Tuesday, February 26, 2008

Profit Laundering: what’s justice got to do with it?

From the February 2008 issue of the Socialist Standard

"Tax Havens Cause Poverty" proclaims the home page of the Tax Justice Network. No, they don't. The profit system does.

The Tax Justice Network thinks that world poverty can be effectively tackled by reforming the international system of taxing profits so as to eliminate tax havens and tax dodging – "profit laundering" as they aptly call it – by capitalist corporations.

This would make no essential difference. World poverty is not caused by corporations behaving badly. Their "bad" behaviour as identified and described by the Tax Justice Network is not bad from a capitalist point of view. It is normal, and in fact it is not possible to alter it – either by legislation or by appealing to the "morality" or "ethics" of corporate leaders. It's the way the capitalist profit system works and can only work. As long as you've got capitalism, in the famous – or infamous – phrase, there is no alternative. No alternative, that is, to capitalist corporations pursuing the maximisation of profits above all else. This is not a matter of choice by corporate executives. It is not because they are personally greedy or insensitive and deliberately choose to run their corporations in this way. It's the reflection in their minds of the underlying logic of the system of which in the end they – like the rest of us in fact – are just cogs.

But what is this underlying logic? What is capitalism?


Basically, it's the market system. Not just markets – they existed before capitalism – but a whole economic system where every aspect of the production and distribution of wealth takes place via the market, by means of a vast network of buyers and sellers. This includes the buying and selling of labour – or, more accurately, of labour-power, of a person's ability to work. In fact, capitalism is based on the existence of a class of people whose only productive resource is our ability to work in some capacity or other (whether so-called manual or so-called intellectual) which we are obliged to sell on the labour market for a wage or salary. But sell to whom? To those who own the other resources essential to production: land and natural resources, and mines, factories, transport, communications. In other words, capitalism presupposes the division of society into two classes: those who own the means of wealth production and those who don't. This is not a 50:50 division, more like a 5:95 one. So capitalism is a class society. Like everything else under capitalism, the relationship between these two classes is a market one, one of buying and selling.

But there's more to this particular market relationship than to that between other buyers and sellers. In other cases, it is a simple exchange of something of one value for something else of an equal value. Such an exchange of equal values is also involved in the wage contract – we get as our wage or a salary more or less the value of the labour-power we are selling – but human labour-power has the unique property of being able to create new value. The difference between wages and salaries and the new value added in the course of producing some good or service is the source of profit, which it is the aim of every capitalist and every capitalist enterprise to extract and maximise.

Some of this profit is creamed off by fat cat directors and owners to support an extravagant life-style but most of it is re-invested. If a capitalist firm did not do this with a view to keeping its productive methods up to date so as to be able to produce as cheaply as possible, it would lose out in the battle of competition with its rivals and, eventually, either go bankrupt or be taken over by one of them. So, under the pressure of market competition, capitalist firms are forced to accumulate most of their profits as more capital.

This competitive struggle to make and accumulate profits as more and more capital is the essence of capitalism. It's an impersonal economic mechanism that imposes itself on all enterprises involved in producing for the market, whether they are owned by individuals, corporations, the state or even by a workers' co-operative. The logic of profit always ends by imposing itself, even on governments, and there's nothing that can be done to stop this as long as capitalism lasts.


Despite what some ideologists of a "pure capitalism" claim, capitalism cannot exist without the existence also of a coercive state – and never has. In fact, the state helped capitalism come into being, as by establishing trading monopolies like the East India Company and as by driving peasants off the land and into factories. But the state produces nothing (unless it is itself involved in production, as it sometimes has been) and so has to be financed by a levy on those who possess wealth or who control the production of wealth, i.e. by taxes. As the 19th century economist (and MP) David Ricardo showed a long time ago, in the end the burden of taxation falls on property and property-incomes such as rent and profit (any taxes on wages are passed on to the employer). Taxes on profits of course reduce the wealth of capitalists but they generally accept the principle of paying taxes as they recognise the usefulness of the services that the state provides them, not least the armed force to back them up in conflicts with other capitalists supported by their state over markets, trade routes, sources of raw materials and investment outlets. But they are not masochists; they'll only pay the taxes they absolutely have to. And a whole business has arisen to advise them how to minimise their tax burden.

Some companies are better able to do this than others, and the Tax Justice Network have a point when they say that:

"The ability of transnational corporations to structure their affairs through paper subsidiaries in tax havens provides them with a significant tax advantage over their nationally or locally based competitors. Local businesses, no matter whether they are technically more efficient or more innovative than their transnational rivals, will be competing on an uneven field. In practice, of course, differential tax treatment favours the large business over the small one, the international business over the national one, and the long-established business over the start-up". (John Christensen and Richard Murphy, Development Journal, September 2004).

Quite true. But why should we, as wage and salary workers, worry about this? Why should we get involved in this dispute between two sections of the capitalist class as to how the tax burden should be shared between them? Why should we take the side of small business as against large business, or national business or businesses in the Third World against international business? Taxation is not our concern as wage and salary workers. Even if multinational corporations were forced to pay more taxes (which is not inconceivable), this would not benefit us, It would only benefit their smaller, national-based competitors. And it wouldn't benefit the mass of the people in the Third World either. Only the business and political elites there who would then have more money to spend on their armed forces and their privileged lifestyles. "Tax Justice" is not our concern.


The profit logic imposes itself irrespective of the type of enterprise. In Adam Smith's day – the middle of the 18th century – most enterprises were run by individual capitalists who risked all their money; there was no distinction between their personal wealth and that of their business. So, if their business failed they were ruined. As capitalism developed more and more capital was needed to start and sustain a business. This problem was partly overcome by partnerships, but this was complicated legally and partners were also still personally liable for the debts of the business; so, if it went under they went under too.

The solution, found and implemented from the middle of the 19th century, was the limited liability company. This was a legal business entity in which people could invest money to be used as capital but only be liable in the event of bankruptcy for the amount of their shareholding. Hence the name in Britain of limited liability company. In France it was called a "nameless [i.e. impersonal] society" and in America a "corporation". Whatever they were called, all had a separate legal personality, allowing them to sign contracts, pay taxes, sue and be sued as if they were real people. Even if, as the recent film The Corporation has underlined, they were real people they would be locked up as dangerous psychopaths. No real person is so cold and calculating and so obsessive about pursuing a single aim.

As might have been expected, many of the early company promoters and directors were rogues who swindled and robbed those who put up the money for their companies, i.e. the shareholders. Legislation was therefore introduced to protect shareholders. Company directors were required to act in such a way as to exclusively further the financial interests of the shareholders, i.e. to make as much profit for them as they could. All their acts as directors had to be justified by this end: they had to try to maximise profits and were not allowed to siphon off money for themselves nor, it could be added, to spend it on "ethical" objectives which they might personally favour.

As Christensen and Murphy noted in their article:

" … tax minimization through elaborate and frequently aggressive tax avoidance is regarded as one of the prime duties that directors are required to perform on behalf of their shareholders."

"Compelled by the profit logic, and by a legal principle that asserts that tax payers may organize their affairs in such a way as to pay the least tax possible under the law, the majority of large businesses have been structured so as to enable tax avoidance in every jurisdiction in which they operate."

The Tax Justice Network thinks that this can be changed, both by changing company law and by appealing to corporate executives to behave"ethically", but they are wrong. Company law – and the legal obligation on corporations to be "a pure money-making machine" – is a reflection of the underlying economic reality of capitalism which, as we saw, is the impersonal economic mechanism of the making and accumulation of profits as more and more capital. No law will ever be passed that goes against this impersonal logic of profit – and, even if it were, it wouldn't work. Any government which tried it would cripple industry within its borders by rendering it less competitive internationally, so provoking an economic crisis and mass unemployment – and the coming into office of a government that would repeal the legislation in question. Within capitalism there is, quite literally, no alternative to corporations being pure money-making machines.

So, if there's no way out under capitalism what are we in the Socialist Party proposing? Basically, to end capitalism, not trying to patch it up or trying to make it work in some other way through tax reforms. Capitalism. So, we're talking about a world-wide change, a global change in both senses of the term. Both world-wide and thorough-going.

To end the operation of the impersonal economic mechanism of the pursuit and accumulation of profits as capital, the first thing that must happen is that the natural and industrial resources of the planet must stop being the property of rich individuals, corporations or States and become instead the common heritage of all humanity. On this basis, the productive resources of the world can be freed from the tyranny of profit-driven market forces and become available to be used, under democratic control, to simply turn out the things that the world's population needs to live and to enjoy life, in accordance with the principle "from each according to their abilities, to each according to their needs".

In the current atmosphere of cynicism, apathy and alienation, to talk in terms of a world-wide democratic revolution to replace world capitalism with world socialism must seem incredibly utopian. Be that as it may, it is the only way out and until people organise to abolish the capitalist profit system the problems we have been discussing will continue. The real utopians are not us, but those like the Tax Justice Network who still think that you can doing something constructive within the capitalist framework of class ownership and production for profit. You can't.

Adam Buick