independent

Wednesday 16 April 2014

James Downey: Google chief Schmidt pushing all the wrong buttons

ERIC Schmidt, chairman of Google, has declared himself proud of his company's ability to avoid paying colossal sums in tax. "That's capitalism," he tells us.

Mr Schmidt's practices are far from rare. Massive avoidance schemes are common in some of the best-run countries. They are designed by very clever people. And they're perfectly legal, unlike the criminal offence of tax evasion.

But they're not capitalism. Not necessarily, anyway.

Many ardent free marketeers cite Adam Smith, the "father of economics", as their model and inspiration. They only quote the bits that suit them. These do not include the principles of taxation which he laid down in The Wealth of Nations more than 200 years ago.

According to the great thinker – he was a moral philosopher as well as an economist – "the subject of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the law".

He made an exception, though in a somewhat hesitant manner. "It is not very unreasonable," he wrote, "that the rich should contribute to the public expenses, not only in proportion to their revenue, but something more than in that proportion."

That wouldn't suit Mitt Romney. The loser in the American presidential election has a fortune estimated at $250m (€190m). He pays a lower tax rate than the average teacher or electrician.

Millions of Americans think that's the way to get economic growth. Not enough to elect him. In the United States, as everywhere else, most people have firm notions about fairness. They may not find it easy to define, but they get very angry when they see what looks to them like blatant injustice.

And that is the central reason why an Irish government that swept into office less than two years ago finds itself battling against the public fury inspired by a Budget that in the view of the average citizen (thankfully, we are not "subjects" any more) broke the rules.

One measure tells it all. The Government cut child benefit for everyone when it could have taxed or means-tested the payment. People think that isn't fair. They're right.

When faced with almost any criticism of this kind, ministers plead "the troika". In our efforts to bring the public finances under control, we are not free agents. We have to satisfy the European Union, the European Central Bank (ECB) and the International Monetary Fund ( IMF).

But we don't have to satisfy them on every detail. And we know that the components of the troika are divided among themselves. Specifically, there are sharp differences of opinion between the ECB and the IMF.

The ECB and Chancellor Angela Merkel are moving at a glacial pace towards a solution to the European debt crisis. The pace does not suit the IMF.

It has urged the EU to move faster to an agreement on separating bank and sovereign debt. Nothing would please our Government better. But the IMF has also expressed – publicly – its dissatisfaction with the same Government on the subject of fairness.

Can this be the same IMF that once supported military dictatorships? Yes and no.

Yes, because its policies, right or wrong, were adopted then and now in the interest of economic growth. No, because under the benign rule of Christine Lagarde (and before that of Dominique Strauss-Kahn, though we don't mention him in front of the children) it has interpreted its brief in a broader way.

From time to time in recent months, we have heard hints that elements of the troika have various reasons for disenchantment with Ireland. The hints have now been partly confirmed. We have not yet had public confirmation of another cause of discontent: fear that Irish politicians do not understand, and have little interest in, the need for radical reform.

If the open criticisms, and the (so far) private criticisms, bring pressure on the Government for worthwhile legislative and public service reform, that will be the best collective Christmas present that Santa Claus could bring us.

But in the end it comes down to the politicians. How many of them have any idea how the capitalist system works? Have they read Adam Smith? Or David McWilliams, who can explain it in the language of the 21st Century?

If they spend just a few hours of their holidays reading basic economics, they must conclude that Adam Smith was right and Mr Schmidt is wrong.

Tax avoidance and unfair measures have effects very similar to those of excessive taxation: the growth of the black economy (€5bn at the latest count) and undermining the social contract. They get in the way of making the system work. And we have to make it work. But not in Labour's way. Not in Fine Gael's way. And not in Mr Schmidt's way.

Irish Independent

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