So amid all the crazy news surrounding asteroids and meteors did anyone notice that some of the most powerful politicians in the world were meeting in Moscow that past few days to discuss the trivial matter of the world economy?
Yes, once again these 20 or so men (I count just 3 women in the official photo op) met behind closed doors in Moscow on February 15, 16 to eat caviar, sample fine Russian vodka and chat about making internationally binding agreements that effect the everyday lives of billions for people with nary a whimper from the international news media. Economists and accountants in suits just aren’t as sexy has space junk falling from the sky I guess.
Two major resolutions came out of this year’s meeting.
First, it was agreed that corporations that shift profits overseas to avoid paying tax are bad. Second, it was agreed that countries that intentionally devalue their currencies in order to attract investment are also bad.
Both resolutions however stopped short of enacting any kind of meaningful policy to actually prevent these practices.
On the corporate taxation front, many companies, mostly multinationals based in the US have been accused of reporting profits in jurisdictions with lower tax rates, while at the same time reporting losses in jurisdictions that have higher taxes or generous write off provisions for expenses. For instance, Facebook recently reported a total of $1bn in profits but managed to pay no corporate income tax in the US. Instead they shifted most of the money to their international operating divisions and reported a loss to the internal revenue agency in the US, claiming a $451m refund on taxes paid there. The net effect of taxes paid in one jurisdiction versus refunds claiming in others was $0.
For the G20 to crack down on this practice seems like a good idea but I fear that the counter argument made by corporations, that lower taxes help create jobs, will hold sway in the United States and other capitalist jurisdictions and nothing will happen to prevent this practice from continuing. Facebook has already made a statement in their defense saying that their employees have paid the equivalent of $2.86bn in income taxes and that this should more than offset the lack of corporate taxes that have been paid. I say hogwash! This is the result of so called trickle-down economics and it’s nothing more than the shifting of the tax burden from the highest wage earners to the lowest. If history is any indication, sadly the Facebook argument will prevail to some degree and the burden of taxes that the rich continue to refuse to pay will fall squarely on the shoulders of the middle class.
On the currency manipulation front countries that intentionally keep their currency low in order to attract investment are being singled out as somehow preventing free trade. Competitive Devaluation as it is called is seen by many as an unfair practice designed to make one country easier to invest in than another. If the Yen for instance is worth less than the Pound and I have to decide which country to build a factory in I am more likely to covert my dollars to yen and build my factory in Japan than I am to build it in the UK. This is just basic math but for some reason it’s seen as unfair and counter to free trade.
If Japan wants to take whatever steps they can to attract foreign investment and make their exports more attractive to the world market while at the same time making imports more expensive in their domestic economy why shouldn’t they? This is exactly the same tactic that has been used by the United States, the United Kingdom and other economies throughout history as a way to build up their domestic economies and help them become more competitive on the world stage. But when the tables are turned, somehow it’s viewed as unfair?
This is a double standard on an epic scale and it’s not just Japan that is being singled out here, this is exactly the same tactic that the World Bank and International Monetary Fund write punitive provisions against into every one of the loans they make to emerging markets in Africa, Latin America and Asia. That’s right; in order to receive economic assistance developing economies must agree that they will allow the free flow of cheap foreign imports into their economies. The net effect is the rich countries that dominate organizations like the G20 are forcing smaller economies to open their markets before they are strong enough to compete adding to and prolonging their economic dependence.
The bottom line is that the G20 is beholden to corporate interests and neither of these resolutions if they ever grow into real binding agreements will be done to help the average citizen. Welcome to the new age of corporate mercantilism.