Amir Farhan

The latest Forbes rich list has just been published with Bill Gates coming top with a personal wealth of $86bn. The combined wealth of 2000 billionaires exceeds $7 trillion! I am not really sure what to make out of it. Are we supposed to admire these people for the amount of money they have accumulated or that we should be in owe of such wealth?  Far from it. There is really something seriously wrong when people are allowed to build such an incredible wealth. It is obscene when one man like Bill Gates has a personal wealth equivalent to the GDP of a country like Sudan (population 37 million), when the wealth of the richest 2000 people exceeds the combined GDPs of both the UK and Germany.

Source http://www.bbc.co.uk/news/business-39332823

This wealth comes at a time when there is ever more poverty and hunger in the world and we see people fleeing poor African countries risking their lives making perilous journeys to reach better places to improve their lot. Their miserable existence could easily be much improved if there was a more equitable distribution of wealth.

Interestingly here is a list of the six happiest countries:

Country        Rank
Norway             1
Denmark          2
Iceland             3
Switzerland     4
Finland             5
Netherlands    6

Source: http://worldhappiness.report/

And here is a list of the six countries with most billionaires:

Country  Billionaires
US              536
China         251
UK             120
Germany  120
India           84
Russia         77

Source:  https://en.wikipedia.org/wiki/The_World%27s_Billionaires

It is interesting to note that despite the abundance of billionaires in the above mentioned countries, none of the countries they belong to, appear in the top of the list of happy countries.

There is no doubt that over the last few decades the gap between rich countries and poor countries has been widening leading in part to the calamitous refugee situation that the world currently faces. But this gap is also widening between the have and have-nots in the rich countries themselves. There is definitely mounting disquiet in the western democracies manifesting itself as a rejection of the establishment, hence the UK Brexit vote and the election of Donald Trump in the US, both of which were results of social discontent, but unfortunately in my opinion the wrong results with unsettling consequences.

The world as a whole is moving into uncharted territory.  More than ever we need to be doubling our efforts to arrive at more equitable solutions to the distribution of wealth. The accumulation of vast fortunes in the hands of the few is doing nothing but stoking problems for the future. Now it is the time to start by attaching a warning to big wealth. Being a billionaire is nothing to be proud of, it is anti-social and is harmful to social cohesion.

Facebook has announced its intentions to go public through an IPO (Initial Public Offering). There is talk that the company will be valued at up to $100bn.

Here are some company numbers:

• Revenue for 2011 is reputed to be $3.7bn
• Net income of just over $700m
• Employs 3000 people.

Whichever measure you take, this valuation is clearly over inflated and absurd. So how do they make up such a staggering figure?

Facebook has only one thing useful, its 700-800m users. It is funnelling its users’ likes or dislikes as targeted data to its clients. It really is no more than an advertising agency. While most organisations have real assets to sell, Facebook is selling its users as though they are its own asset.  Facebook is playing on its users’ obsession with popularity and the vacuous ‘celebrity culture’. Facebook, together with other social media sites have managed to cajole people into giving away information about themselves, thereby eroding personal privacy. Sometimes, sordid information or even pure lies are published on these sites leading quite often to disastrous consequences. There is now a growing consensus that social media sites do more harm than good.

As for the $100bn IPO, let us ponder on this for a while:

• Facebook is just a social media site. A passing fad that can easily change and that exaggerated valuation may turn out to be worthless.
• $100bn is equivalent to the GDP of many fairly large countries (such as Morocco, population 35 million).
• Just think of how much $100bn can improve public services (how many more schools, hospitals, roads, etc it can provide for) or what it can do for the millions of poor people around the world.
• The new Facebook will be capitalised almost the same as the UK’s GlaxoSmithKline, a company with large portfolio of products for fighting diseases and a work force of 95000, a company with real jobs and real products (and yes huge profits).

What benefit would this massive Facebook IPO bring to our lives? I bet, absolutely nothing. It is just another product in the line of ‘Get Rich Quick’ culture. It will add nothing of value to the real economy. It is one more exercise so that investment banks, lawyers, and of course Mark Zuckerberg and other owners of Facebook make huge sums of money. So when the floatation comes, just give it a miss.

More reading:

http://www.guardian.co.uk/technology/blog/2012/feb/01/facebook-ipo-announcement-live

http://www.bbc.co.uk/news/technology-16835116

Taxation is the revenue that the government collects in order to deliver public services such as health, education, welfare and defence, etc. In the UK these revenues come from Income Tax, National Insurance Contributions, Value Added Tax, Council Tax, Corporation Tax, Fuel Duty, Business Rates, etc.

Income Tax:  This is the biggest single component of UK taxation receipts, it accounts for about 30% of the total. Income tax started late 18^th century and was rated at 1-10% of income. Currently it is levied according to income as follows:

On the face of it, the above rates seem to be fair, i.e., the more an individual earns the more tax is paid (both in relative and absolute terms). However, the reality is different with a much heavier burden on the low and mid incomes than on higher incomes. Here are a few reasons for this:

National Insurance Contributions (NIC): This tax started in the early part of the 20^th century. It is now the 2^nd biggest component in UK tax receipts accounting for almost 20% of all receipts. However, it is a tax on earned income and not on income from investments. As many high-earners in big corporations are able to ‘massage’ their pay package, they shift a big portion of their pay to non-NI-able income, such as taking pay in the form of dividends, shares or pension contributions. In this way they manage to escape paying NICs and reduce their overall tax liability. It is also worth bearing in mind that while the average NIC rate is something like 10-12% of gross income, it is only 2% on pay higher than £3540 per month. This is clearly a tax advantage for the highly paid.

Expenses: When expenses are incurred in the line of work, they would of course be reimbursed without any taxation implications. The trouble is that there is now a prevailing culture of claiming for items that fall well outside what is a legitimate expense. There have been many cases of expenses’ abuse such as the MPs expenses, and that of the National Policing Improvement Agency. This agency issued credit cards to 150 of its staff, only for them to spend up to £6.5m from 2008 to 2010, averaging £20,000 per person per year, spending on such items as lawnmowers and karaoke equipment. This abuse goes on a much wider and deeper scale. Large corporations have no hesitation in helping their top executives to expensive holidays, cruises, flights, etc and claiming them as expenses. Expenses’ abuse is yet another ‘privilege’ used by the wealthy and powerful to augment their income without incurring tax liabilities, something which is not available to the average worker.

More reading: http://www.dailymail.co.uk/news/article-2023578/Police-quango-expenses-Fury-6-5m-lingerie-beehives-away-days-expense.html

Dividends and shares: As mentioned, the wealthy employees shift a big chunk of their pay package into dividends and shares (in some cases this amounts to almost 50% of their total pay package). This way they manage to avoid paying NICs. Bear also in mind that as far as shares are concerned, they normally get offered them at preferential rates and end up selling them when the price is right making handsome profits. Again these profits are not subject to NIC.

Non Domicile (non-dom) status: Essentially, non-domiciled individuals, or ‘non-doms,’ are resident in the UK but have strong affiliations with another country and have an intention to leave the UK at some time in the future.  There are an estimated 120,000 registered non-doms in the UK. A non-domiciled person could keep their overseas income and capital gain out of the UK tax net merely by not bringing such income and gains into the UK and paying a modest charge. For example, if someone has, say, £500,000 income overseas, he will be liable to 50% tax on that income, which would be £250,000. To keep this overseas income out of the UK tax net, he only needs to pay a charge of £30,000!    This status has been habitually abused by many high-flying businessmen. Two examples spring to mind, one of Ron Sandler, the boss (until 31/12/11) of Northern Rock Bank (a nationalized bank) and the other is the MP for Richmond Park, Zac Goldsmith. How is it that they can hold (or offered) such senior public offices  and yet from a taxation point of view they are classified as non-dom?

More reading: http://en.wikipedia.org/wiki/Ron_Sandler

&  http://www.guardian.co.uk/politics/2009/nov/29/zac-goldsmith-non-dom-status

Pensions: Pension contributions are not only exempt from tax, but actually help reduce overall tax liability. Top executives at large corporations are being offered very generous pensions packages, thereby maximising their overall pay package and at the same time minimising their tax liabilities. Do you remember Fred Goodwin the previous boss of RBS bank? The man behind the bank’s collapse, he still walked away with an annual pension of £693,000. Do not forget that it was the tax payer who bailed out his failed bank to the tune of billions.

More reading: http://www.telegraph.co.uk/finance/financialcrisis/4840576/Sir-Fred-Goodwin-refuses-to-give-up-693000-RBS-pension.html

Council Tax: Somehow, this tax does not get a mention when people discuss taxation and yet it can seriously add to the total burden. This property tax is yet another one that is skewed in favour of the rich (because it is capped at band H). For example, a typical average family may have an income of £50,000 per annum and may be living in a house worth perhaps £300,000. Their council tax would probably be in the region of £2000 per annum. In other words it adds another 4% on top of central government tax.  However, if someone earns say £300,000 per annum and lives in a property worth over £1m, his council tax will probably be just over £3000 per annum, i.e. Just 1% of his income.

You can from above see that most taxes seem to have a cap (income tax, NIC, Council tax) that favours the rich. Additionally, with clever manipulation of pay, the wealthy can substantially reduce their overall tax liability. We end up in a situation where the low paid are certainly paying a much greater portion of their income in tax than the higher paid. The disparity is perhaps best exemplified by this:  Mr. Warren Buffett (one of the richest men in the world) said that he was taxed at 17.4 per cent on the $46 million he made in a year, without actually trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 35.8 per cent.

More reading: http://abcnews.go.com/blogs/business/2012/01/warren-buffett-and-his-secretary-talk-taxes/

While Mr. Buffett is being honest; we know that the majority of the wealthy certainly try harder than him to reduce their tax exposure, not only exploiting tax loopholes, but quite often resorting to schemes bordering on the illegal. They set up off-shore bank accounts and use expensive tax advisors to help them create a complex tax web, so that it is hard for tax authorities to untangle and bring about a successful prosecution.

The tax evasion tactics used by the rich are further adding to the already increasing pay gap between the low and high paid. Such disparity in pay has not been seen since Victorian times. While the rich are more than ever enjoying the trappings of their lavish lifestyle, the average worker is made to work harder than ever to make ends meet. The government, despite its promises of reform has proved that it is impotent in the face of big business. This is best typified by the fact that bankers paid themselves a bumper £4.2bn in bonuses last Christmas ignoring repeated government warnings. This is despite the fact that many of the banks were bailed out with tax-payer money. But perhaps we should not be too surprised for it seems that the government and the rich are in cahoots. Just follow the case of ex PM Tony Blair making millions and paying just a tiny fraction in tax.

More reading: http://www.telegraph.co.uk/news/politics/tony-blair/8999890/Tony-Blair-and-the-8million-tax-mystery.html

Clearly our democracy is being undermined by arrogant bankers and other fat-cats and unless decisive measures are taken to remedy the situation, we may be sleep walking into an ugly state of affairs.

In a recent article that appeared in Bloomberg Businessweek, written by Charles Kenny, he seemed to extol the virtues of Big Business, particularly when it comes to comparing with Small Business. Here is one excerpt from that article:

‘If you’re looking for a lot of good-paying, stable jobs, you’d better hope there are some big companies around that want to hire. Kansas City Federal Reserve economist Kelly D. Edmiston’s analysis of U.S. data found that each year, 22 percent of staff in companies with fewer than 100 employees quit or are fired, compared with only 8 percent for companies with 2,000 or more workers. Edmiston also found that the jobs offered at large businesses were better than those at small businesses. Hourly wages at the largest companies, those with more than 2,500 employees, average around $27, compared with $16 in companies with payrolls of fewer than 100. Companies with more than 100 workers are almost twice as likely to offer retirement benefits and insurance, and considerably more likely to offer health care’

Charles Kenny further advocates that in the US, instead of providing subsidies to small businesses, he reckons that it is more economical to allow big Chinese and Indian businesses to open shop in the US.

Here is what he says:

‘ Although politically unpopular, attracting more large companies from China and India to set up shop in the U.S. could be a better use of resources than providing yet more tax breaks and loan guarantees for small business’

To read the full article:

http://www.businessweek.com/printer/magazine/rethinking-the-boosterism-about-small-business-09282011.html

Although the article discusses the US economy, the arguments can equally be applied to other economies such the UK.

In the first instance, the analysis in the article appears to make good sense, however it seems to only deal with the superficial aspects of Big/Small Business rather than dig deep into some of the underlying characteristics of Big Business.

Here are these characteristics:

Tax Avoidance: in 2009, Barclays Bank declared an annual global profit of £4.6bn (the bank also made an additional £6.3bn from assets sales), but only paid £113m in UK corporation tax i.e. just 1%. While the bank argues that it operates internationally and that it pays its due taxes, it is difficult to see how such a small amount of UK tax is paid when 60% of the bank’s operations are in the UK. However, once you realise that Barclays Bank has something like 300 off-shore companies; it becomes clear that they are able to use complex structures to make it difficult for tax authorities to untangle this web and track the money trail. Barclays Bank is not alone in this practice; almost all big companies employ these questionable tactics to avoid paying the true tax due. Small businesses have no chance of setting these expensive and complex tax avoidance structures.

For more information see: http://www.bbc.co.uk/news/business-12511912

Another worrying aspect is that big corporate not only manage to use ‘creative accounting’ practices to minimize the tax due, they also have the audacity to dispute and delay paying what taxes that have already been declared. According to recent Commons public accounts committee hearings, it seems that big corporations have managed to establish a ‘cosy relationship’ with the tax authorities. The committee says that it has uncovered “specific and systemic” failures in Britain’s tax-gathering agency while investigating deals with Vodafone and Goldman Sachs. It found that many firms had struck ‘deals’ with tax authorities, and suspect that these questionable deals are among £25bn of outstanding unresolved tax bills

For more information:  http://www.guardian.co.uk/politics/2011/dec/20/inland-revenue-sweetheart-tax-deals

Too big to fail is a term that has become familiar to us after the recent financial crises. It implies that certain institutions are so large and so interconnected that their failure will be disastrous to the economy, and therefore governments have a responsibility to support them when they face difficulty. Indeed we all have seen how governments rushed with billions of tax payers’ money to prop up the banks. But this is clearly a flawed policy for these banks will seek to profit from these policies by taking an even higher level of risk. The policy is counterproductive, large banks or other large institutions should be left to fail if their risk management is not effective.

Monopolistic competition; we are given to believe that the big corporations are competing to give the consumer the best possible value. However, what they really do is that they actually control the market but give the impression that they sell different products—products that differ somewhat or are perceived to differ, but they serve the same purpose. For example we seem to think that there is competition between Coca Cola and Pepsi Cola, but in reality they just use this phoney competition to control the cola market. Likewise the utilities companies may offer us many different products, but they control the market with little price differential between them. You can apply this to many other sectors such as banking, oil, etc. These large organisations while seemingly in competition, they actually monopolise the market and charge exorbitantly for their products and services, effectively operating as a cartel shutting the door to any new genuine competition. Should this competition become troublesome, perhaps they make an offer that cannot be refused. News Corporation has over the years acquired hundreds of media titles and companies and has become so big and powerful that despite the scandals of late, it is able to weather the storm.

Global Reach: Most of the big corporations operate in many countries and are able to relocate to wherever suits their financial objectives, be it lower labour costs (as in India or China) or lower corporation tax (as in Ireland). They are even able to dictate their terms (such as developments grants and other sweeteners) upon the government of a country as a pre-condition before relocating to that country. They have no hesitation in closing down operations in one country and moving into another where production costs might be lower. In a recent and familiar case, Kraft of the US purchased Cadburys of the UK, and very quickly rescinded on their promises and proceeded to close UK factories. They can indeed use their power to play one country against another to gain maximum advantage. And of course they also extensively use tax heavens to avoid paying full tax.

I can say that the four points raised above (Tax Avoidance, Too Big To Fail, Monopolistic Competition and Global Reach) are actually weapons that big businesses use to fight and squeeze out Small Business. They deploy these weapons to enhance their profits and further their position and power. Furthermore, they are so powerful now they are able to cajole, dictate and even issue veiled threats to governments. This in my opinion is a real threat to our democracy. After the recent financial crises, there is now a prevailing feeling that our democracy has in many ways been hijacked by Big Business. Big Business now seems to have a bigger sway over the Government than the public. I believe that the time has come to reform our laws so that we can take into account the threat of Big Business and restore power to its rightful owners, the public.

When the Coalition government decided on budget cuts and austerity measures, it claimed that by reducing the scale of the national debt we would restore the fiscal integrity of the state and prevent default. That would appease the financial markets and ultimately restart economic growth. They said that we are all in it together. This last claim certainly proved hollow.

A recent report by Incomes Data Services (IDS), found that in the last year alone top executives’ pay has actually gone up by up to 50% at a time when the public at large is expected to accept cuts in services, cope with rising inflation, job insecurity and pensions squeeze. To add insult to injury the performance of the companies that these executives ran did in no way match the pay they awarded themselves.

For information on IDC report see http://www.bbc.co.uk/news/business-15487866

But there is nothing new about these rises; this trend has been going on for some thirty years. An enquiry carried out by the High Pay Commission, found the pay of top executives had increased by more than 4,000% in the past 30 years, compared to a mere threefold increase in the average salary, massively widening  the gap between the highest paid 0.1% and the rest of British society. In 1980 the pay at the top was about 13 times the average pay, while in 2010 it rose to a staggering 169 multiples. Such disparity has not been seen since Victorian times.

For information see: http://web.orange.co.uk/article/news/high_executive_pay_angers_public_report_says

The unacceptable levels of pay are the natural outcome of greed going unchecked due to lax financial regulations and the ever increasing power of the multinationals some of whom are now bigger than many medium size countries. A recent study by Federal Institute of Technology Zurich (ETHZ) has established that 147 Multinationals actually own 40% of the world entire wealth.

For more info: http://www.swissinfo.ch/eng/business/Multinationals_power_must_be_kept_in_check.html?cid=31486960

Furthermore, they all seem to have interest in each other making them an extraordinarily powerful web, in some cases they are more powerful than the president of a small or a medium size state.

The concentration of wealth in the hands of the few is very damaging to society for in the long run it creates social tension. This might erupt unexpectedly (perhaps the latest riots were a sign of this). What is more disturbing, it seems that these multinationals with their enormous power and wealth, their manipulation of the media are able to indirectly dictate to governments. Have you ever wondered about the invasion of Iraq in 2003? We know that the war was based on lies and that it was not legal. The war caused untold damage to Iraq’s infrastructure, thousands of deaths, brought the country close to civil war and installed a corrupt government. But it was no less painful for the US and Britain, both of whom suffered in terms of loss of life and the sheer cost of operations (paid for by the taxpayer). So who did benefit? You will probably be able to trace it to those with vested interests in oil, weapons and phoney construction contracts; in other words you can trace it back to those multinationals.

Now to the so called ‘Credit Crunch’. Who caused this crunch? In a big part, it was the greedy bankers who emptied the bank coffers rewarding themselves handsomely at the expense of the public. Note how quickly governments went to the help of the bankers with stratospheric sums of money (tax payers’ money of course). Note also how not a single banker was investigated. Contrast this with the MPs expenses scandal which pales into insignificance by comparison.

More recently, we have the European debacle. France and Germany pushing for more European fiscal integration so that their banks do not suffer should the Greeks and the Italians default on their debts. In the meantime the UK government refuses to join in because the agreement threatens the position of the bankers in the City of London. Clearly all these governments are paying lip service to their bankers.

We need to wake up. Our society is under threat, our democracy is under threat, we need to check the power of the banks and the multinationals before it all unravels in an ugly way.