Saturday 22 October 2016

System is rigged for the rich so the poor borrow to get poorer

Published 07/09/2016 | 00:00

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Sometimes you could be forgiven for feeling the best qualification to participate profitably in this Irish recovery is not being Irish.

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 Last week, we had Apple squirrelling away billions and now we have Nama selling large chunks of the Irish economy, billions of euros of assets, cheaply to foreign funds. Yesterday, we had confirmation that rather than paying tax on their earnings here, these funds are using a loophole to avoid tax.

A question worth considering today is whether Nama sold to these funds knowing the funds would use a loophole to avoid tax? This is impossible to answer, but it's a question worth asking.

Several large vulture funds are using this structure, called Section 110, to avoid paying tax on revenues from their Irish operations. The S110 was set up in 1997 to enable IFSC companies avoid tax, quite legitimately, on revenues which were gathered elsewhere in the world. It is usually done via a profit-participating note, a type of funding advanced by a parent company or a lender controlled by a parent company. Repayments on this loan are garnered from repayments on the underlying asset, and shifted offshore.

But the repayments in the case of the vulture funds/landlords operating in Ireland are Irish-generated income. These are rents paid by Irish businesses and tenants to their new landlords and the money is leaving the economy directly. The Irish State gets nothing.

The fact the Government has finally moved to close this tax loophole is to be welcomed.

The problem with this story - apart from the lack of fairness of it all - is that if these funds are allowed to move their money out of the country, the Irish tax base gets narrower. When your own state actively narrows the tax base, if the state wants to maintain the level of public services, it has to tax those who can't avail of these tax avoidance schemes much more.

As well as looking at the fairness of these tax loopholes, I want to talk about the average citizen who can't avail of these taxavoidance schemes whether they are for vulture funds or companies like Apple. I want to show how the system is rigged for the rich and how by just standing still, the already rich get richer and the poor get poorer.

I will do this by looking at the realities of debt in the modern western economy because debt is driving everything, in particular it is driving inequality which is forcing people to vote for extreme candidates like Trump.

Before we look at the reality of debt for poor people, let's go back to the vulture funds and examine the use of debt by rich people.

The vulture funds were in the position to buy Irish assets over the past few years because they had access to debt and could borrow cheaply to buy the discounted Irish assets. This type of borrowing for investment is one end of the borrowing scale. It is the rarified world of wealthy borrowers. Even before they get a tax break, the rich are in clover. Rich people use debt to invest. These investments generate income and profits. When debt is scarce, there's a bigger opportunity to make money. This is because when there is no credit about, assets will be sold extremely cheaply - as happened in Ireland.

Typically, rich people also borrow at low interest rates because they have collateral to back up their borrowings.

But there's a massive difference between how rich people use debt and how poor people use debt. This difference is driving inequality - the single biggest political issue of the Western world. However, mainstream politicians don't seem to understand the connection between debt and poverty. They therefore seem to be perplexed when the little guy votes for someone like Trump who says he has an easy answer.

Let's stand back and see what's going on. The entire Western economic system is characterised by debt. Banks want to push as much debt as possible into the system. So for the banks, periods when access to debt is difficult are disastrous. Banks make no money if you and me are not in debt. The biggest difference between the economy of my adult life and that of my father's, 40 years ago, is debt. In my Dad's time, people didn't get into debt. Now debt is the norm.

But let's see how this debt world works from the perspective of equality. While rich people borrow to invest and this investment generates profits and income, poor people borrow to consume. Once you borrow to consume, you are in trouble because there is no stream of income accruing from those borrowings. There are simply repayments. These repayments don't add to your income but detract from your income.

So when poor people borrow for Christmas and communions or the like, they start to get poorer, not richer. They also pay much higher rates of interest on their borrowings, so they not only get poorer but they get poorer quicker. As poor people's incomes stagnate, their ability to give their kids the lives they want diminishes too. But there is always the opportunity to borrow and of course, as banks make money on other peoples' borrowings, the bank will always have an incentive to hook the poor person in. You don't have to go all the way down to moneylenders to see this process in action.

Consider the simple car loan or holiday loan. These are standard products, which serve to make the average guy poorer because they are constantly sucking income away from such borrowers.

Now you can argue that people shouldn't take out loans they can't afford. But the problem is they can afford them technically, but the loans are just making them poorer. And, the incessant consumer advertising influences the vulnerable profoundly.

This is the reality of debt.

Rich people use debt to get richer because they invest and poor people use debt to get poorer - and they don't realise it. So as more and more debts are pushed into the system to finance our consumer lifestyles, the gap between rich and poor gets bigger. The awful irony is that 'trying to be like the rich guy' is often what is driving the poor guy's spending patterns. He doesn't realise that trying to look and live like the rich dude is actually what is making him poorer, not richer.

And of course, unlike the rich guy represented by the vulture fund, the poor guy never gets a tax break.

Is it any wonder people are voting against the elites when the game is so rigged?

Irish Independent

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