Monday, January 21, 2013

Day 4 - Is making real Solutions out of the hands of the legislators due to lack of funds (no money to build a world that works)?

Before I start I would like to say to Viktor's (Day 1) and Mike's (Day 3) posts that I agree that law is made overly complicated through its scattered nature and difficult terminology. Because of this I can't wait to get down to de-constructing, investigating and exposing the system with you. Looking forward to working with you guys! 
In my view there is only a single reality to talk about and this reality is something that everyone can understand - after all we are quite literally built for it. The reality of things doesn't change through fancy terminology - however the attempt to see, realize and understand what is being said might stop when facing a barrage of previously unknown words. Therefore while I aim to use the correct terminology (because of I am studying the subject - I take this opportunity to investigate and practice) I also aim to explain them directly, through context and/or through links. I can discuss anything that remains unclear in the comments - Enjoy!

NoteI compared data from a few different sources. I am not a trained expert with numbers and therefore my calculations are approximate. If I find some errors I will correct them. 

The legislation of each nation is decided by the Process of each nation.

Every nation has its own process by which it decides on how to organize for example its crime control. Within the preparation of each new law and policy of my country the scientific institutions are consulted for suggestions, perspectives and advice. When it comes to crime control the process should turn to criminology and its many viewpoints that each offer a different way of explaining, and therefore fixing, the problem of crime. 

In a democratic system science (that something has been proven) is not enough - "political will" is also required. To get an idea of how political will for change comes about I will have a look at how Finland started its anti-tax evasion project in 1996. Since then Finland has had 6 consecutive projects and a new one is just starting.  

I specifically chose this topic due to its controversial nature: in one hand most are aware that it hurts a nation and the lives of each one there to loose tax revenues, but on the other hand the people who make this happen the most are people that are close to positions of power. Thereby the current inequality of opportunity is quite problematic in terms of finding the "political will" to make the necessary changes to it.   

1) In the 1970's the committee on tax evasion expressed concerns about how widespread tax evasion really was - or more specifically the loss of tax revenues. It was estimated that the annual losses were around 400 million Finnish marks. One of the cases exposed was a partially government owned television factory Salora Oy. The topic of white collar crime and tax evasion was was raised in public discourse but then soon forgotten after additional resources were dedicated to research and the a tax inspection unit with police jurisdiction was formed. 
2) In the 1980's the problem resurfaced when research reports (by a committee headed by Jukka Pasanen) started to project alarming estimates on how much tax revenues were lost (several billion Finish marks) but the accelerating economic growth created a lack of interest to address the problem.  
3) In the 1990's Finland faced an economic depression and the question of tax evasion and white collar crime as the reason for lost tax revenues resurfaced. During that time of economic ruin the Minister of the Interior stated in a speech he gave that [rough translation] "Finland has dreamed the dream of the sleeping beauty for these past ten years after the committee of Pasanen. Now we are in the economic and in the international situation that we have to invest in the fight against economic crime (lost tax revenues) with more devotion and vigor". 
Talousrikollisuus ja sen kontrolli Suomessa 
(Financial crime and its control in Finland)
Anne Alvesalo-Kuusi, University of Turku

At this point Finland was in a position where the media had made it public how wide spread tax evasion and white collar crime can be with the Salora case, 20 years worth of scientific data on the topic had been created and the economic situation was threatening the foundation of our welfare state (economic endeavor and taxation).

The driving principles of the formed "political will" were mainly economic considerations - not just any economic considerations but being on the brink of ruin - and the demands made by the public (fixing the economy was the only question on the minds of the public during the economic depression of the early 90's). 

In my opinion the problem within this can be depicted by comparing an artist to an entertainer: an artist creates art for the sake of the expression itself until it reaches perfection (if it can ever even do so). An entertained in the others hand develops an image and designs a show that brings in an audience - here the show is as good as is required to please the audience and to thereby bring in the money. Now with entertainers we know that we are paying to see a show (not art), but with politicians it is rarely realized that instead of real artists we have entertainers who are trying to make a living. Why else would we time and time again apply short term solutions to long term problems? 

Now to place my opinion into perspective I must ask the question whether or not the way Finland started to combat tax evasion and lost tax revenues was effective - whether or not it solved the problem or if it was merely a gesture to make "the audience applaud" and then go home satisfied that something is being done. 

Did the projects bring back lost tax revenues? 


The statistics show that in 2007 807 inspections exposed 218 million euros in lost tax revenues from which 36,8 million was recovered (16,8%), in 2008 821 inspections exposed 245 million euros in lost tax revenues from which 59,1 million were recovered (24,1%) and in 2009 802 inspections exposed 258 million in lost tax revenues from which 35,3 million was recovered (13,7%). The average return of lost tax revenues during the years 2007, 2008 and 2009 was 15,15% or 43,7 million euros. 

(Counter-Tax Evasion Monitoring Report 2009)

Unfortunately the report is not that clear about nature of the corporations that "got caught". However the report lists 4 different crime types and how much they were committed (tax evasion, grand tax evasion, accounting violation and grand accounting violation). Now for regular tax evasion and accounting violation simply neglecting to report information is seen as a felony regardless of motive - technically I even commit a felony each day my taxes remain unpaid - which suggests that some of the inspections were "false alarms" and more recollected revenues were listed from taxes that would have been paid anyway but only a little late. In the grand versions of these crimes one has to neglect something completely or distort the information given for taxation with the specific purpose of evading taxes. 

From this one might conclude (?) that the companies that were busted for tax evasion were either organized crime or small to medium enterprises and larger companies which do not afford tax avoidance (because then the company would be legal).

  • Tax avoidance (from wiki): Tax avoidance is the legal usage of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. 

In the light of a much larger problem: Tax avoidance.  

Tax avoidance of private citizens alone through tax havens is estimated to be 11,5 trillion dollars (~8,63 trillion euros). It is estimated that nations loose 255 billion dollars (~191,44 billion euros) in tax revenues this way. This figure divided by the number of nations in the world (204 according to the United Nations) the annual tax revenue losses of Finland comes down to 981 million euros (one nation average)

This figure is 380% more than what was exposed in 2009 through tax evasion inspections and 2244% more than the sum that was actually reclaimed that year. It is improbable that Finland actually looses this much taxes - especially through private citizens alone - but even if I halve the figures or divide them by 3 they are still quite staggering.  

NoteI will write a post about how Tax Avoidance works (suggested read: Nicholas Shaxson - Treasure Islands).

(The Global Economy of Tax Havens)
Attac Finland
(Counter Tax Evasion Monitoring Report 2009) 

If this is the damage, why the consent?

Countries are dependent on the economic endeavor it can tax and the loans it takes. Within the current economy the market of each country contains many international companies (on top of the local ones) which bring a lot of employment in whatever country they operate in (as well as the tax revenues). These companies choose where they operate and thereby nations are engaged in tax competitionSimply put "the game" (national regulation) has to favor the "larger players" to arouse their interest to come to a nation in the first place to provide jobs for the people and because this has been going on for a while "the game" is currently pretty one sided.  

The scope of the legislation that multinational corporations can choose from is extensive - basically the tax laws of each nation and the trade agreements and unions between nations. I know two examples of how a corporation can benefit from existing in several countries and I will write about these as well as Tax Competition in Finland in a later post (suggested read: Matti ylönen - Veroparatiisit)

Small entrepreneurship devastated, trying to cut tax revenue losses by hassling criminals and the "little guy" and social spending dropping due to an unequal "playing field" letting the "big players" avoid taxes - shit

In the light of how much tax revenues are lost to tax avoidance (which existence is ethically dubious to me), tax evasion hardly seems like a problem except in the case of organized crime. With the increasing control of tax evasion, but hardly anything being done to equalize the inequality made possible by tax avoidance I think it is safe to say that the real problem is not being addressed. I am still searching this but so far I've found activist/"practivist" groups (such as Attac% and Ems) and a few researchers who suggest (authors of the books mentioned in this post for example) that action should be taken, but no conclusive action is being taken. Without going more into why the world's attempt to fix itself is only a seeming one, I will just leave this here

  On a personal level the entrepreneurs that I've met through my small advertising company have all had tax problems due to money being tight. Re-sale for example is quite impossible in the presence of huge stores for pretty much all goods and services. Often people want to "buy local" (support the "little guy") but the buying power of their salary has dropped so dramatically through out these consecutive depressions since the 90's that they must resort to the cheaper prices of the "bigger players". Therefore even though large corporations bring jobs to a nation they make entrepreneurship A LOT harder. 

On a national level it seems that much of the decision-making required to solve problems like unemployment, disappearance of small to medium enterprising to competition and everything that low tax revenues leads to is out of the hands of the legislators and in the hands of the capitalists. Simply put, legislators can decide all they like but without tax revenues or loans they can't do shit. The action that ultimately solves societal problems requires money to change hands or the system of money to change so that necessary actions can be taken. 

Currently the "smaller player" has to accept a disadvantageous position to the "bigger players" because they have the money - money that is required for all economic endeavor. This is a problem. I mean, I'd be glad to make someone stinking rich (even on my own expense) for building a world that works - this one obviously doesn't and it already makes people sticking rich. Consuming as the prime objective of society should definitely be changed into something else. 

Gotta study up on the EMS solution mentioned by Viktor and Gabriel

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