Thursday, 1 September 2016

The Sound and the Fury

The sight of the Irish government furiously rejecting a potential windfall equivalent to 28% of its annual tax revenue is bizarre enough, but the horror of the American government at the prospect is even more amusing when you consider its repeated chiding of corporations like Apple for holding profits offshore, beyond the reach of the US tax authorities. The explanation for the former is simple enough: Ireland's fear that upsetting Apple would be bad for business. The explanation for the latter is more interesting: that Apple (along with other companies) has been in talks with the US government over the repatriation of profits for some time and the European Commission's intervention risks queering the pitch. This is less about the EU grabbing tax revenues that would otherwise accrue to the US Treasury (fines by foreign states can be offset against US tax) and more about the PR laurels. Given that the EC's Apple ruling will be appealed, and could take years to resolve, the fury was clearly about the timing of the announcement.

According to Tim Cook today, "We provisioned several billion dollars for the U.S. for payment as soon as we repatriate it, and right now I would forecast that repatriation to occur next year". Apple aren't in the habit of making up policy on the hoof, so it is fair to assume that discussions were at an advanced stage but embargoed until after the November presidential election. While it is likely these discussions have been bi-partisan for form's sake, I suspect the expectation is that a Democrat will take the White House, so the deal - presumably to reduce or partially exempt the Federal corporate tax rate of 35% -  has probably been cut with friends of Hillary. This is embarrassing for a candidate who has struggled to convince voters that she prioritises Main Street rather than Wall Street, and may even prove too tempting an opportunity for Trump to ignore ("I'd've got a better deal"), which might really queer the pitch for Cook et al.

This domestic US political context has largely been ignored in the European reporting of the issue. In the UK, Brexit has inevitably fouled the air. In The Telegraph, Ambrose Evans-Pritchard produced a masterpiece of paranoid resentment: "Behind the shadow boxing is a strong suspicion that powerful forces in the EU are trying to use state aid probes to break the global dominance of America's technology giants, vainly hoping to nurture its own 'Silicon Valley' behind a digital wall ... The US has in the past played down the episodic outbursts of anti-Americanism, but patience is wearing thin and the strategic calculus is shifting ... Others question ever more loudly exactly why the US should continue to guarantee the EU's eastern border against Vladimir Putin's Russia if Brussels is behaving in such an unfriendly fashion". I'm only surprised he didn't accuse the French of hating American films and being crap at Rock-and-Roll ("Johnny Hallyday? Pah!").

In Ireland, the concerns are understandably parochial, ranging from the stability of the new coalition government to the "suggestion" by the EC that any windfall be used to pay down the national debt rather than drop a couple of grand of helicopter money on each Irish citizen. Michael O'Leary of Ryanair has predictably taken the populist low road and suggested that rather than appeal the ruling the Irish government should just tell the European Commission to "Fuck off". This is a man whose entire business is dependent on the single market and the prevention of disguised state aid to national carriers. For all this, there is little serious concern that the ruling will jeopardise Apple's presence in the Republic (this line is mostly pushed elsewhere in Europe). As The New Yorker noted, the country's tax regime is attractive enough without a sweetheart deal, not to mention its other advantages: "Ireland’s primary global sales pitch was that the country offered multinational firms a twofer: you can get your tax avoidance and a qualified, English-speaking workforce all at the same time".

The basis of Apple's and the Irish government's criticism of the Commission is that it has exceeded its competency by interfering in a member state's tax policy. This is ironic because the Commission's case is that the Irish state has exceeded its competency by employing tax as a means of favouring a specific corporation, so undermining the single market. For many, this points to the dispute being part of the ongoing tussle for power between national states and the federalists of Brussels: "Although it catches the headlines, the US’s spat with the EU is a sideshow. This is another instalment in the fight for supremacy between the EU institutions and the member states". This is a view that is more popular in the UK than elsewhere, and little more than a polite liberal form of the Telegraph's bonkers argument ("It is a reminder of why Britain must remove itself entirely and forever from the clutches of this Caesaropapist construction" - Evans-Pritchard may not be au fait with Borgen but he evidently remembers I, Claudius and the 80s version of The Borgias).

In fact, the struggle is a more fundamental one between capital and the state in an era when the latter must increase tax revenues from capital or face civil unrest in the face of the pincer movement of median wage stagnation and increasing welfare bills. Capital has had a long period of dominance in the political economy of the West, benefiting from the breaking of organised labour in the early 80s, the taming of inflation, the leverage of financialisation and the scale economies and arbitrage of globalisation. But the consequence is that the state is running out of ways to raise revenue as the tax receipts from personal income and consumption decline relative to demand (exacerbated by precarious employment and ageing). This is why corporate tax avoidance and wealth taxes have moved back onto the agenda since 2008. It is not dangerous lefties who are arguing for this but centrists who recognise that "shrinking the state" is a pipedream and that austerity is counterproductive.

The strategies that were employed in the postwar era to reconcile capital and democracy have now run out of steam, leading to a palpable friction. The reason increased public debt is not attractive at negligible interest rates is because the state has traditionally relied on inflation to erode the capital value (without this, a time of unsustainable repayments will eventually arrive). The reason further financial deregulation (or proxies like helicopter money that deliver a monetary as opposed to a fiscal stimulus) is not attractive is because a precedent was set in 2008 that the financial sector will be bailed out, so prudential lending cannot be relied on. Reversing anti-union legislation will help some groups boost wages, but the structural change in the economy since the 80s means it will help too few to boost incomes generally. Globalisation is slowing, not just in terms of the free movement of people but the movement of goods, services and capital. Part of the rationale for Apple repatriating their profits is that they lack sufficient investment opportunities abroad.

This brings us to the underlying issue of distribution. As Jolyon Maugham notes: "what Ireland has been doing is giving a subsidy to Apple’s shareholders with other people’s money ... taxes that would have been paid elsewhere in the single market". In other words, the Irish government's tax policy (for which it claims national competency) affects tax revenues beyond its own border. Specifically, it disadvantages taxpayers in the EU countries where Apple sells goods and services but pays little or no tax. Those citizens have to make up any shortfall in national revenues through higher income tax or VAT. This is ultimately to the advantage of Apple shareholders, many of whom are wealthy non-EU citizens. One could go further and point out that Apple's outsourcing of production to China has allowed a greater share of profit to accrue to capital than labour. When we talk about growing inequality, we talk about maldistribution and the abuse of power.

Globalisation rather than political conviction has been the chief driver in shifting the burden of taxation from corporate income to personal income and consumption. While the shift reflects both ideology (that business owners should be encouraged as "wealth-creators") and the relative ease of raising tax from pay and sales compared to business profits, the key factor has been the expanded opportunities offered by the free flow of capital, goods and services. It is the successful WTO rounds and the construction of the EU single market, combined with the explosive growth of digital markets, rather than the genius of the tax-avoidance industry or the connivance of politicians that has delivered superior benefits to Apple and Ireland. The European Commission's intervention (like that planned by the US Treasury) will not reverse this, but it will target egregious abuse both to increase tax revenues and assuage electoral anger lest a more fundamental redistribution gains popularity. Ultimately, this is a spat over political credit.


  1. "The reason increased public debt is not attractive at negligible interest rates is because the state has traditionally relied on inflation to erode the capital value (without this, a time of unsustainable repayments will eventually arrive)."

    I'm no sure that's true. The thing about public debt is that, if you read Abba Lerner, it is only "owed" to ourselves, and and repayment in the future is made to ourselves. Critics will always say "but that just means that you print as much money as you want, which will lead to disaster". But that's not the point, which is that the limits to public debt are just much higher than those applied now, especially in an era of low inflation. The downside would more likely be comparative, in terms of the exchange rate. But it should be possible to manage public debt, interest rates and the exchange rate without any danger of unsustainability.

    1. Lerner is broadly right, but the situation differs by country because of the amount of government debt held by foreigners. For example, 27% of UK government debt is owed to non-UK creditors. In contrast, less than 10% of Japanese debt is held overseas (and most domestic holdings are with the BoJ), which is why no one is too worried by the larger quantum of Japanese public debt.

      Sovereign bonds are usually acquired as a safe asset, i.e. with a relatively modest rate of interest. Investors will accept some additional erosion through inflation as a quid pro quo for security. A state's ability to issue new debt will be influenced by both the rate at which historic debt depreciates (making room for more) and the increased cost of debt servicing (which must come out of current expenditure).

      Orthodox monetary policy demands that interest rates be raised to restrain inflation, which means that depreciation of the debt will be offset by increased servicing costs. The fear is that a run on the pound may cause the BoE to increase the interest rate without a compensating rise in inflation, leading to a "sovereign debt crisis": an inability to meet current repayments without the diversion of funds from elsewhere (i.e. dramatic public service cuts or the selling-off of national assets).

      My point is not that this is the right way to look at public debt (I'd advocate an increase to fund capital investment that would add assets to the balance sheet and future income to the current account), but that it is the orthodoxy and that explains why the government is reluctant to take on more debt at a time of historically low rates of interest (and incidentally why the inflation target is 2% and not zero).