsidiaries paid an effective tax rate of only around 6 per cent. This compared with 31 per cent paid by Disney. The Economist notes that “basic corporate-tax rates in Australia, America and Britain, the three main countries in which News Corporation operates, are 36%, 35% and 30% respectively”.

The article points to the difficulties of finding out about the specifics of News Corporations’ tax affairs because of the company’s complex corporate structure. “In its latest accounts, the group lists roughly 800 subsidiaries, including some 60 incorporated in such tax havens as the Cayman Islands, Bermuda, the Netherlands Antilles and the British Virgin Islands, where the secrecy laws are as attractive as the climate”.

The article continues, “This structure, dictated by Mr Murdoch’s elaborate tax planning has some bizarre consequences. The most profitable of News Corporation’s British operations in the 1990s was not the Sunday Times, or its successful satellite television business, BSkyB. It was News Publishers, a company incorporated in Bermuda. News Publishers has, in the seven years to June 30th 1996, made around £1.6 billion in net profit. This is a remarkable feat for a company that seems not to have employees, nor any obvious source of income from outside Mr Murdoch’s companies.”

— Tax Havens; Releasing the hidden billions for poverty eradication, Oxfam, June 2000

Effects of Corporate Evasion of Responsibilities

One of the quotes above, is from J.W. Smith. There he describes the cost of transfer-pricing. He goes on to explain quite well the effects and points out that both high-wage and low-wage countries lose out as the wealth is siphoned to offshore accounts to avoid taxes. This is “historical mercantilism to perfection” by intercepting both the foreign country’s wealth and one’s own.

However, as he goes on to point out, there is a difference in that today’s corporations don’t have any loyalty to any nation, due to greed.

The last 20 years has seen the wealth of the United States reduced as corporations seek out cheaper and cheaper places where wages are cheaper and environmental, safety and other regulatory measures are less or non-existent. (This has the effect of depressing wages and labor rights in industrialized as well as developing countries and therefore affects the wealth of those countries.)

Disparities between the wealthy and poor continue to rise, in the most powerful nation as well as all other countries. As Smith continues to point out,

Looking only at their bottom line, and listening to their own rhetoric, the managers of capital are unaware they are moving society back towards the wealth discrepancies of the early Industrial Revolution; this return to quasi-aristocratic privileges is a recipe for eventual contraction of commerce and destruction of their own wealth along with that of labor.

— J.W. Smith, The World’s Wasted Wealth 2, (Institute for Economic Democracy, 1994), pp. 164-165.

While Smith wrote the above in 1994, it is applicable today as well, with the recent wave of news about “corporate crime” and fascination of some CEOs and other executives as some major American companies have faced bankruptcy or have collapsed. Yet, the media, while offering an outpouring of news and analysis have by and large concentrated on individual characters and looked for scapegoats (CEOs being the current flavor!). The impacts of the underlying system itself has been less discussed and when it has, often been described as basically ok, but just affected by a few “bad apples.” As media critic Norman Solomon describes,

On the surface, media outlets are filled with condemnations of avarice. The July 15 edition of Newsweek features a story headlined “Going After Greed,” complete with a full-page picture of George W. Bush’s anguished face. But after multibillion-dollar debacles from Enron to WorldCom, the usual media messages are actually quite equivocal — wailing about greedy CEOs while piping in a kind of hallelujah chorus to affirm the sanctity of the economic system that empowered them.

...Corporate theology about “the free enterprise system” readily acknowledges bad apples while steadfastly denying that the barrels are rotten. ... (“Let’s hold people responsible — not institutions,” a recent Wall Street Journal column urged.)

...Basic questions about wealth and poverty — about economic relations that are glorious for a few, adequate for some and injurious for countless others — remain outside the professional focus of American journalism. In our society, prevalent inequities are largely the results of corporate function, not corporate dysfunction. But we’re encouraged to believe that faith in the current system of corporate capitalism will be redemptive.

— Norman Solomon, Renouncing Sins Against the Corporate Faith, Media Beat, Fairness and Accuracy In Reporting, July 11, 2002

Government Interference or Assistance?

In some countries, the business community shouts a lot about government interference (in their profits) and recommends that the government be reduced in bureaucracy. While many governments are plagued with inefficiency, some is due to the powerplay of groups including various industries.

However, without the various governments, entire industries and market economies wouldn’t have got started in the first place. In the US, for example:

  • The pharmaceutical industry received research and development funds from the US government.
  • The Internet was created with public funds, but is now handed to corporations to profit from.
  • Most major industries receive some support or bailout, including:
    • Energy industries
    • Agriculture
    • Biotechnology
    • Information Technology
    • Telecommunications
    • Weapons/arms/military industrial complex
    • and so on.

While the private companies profit, any costs, such as social problems resulting from environmental degradation, resulting social degradation and so on, are all socialized. “Privatizing profits, socializing costs” is a common phrase heard in critical circles.

And politics has gotten even murkier since the aftermath of the September 11, 2001 terrorist attacks on the U.S. Some industries have used the September 11th incident to say that has led to loss of business and to try and ask for government assistance as a result. While it has surely had an effect, for example, in the airline industry, as the UK’s BBC 24 news program on September 27, 2001 at about 8:30pm in an interview, said that before the tragic terrorist attacks some of the airline companies such as British Airways were already suffering quite badly, and this tragedy provided an excuse to get out of it. Of course, this doesn’t mean all companies were using the excuse, but it does highlight the difficulty of addressing these issues during highly emotional times. Companies are understandably going to try and use this to their advantage if possible, to a limit.

Economist and professor at M.I.T., Paul Krugman highlights this with the case of the highly publicized Enron collapse, in a piece that appeared in the New York Times, quoting here at length:

Enron’s illusion of profitability rested largely on “mark to market” accounting. The company entered into contracts that would yield profits, if at all, only over a number of years. But Enron jumped the gun: it treated the capitalized value of those hypothetical future gains as a current profit, which could then be used to justify high stock prices, big bonuses for executives, and so on.

...the Bush administration has turned to the political equivalent of another increasingly common accounting trick: the “one-time charge.”

According to Investopedia.com, one-time charges are “used to bury unfavorable expenses or investments that went wrong.” That is, instead of admitting that it has been doing a bad job, management claims that bad results are caused by extraordinary, unpredictable events: “We’re making lots of money, but we had $1 billion in special expenses associated with our takeover of XYZ Corporation.” And of course extraordinary events do happen; the trick is to make the most of them, as a way of evading responsibility. (Some companies, such as Cisco, have a habit of incurring “one-time charges” over and over again.)

The events of Sept. 11 shocked and horrified the nation; they also presented the Bush administration with a golden opportunity to bury its previous misdeeds. Has more than $4 trillion of projected surplus suddenly evaporated into thin air? Pay no attention to the tax cut: it’s all because of the war on terrorism.

— Paul Krugman, Bush’s Aggressive Accounting, New York Times, February 5, 2002

More Information

I have not even scratched the surface of this issue here, at it is large and complex. Since the September 11 tragedy, this issue has ballooned incredibly and I have hardly discussed any of the issues arising since then. However, there are a number of organizations doing more research on this, and critics have pointed out these issues for a long time. You could start off at the following links to learn more:

Document History

DateReason
September 14, 2005Added sections on tax avoidance, havens, their impacts on poor countries, etc.
June 3, 2005Added a section on US tax shelters and the impact to the US economy.

Alternatives for broken links

Sometimes links to other sites may break beyond my control. Where I can, I try to provide alternative links to backups or reposted versions here.

Actual Link:

Alternative:

  1. Press Release summarizing the reporthttp://www.taxjustice.net/cms/front_content.php?idcat=30

Actual Link:

Alternative:

  1. Press Release summarizing the reporthttp://www.taxjustice.net/cms/front_content.php?idcat=30

Actual Link:

Alternative:

  1. Press Release summarizing the reporthttp://www.taxjustice.net/cms/front_content.php?idcat=30

Actual Link:

Alternatives:

  1. Press release introducing the reporthttp://www.christianaid.org.uk/indepth/509tax/index.htm
  2. Summary from the Guardian Newspaperhttp://www.guardian.co.uk/debt/Story/0,,1568254,00.html

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  • by Anup Shah
  • Created: Monday, September 04, 2000
  • Last Updated: Wednesday, September 14, 2005

“If you come only to help me, you can go back home. But if you consider my struggle as part of your struggle for survival, then maybe we can work together.” — An Aboriginal Woman

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