How to stop the super-rich looting our wealth: make it illegal
The Paradise Papers has revealed that the amount of money being stashed “offshore” by the UK’s super-rich is greater than we had previously thought. At the same time, the government has launched an inquiry into rising household debt, as the UK’s borrowing reaches levels last seen before the global financial crisis. How is it that a tiny sliver of the population can be banking absurd slabs of wealth while the majority of us go deeper into the red?
We are constantly reminded that tax avoidance is “perfectly legal” – rational even, according to some. But we should ask why we have made predatory practices legal, as long as they can be masked behind financial abstraction. It is also perfectly legal for a holding company to purchase a chain of care homes, load it up with debt, then squeeze the wealth out of it until the debt-burdened operator is on the verge of collapse – and rational for those unburdened with an excess of conscience to do so. But it’s incredibly costly to the rest of society.
Such asset-stripping practices are a microcosm of the whole economy. The system is set up to burden everyone except the already-wealthy with debt so that we can finance the ever increasing savings of the elite.
One of the often unremarked propaganda victories of the market-fundamentalist consensus is to embed the notion that there is a single “correct” set of economic policies, from which governments stray at their peril. By establishing concepts such as “the market” as natural forces, they have been able to produce a view of reality where deviation from their preferred policies is seen as irresponsible.
As Ha-Joon Chang of Cambridge University tells us, though, markets are not a natural system like plate tectonics, but rule-bound institutions. We can, and do, change the rules to suit the political outcomes we desire. Rather than being the result of an optimised system, the flow of money from an indebted lower class to a gilded elite is a political choice.
Our present system was not inevitable but the result of an accumulation of choices. For example, tax havens were created because the British empire chose to indirectly subsidise its former colonies via tax treaties designed to encourage the growth of financial services. As such, “leakage” of tax to small island territories should not be considered a bug but rather the system working as it was designed to do.
Likewise we have chosen to let the financial sector run riot. Having a financial sector isn’t bad, and issuing loans isn’t bad. Indeed, without the lubricating effects of a wellfunctioning credit market, the economy would move much more sluggishly. But there are limits to how much of an economy the financial sector can encompass before it stops enabling growth and starts cannibalising it.
As the economists Stephen Cecchetti and Enisse Kharroubi wrote in 2015, in a Bank for International Settlements paper, “higher growth in the financial sector reduces real growth” by crowding out other researchand development-intensive industries. In other words, the more resources an economy puts into constructing complicated structures for extracting double-digit returns from boring industries such as care homes, the less is available for genuine productivity-improving innovations and inventions.
A feedback loop of “regulatory capture” means the referees are owned by the biggest players. Over time the deck gets stacked in the industry’s favour, and it points to its increased winnings not as a sign that something is amiss, but rather that it, as the best player, deserves even more preferential treatment. “What would the rest of these players do without the chance to win some of my massive stack of chips? You need to treat me better or I’ll take them all and leave.”
The big-ticket reveal from the Paradise Papers isn’t, therefore, the lost tax revenue but the fact that we have made political decisions that were supposed to improve growth, but had the effect of sucking money out of the real economy to these tax havens, and increasing inequality. Money loaned at interest is increasingly not invested in improving the productive capacity of the nation, but rather hoovered upwards to the savings accounts of the very rich.
The argument that “if you tax it, we’ll leave” is fatuous when the money has already gone offshore. From the perspective of the British economy that money might as well have been taxed at a rate of 100% – it’s not paying wages or buying machinery, it’s just sat idly in Bermuda and other havens, with exactly the same effect on growth as if the government had taxed it into oblivion, and the profits that produced it not existed in the first place.
Economics is a toolkit, not a straitjacket. Governments, unlike households, have powerful tools they can use to get us out of this situation. They have central banks, control over their own currencies, and the power to set the rules of the game. It is entirely possible for them to set up these rules so that the wealth created from economic activity in this country ends up in ordinary pay packets where it can be used to pay off the debts and build up the savings of the majority. It must, however, choose to do so – which means it first has to stop heeding the self-interest of the wealthy and start listening to the rest of us.
• Phil McDuff is a freelance journalist who writes on economics and social policy