Ian McAuley. Is capitalism redeemable?  Part 4: Moral conflicts

Luxembourg (more properly the Grand Duchy of Luxembourg) is one of Europe’s smallest sovereign nations, both in population (about the same as Tasmania’s) and area (about one thirtieth of Tasmania’s).  Many Australians might have driven right through it, not realizing that in a half hour or so they had crossed a whole nation.

If corporate accounts are to be believed, however, it is a major centre of economic activity. Ikea, Fedex and Amazon – all firms with global distribution functions – realize a large proportion of their profits in Luxembourg, even though it is landlocked.

But if you linger in Luxembourg you won’t find any Amazon depot, and not even an Ikea retail outlet. Nor will you find an Australian bar for employees of AMP, the Macquarie Group, Lend Lease and the Goodman Group, companies which also report a significant presence in that country.

Luxembourg is in the Australian news because those firms and many others, using various techniques of transfer pricing, declare part of their profits there, taking advantage of its low corporate tax rate.  In other words, they are engaged in tax minimisation, at the expense of our own public revenue.

Whether such schemes are legal is a question for the courts. But by any reasonable criteria we are entitled to feel that there is something morally wrong about such corporate behaviour.

The common corporate rationalization for such behaviour is that everyone else does it. It’s an excuse we probably tried as children, and learned that it didn’t have much traction. But before we jump in and condemn the corporations, let’s look at that rationalization in two situations we may encounter when we’re in a stadium watching a football game or the races.

The first situation is where we may be tempted to shove our trash under the seat, observing that many others do likewise.

The second is when we stand up during an exciting part of the event, presenting the person behind us with the choice of looking at our backside or standing up herself. Our rationalization is that the person in front of us stood up.

Both decisions – discarding trash under the seat and standing up – incur costs on others. But in the case of the trash the personal cost of finding a bin is trivial. In the case of standing up, the personal cost of staying seated is significant. (Those who have studied game theory will recognize the latter as a “prisoners’ dilemma” situation.)

To generalise the issue, there are many situations where we do the wrong thing because we are penalised for doing the right thing. These are morally difficult situations where reasonable people feel they have no choice but to act unreasonably.

Those situations are often faced by corporations in competitive markets. The firm that doesn’t minimize tax, that doesn’t misrepresent the quality of its products, that doesn’t ruthlessly exploit its workforce, that doesn’t pollute the environment when its competitors are doing all these things may be sending itself out of business, or paving the way for an even more ruthless raider to take it over.

In competitive situations it is not feasible or fair to leave sole responsibility for good behaviour with the corporations. The moral responsibility is a collective one, involving a recognized higher authority. Returning to the stadium situation, if there were an enforceable rule requiring us to stay seated in the stadium, we would all be better-off.

In relation to corporate behaviour that authority is the government, which is where the prime responsibility lies. We elect governments to protect the weak against the strong, to protect the public interest against the sectional interest.

Politicians, in defence of weak regulatory effort, may claim that in an interconnected world individual nation states are powerless, but there are vehicles of multilateral cooperative action, such as the World Trade Organization attending to the rules of trade. The hurdles to cooperation on taxation, labour standards, product safety and environmental protection (particularly the urgent issue of global warming) are not insurmountable.

That doesn’t get corporations off the hook: they have political influence.  In that regard it was disappointing to hear a spokesperson for the Business Council of Australia suggesting that governments should not pursue international tax reform too vigorously.

While the Australian travelling through Luxembourg may not see much sign of corporate activity, he will see excellent publicly-funded public transport, roads, schools and a health care system.

The traveller, having been driving on French or German roads, may notice that Luxembourg has low gasoline taxes. Will he yield to the temptation and top up his rented car, or will he wait till he is over border and chip in to pay for the roads he has been using?


Ian McAuley is a retired lecturer in public finance at the University of Canberra and a Fellow of the Centre for Policy Development.

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2 Responses to Ian McAuley. Is capitalism redeemable?  Part 4: Moral conflicts

  1. Avatar Michael D.Breen says:

    Agreed with Walter Hamilton on Ian McAuley’s work. Not sure of this is ad rem, but…There is a, or used to be a fascinating defense of tax avoidance by Catholic tax payers as taught in Moral Theology in seminaries. The proposition was that since Catholics payed taxes and were also obliged to fund their own school system they were paying twice for education. So they were entitled to get back some of what they paid in tax, and if they could get away with it without the authorities knowing they were on side with the law and still acting morally.The practice went by the wonderful title of Occult Compensation. This was particularly gratifying to Catholic hoteliers of Hibernian decent.

  2. Avatar Walter Hamilton says:

    Ian McAuley writes eloquently on the theme of wayward capitalism. I particularly liked his comparison of the capitalist excusing his tax avoidance strategy by saying ‘everyone else does it’ to the sports spectator who leaps to his feet, blocking the view of those behind, because someone in front of him has done the same. Any corporation doing business in Australia should be PROUD to pay its fair share of local tax because only that way can government pay for the services that support the civil society on which successful capitalism depends for its future. Consumers, in the meantime, should show what they thing of tax avoiders by avoiding doing business with them. On another level, paying cash to the trademan who does not declare GST is also robbing the public purse.

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