Scandinavian Models

Should we provide state-backed loans to businesses that avoid tax? Other European governments are making assistance conditional on being registered domestically for corporation tax and even on not paying dividends or executive bonuses. Morally this is understandable, hence the Church of England has chipped in to the debate in the UK, but it's economically questionable, both in terms of its immediate impact on aggregate business activity and its longer-term effect on government revenue. The pragmatic response is that if we want to minmise disruption to the economy we need to preserve as many existing firms as possible, regardless of their tax status or ethical track record. Discriminating now is literally virtue-signalling, and doing so in the midst of a pandemic is self-indulgent. This doesn't mean that we should tolerate tax-avoidance, but that now is not the right time to focus on it. That time was before the pandemic, when some of the politicans now arguing for funds to be withheld were less trenchant in their criticism, or after the pandemic, when I suspect many will revert to a more tolerant attitude.

EU states like France and Denmark that intend to deny assistance to tax-avoiders are not applying a novel policy of ethical judgement. They are simply continuing their existing policy in respect of tax-havens, which can be summarised as a lot of posturing and limited action. This is an expression of bourgeois virtue, as is the related demand that companies suspend dividends, which simply means capital hoarding cash that would otherwise be converted to income and more widely distributed. A virtuous approach relies on scapegoats, so the EU recognises the Cayman Islands as a tax-haven but not Luxembourg or the Netherlands, while it simultaneously tolerates a broader business culture that winks at systematic avoidance. What the current moment reveals is that firms are embedded in society and can only avoid their responsibilities through government connivance. Emmanuel Macron and others are simply trying to divert attention away from that truth. We can also see this ostentatious virtue at work in the decision of the gambling industry to forgo advertising during the lockdown. If such advertising is wrong now, then why is it right at any other time?

The UK government is pursuing a similar course in adopting a wary attitude towards Virgin Atlantic, focusing on the moral hazard of public debt rather than its own connivance in that company's history of tax avoidance. But this political emphasis on the idea of "something for nothing" highlights how the proposed "bailout" of businesses has been misrepresented by sections of the media. What the government is offering, through the Coronavirus Business Interruption Loan Scheme (CBILS), isn't a state loan, let alone a handout, but an 80% guarantee on commercial loans, of up to £5 million, to borrowers with turnover up to £45 million. This means that if the borrower defaults, the commercial lender is liable for only 20%. There's not much moral hazard here, even though the government will also pay the interest and charges on the loan for up to 12 months (through the separate Business Interruption Payment scheme). This isn't a parallel system to commercial financing, rather it's an auxiliary measure intended to give banks and other lenders the confidence to extend financing to stressed companies.

Initially the scheme was exceptional: limited to businesses that couldn't secure loans under normal commercial terms. That restriction has since been lifted, while the requirements for collateral have also been eased, and now the government is proposing to guarantee loans of up to £50,000 at 100% for small businesses. It's had much positive press ("Dishy Rishi" etc), but CBILS has proved something of a damp squib so far, with less than half of all applicants securing a loan. There is also an 80% guarantee scheme for large businesses (CLBILS+), limited to £25 million for firms with turnover from £45 million to £250 million and £50 million for firms with turnover above that level. These aren't eligible for BIP interest cover, so they are no different to a normal commercial loan. In addition, the Bank of England is offering a Covid Corporate Financing Facility (CCFF), whereby it buys short-term debt (commercial paper maturing at up to 12 months) in order to provide liquidity for larger firms. All in all, the government's strategy for supporting business is cautious and conventional, despite the media claims of a radical departure.

An alternative approach should be considered for large businesses, including foreign-owned (and not just tax-haven-based) ones like Virgin Atlantic. While Richard Branson has proposed a goverment loan on "commercial terms", the state could instead take an equity stake, as it did in 2008 with some UK banks. That was couched as a temporary mechanism for providing liquidity, but it can also be a way of (de facto) recouping tax in the form of dividends or capital gains. This is not to suggest that dividends should be seen as a substitute for corporation tax (should the state secure a majority of the equity, it should then insist on the business being redomiciled to pay its tax in full), rather it should be seen as a second-best approach to ensure that society is able to recoup some of the benefits of its own wider investment - e.g. in airport and road infrastructure. There is the risk that the investment can go down as well as up (and that would be as good a reason as any for avoiding an airline today), but this should be seen as part of a wider portoflio rather than just a targeted investment in troubled firms.

The model for such "beneficial nationalisation", where the state acts as an investor rather than a dominant owner, is that of the sovereign wealth fund. A majority of the Government Pension Fund of Norway, the largest sovereign fund in the world at over $1 trillion, is made up of holdings in foreign companies, many of them registered in tax-havens. Though the Fund applies ethical standards in respect of which companies it invests in, this largely reflects the nature of the business or its operating practices (e.g. avoiding arms, tobacco, environmental damage etc). It doesn't insist that companies pay a particular level of tax, either in Norway or elsewhere, though it has made moves towards greater transparency over tax-havens under public pressure following the Panama Papers revelations. It's a capitalist entity, with all that this implies in its attitudes to corporate governance and the management of labour, but its ultimate subservience to parliament means it must be sensitive to public opinion. The result is that Norway is often more effective in raising revenue from tax-haven-based businesses than either their nominal or actual home countries.

The debate on whether tax-avoiding companies should have access to state support is framed as a moral issue, but at root it concerns the power that ownership confers to domicile offshore. For all the appeals to virtue by contemporay politicians, few states have been inclined to restrict that power since the 1980s, indeed many have gone out of their way to try and attract foreign businesses through tax arbitrage. Though most politicians clearly pursue capitalist class interests, we should also recognise how difficult it would be to restrict the power of ownership in a globalised economy lacking capital controls. One way out of this bind would be to gradually socialise ownership, not through pension and mutual funds that merely veil capitalist power, but by the "inclusive ownership fund" approach proposed by Labour last year (partly modelled on Sweden's Meidner Plan). This wouldn't work for offshore companies, but that's why any way the state can opportunistically secure a stake should be pursued, even if it means bailing out Richard Branson. Ironically, some domestic businesses that dismissed Labour's plan at the time are now lobbying for the state to provide capitalisation through equity.

What the current protestations of virtue indicate is that the state will in future seek to recoup greater tax from offshore companies, not so much because of public opinion but because all developed states now recognise that the distribution of tax between capital and labour needs to shift in favour of the latter if society is to avoid galloping inequality and collapsing public services. This recognition predates the Covid-19 pandemic, but the current crisis makes it more pressing. After the last decade, any state that seeks to increase the tax burden disproportionately on labour, which is what austerity does, will almost certainly face serious social unrest (les gilets jaunes amplified). France and Denmark are signalling that capital must carry a larger burden in future, while the UK is signalling that it remains uncertain about its strategy post-Brexit: whether to double-down on being a tax haven gateway that privileges capital, or to pursue a more national economy in which the burden of tax is more evenly shared between capital and labour.