The EU’s ruling on Apple’s Irish tax affairs is a sign of two different sets of change: the ending of the ICT boom, and the decline of globalisation

Silicon Valley seems surprised, and not for the first time, by the fact that the European Union has a different view of its business practices than it does. Apple is perplexed (even maddened) by the decision of the EU’s Competition Commissioner, Margrethe Vestager, that it should pay the same rate of corporation tax as other companies doing business in Ireland–and that it therefore owed €13 billion, perhaps more, in back taxes. Bloomberg explains the issue well.

Google, similarly, has been perplexed by the three separate anti-trust suits that the EU has filed against it. One relates to its advertising business; a second to its shopping service; the third is about whether Google has been giving preferential treatment to both Search and Chrome in its Android operating system.

So what’s going on here? Two separate things: first, it’s about the coming end of the ICT boom that has dominated innovation and culture since the mid-1970s; second, it’s about the limits of corporate power and influence as economic globalisation declines.

Patterns of innovation

I’m a fan of Carlota Perez’ model of the relationship between finance and technological innovation. She suggests that since the British industrial revolution, we’ve been through five technological “surges,” each lasting around 50-60 years, and following a similar pattern. There’s an “installation” phase, in which infrastructure investment is funded by finance capital. There’s a crash, when investment returns fall short of expectations. And then there’s a deployment phase, when companies with customers (“production capital”) pick up the pieces as the market moves from early adopter to mainstream, and make a fortune, before the market matures, the rate of growth cools, and the return on investment falls.

It’s a heuristic, not a law, and not everyone likes it (Paul Mason is particularly critical in PostCapitalism), but as a heuristic, it has quite a lot of explanatory power. Some of that explanatory power is about how dynamic economic sectors run out of steam.

‘Twilight of the golden age’

The characteristics of the market in the “maturity” phase of a technology surge are falling productivity and profitability, caused by the saturation of markets, maturing technologies and commoditisation. This underlying story is disguised, because there are still “shooting stars” (my phrase, not hers) with short life cycles, because they benefit from learning curves and launch into saturated markets. It is also disguised because, as Perez writes in Technological Revolutions and Financial Capital, “the signs of prosperity and success are all around.” [p54]

The companies that have prospered during the market acceleration phase are large enough to postpone the problem, whether through mergers, through acquiring smaller firms, or squeezing them out of the market, or diversifying into other sectors. [p82] The result? It “is the twilight of the golden age, though it shines with false splendor.” [p54]

In particular, it shines with false splendour because of the gap that has opened up between societies and corporations. “[U]nfulfilled promises had been piling up.” There “is an increasing socio-political split.” The social optimism of the early part of the technological surge started has not been realised. In making this point, Perez uses as examples the machine breaking and corn law protests of the early 19th century and the protests of 1968.

The dissatisfaction and frustration driving them both is of a fundamentally similar origin: capitalism had been making too many promises about social progress and not delivering enough, showing too much capacity for wealth creation and not distributing enough [p55].

Social and political costs

The dissatisfaction over corporate tax avoidance, and even the Google buses, perhaps represent elements of a similar mood now.

If that’s the big picture, the detail also changes. One of the things that creates this change in mood is that the social and political costs of the new technologies, the “externalities,” start to become clear. And as the businesses start to slow down, in terms of their accumulation or return on investment, so regulators and policy-makers, even politicians, start to catch up. They start imposing constraints to reduce these external costs.

A comparison with the last technology surge might help. In the UK, during the late 1950s and 60s, the final leg of the cars/auto technology surge, we saw the introduction of parking meters, and drink-driving limits. Seatbelts followed a few years later.

Pushing to extremes

In futures terms, borrowing from the McLuhan’s Tetrads, the gap between the policy-makers and the businesses is down to their mental models. The policy makers are worried about what the technology is “reversing into”: the Tetrad question here is, “What does it flip into when pushed to extremes?”. In other words, what it becomes when it saturates society. The businesses, in contrast, are still caught in their founding myths, captured in the Tetrad model by “retrieval”: “What does it retrieve that had been obsolesced earlier?” This question is about the metaphor that the technology has wrapped itself around.

And thus, for example, we have the frankly embarrasing sight of Mark Zuckerberg of Facebook hailing the anniversary of the World Wide Web, apparently on the wrong day, while his business does everything it can to subvert the principles of openness on which the Web was built.

So what do these different businesses reverse into? Google and Facebook make money by selling the network surplus created by the interactions of their billions of users on to advertisers. (“If you’re not paying, then you are the product.”) As revenues stutter, they have to find new information about them to sell, as Facebook is currently doing with WhatsApp. Or privilege certain advertisers, as Google is effectively alleged to have done by the EU.

‘You didn’t build that’

For Apple, which is still mostly a design and manufacturing company, with a content distribution business layered on, the argument is that “you didn’t build that“. Businesses are built on public assets, as Mariana Mazzucato argues in her book The Enterpreneurial State. She has a particular interest in the iPhone.

Of course, all of these businesses also largely rely on the public sector, in every market in which they operate, to educate their workforces, to keep them healthy, and to put in useful infrastructure such as road and rail, often sweetened with development grants or soft funding.

The limits of globalisation

And this takes on to the second aspect of the EU decision, which is about the limits of globalised businesses and their relationships with states. One of the more interesting aspects of the EU judgment is that it’s not a fine that would be collected by Brussels. Instead, the competition decision is that because Apple was allegedly given a different rate of tax in Ireland from other corporations, then this tax agreement represented a form of state aid that is illegal under EU rules. Therefore, Apple is obliged to pay to the Irish government €13 billion in unpaid taxes.

We’ll pass over the disingenuous special pleading that Tim Cook offers in his “message to the Apple community in Europe,” in which he walks through the history of Apple’s investment in Cork, even calling up the sainted Steve Jobs in support, as if it were an act of charity rather than because the company needed a manufacturing base in the EU and Ireland offered an educated English-speaking workforce in a relatively low-wage area with added inducements.

European landing stage

It’s not chance that it was Ireland that ended up in this position. In his book Ship of Fools, the Irish Times columnist Fintan O’Toole, of whom more shortly, observes that Ireland’s particular history means that by the 1990s it the country was part of a modern global economy but with a pre-modern political system. It has missed out on the messy modern stage where the norms and expectations of democratic government are created.

The way the Irish economy modernised over the last fifty years, in effect, was by being offered as a European landing stage to mostly American businesses, while offering the kind of crony deals that were the meat and drink of local Irish politics.

This had its upsides. As Fintan O’Toole notes this week in an article,

If Ireland has sold its soul to the corporations, it has arguably got a very good price for it – not just jobs and tax revenues but a relatively peaceful transition from conservative nationalism to global modernity.

New rules of engagement

After a couple of days of dithering Ireland’s government decided to appeal against the EU decision. But the country’s traditional ruling parties, whose hold on government has been fragile since the financial crisis, are squeezed two ways here. For one thing, citizens, and opposition parties, will have a view on whether the government should be helping Apple hold tight to €13 billion.

Perhaps more significantly, O’Toole reads the EU decision as another marker that the rules of engagement between states and corporations have changed.

The EU ruling is itself a symptom of a much bigger shift: amid a longterm crisis in global capitalism, massive corporate tax avoidance is becoming politically unsustainable. And a vision of Ireland that places the facilitation of that tax avoidance at its heart is therefore not sustainable either.

Other signs of this change: the OECD’s anti avoidance campaign and the leaking of the Panama Papers.

Taking the lid off tax

As Bloomberg columnist Justin Fox put it,

it seems pretty clear that the devices used by U.S. tech giants to shift their European income not just to low-tax jurisdictions but to nonexistent ones are proving to be a step too far.

And generally, you have to say that when US companies have lost the support of Bloomberg in a fight with the EU, they’re a long way out of step with opinion.

But as the European Commission diagram at the top shows, there’s also a bigger box that might be prised open. The opacity of Apple’s tax arrangements (and many other corporations) makes it hard to do the sums reliably. Correcting that problem leads quickly to country-by-country reporting, which tax justice campaigners have long advocated as part of the  route to greater tax transparency. If you’re a global multi-national, the squeeze is on.

James Meek offered a different account of the Robin Hood story in his recent London Review of Books lecture at the British Museum. Essentially, he argued that the underlying idea of Robin Hood, the apparently progressive notion that “he takes from the rich to give to the poor,” had been captured by pro-austerity politicians and rewritten as a story about the evils of tax.

Meek’s text has now been published by the paper, along with a recording of the lecture. In this post I’ve improvised a little around his argument before adding some reflections of my own.

National myths

As Meek observed, stories have a climb a high bar to make it as national myths: “any individual must be able to interrogate their own memory to assemble their own version of the myth.”

Robin Hood clearly passes this test; it’s a story most people can tell, partly because it gets retold constantly. He didn’t mention this, but by my count there have been something like 25 films and television series worldwide about Robin Hood in the past 25 years, each using the story malleably to their own ends.

The idea of the noble robber also runs deep across many cultures, from Pancho Vila (not mentioned by Meek) to his recent counterpart, El Chapo, who turned himself in rather than have to spend more time talking to Sean Penn, to Jesse James in the US. A Woody Guthrie song celebrates the Depression-era outlaw Pretty Boy Floyd, known as the “Robin Hood of the Cookson Hills”. Indeed, the archetype of the bandit is so common that the historian Eric Hobsbawm was able to write, and re-write, a whole book exploring its meaning.

But at their heart, these bandit stories tell the same story: the bandit who is outside of the law because he fights oppressive authority and sides with the poor.

A feathered arrow

At the heart of the Robin Hood story, there are four actors, or perhaps five. First, the Sheriff of Nottingham, the agent of the wicked King John, who has to collect taxes from the people to pay for John’s catastrophic wars. Second, the people, oppressed, scraping by, with not enough money to pay the extra taxes. Third, Robin Hood, the dispossessed Earl of Locksley, now living as a bandit with the band of Merry Men in Sherwood Forest. Fourth, the absent King Richard, who would (surely) sort everything out if only he were here. And, perhaps, Maid Marian, described as a “beard” by Meek, but even if not, seems to exist mostly as a plot device.

For Meek, the core story in the Robin Hood narrative is the moment when he ambushes the Sheriff’s coach in Sherwood:

A column on horseback rides in wary silence between the trees. First comes a soldier in chain mail; then a haughty gentleman, dressed in clothes that are at once ostentatious, expensive, and redolent of decadent fetishes; then a cart carrying an iron-bound strongbox, guarded by more soldiers; then the rearguard. A horse rears and whinnies. A feathered arrow is embedded, quivering, in the bark of a tree, just in front of the rich man’s arrogant nostrils. The soldiers draw their swords, but it’s too late; each finds himself with an outlaw’s arrow pointing at his head. The rich man, who turns out to be the sheriff of Nottingham, becomes a snivelling coward, begging his attackers to take the money and spare his life. The strongbox is taken and forced open. Silver coins spill out. The outlaws are about to fill their pockets, but Robin wards them off: this money is for the poor.

Weighed down by taxes

Meek’s argument was that in recent years, the wealthiest and most powerful had stood the myth on its head. By some rapid re-framing, the poor find themselves in the box where the rich used to be.

Suddenly it’s the poor who are “living in big houses, wallowing in luxury, and not needing to work”, while those previously known as “rich” are now instead working hard but weighed down by taxes. Papers like the Daily Mail prop up this new version with tales of people with 11 children  living on the public purse. This is not, though, a uniquely British version: like many other stories told of contemporary Britain, this one originated in the United States in the 1970s, with the myth of the “welfare queen,” a story told by Ronald Reagan of a black woman (always a black woman) who drove to the welfare office in her Cadillac wearing her furs to collect her check. In short, anyway, it the poor, not the Sheriff, who are oppressing us, and this version of Robin Hood is on talk radio complaining about taxes.

And it is this story about the world that is being summoned from the deep whenever a politician refers to “hard working people,” a trope that is used by Canadian conservatives such as Stephen Harper and American Republicans such as Mario Rubio – and, perhaps more stupidly, by British Labour politicians who are giving the political ground away to their opponents. But, suddenly, anyone who works for a living, from the Duke of Grosvenor to a zero hours barista, have become the oppressed of the earth. Taxation is a form of “robbery from the hard working peasantry to fund the lifestyles of idle hedonists.”

Suddenly, then, we’re in the land of George Bernard Shaw’s satire on 19th century notions of the “deserving poor” rather than the “underserving poor”. But it’s not being read as satire any more.

Shabby rich men

The most intriguing part of the lecture was Meek’s short history of taxation. Britain’s first income tax was introduced by Robert Peel in 1842, at just under 3% on incomes over £150 per year (approximately equivalent to something over £100,000 today) to enable him to remove tariffs on various foods, a redistribution that the Conservative Party didn’t forgive him for. In 1908 the Liveral Lloyd George introduced means-tested pensions, paying for them by adjusting the taxes paid by the 12,000 richest people in the country. “If there are amongst them”, he said, “men who grudge out of their riches a fair contribution towards the less fortunate then they are very shabby rich men.”

The increase in taxes after World War 1 was partly driven by the need to pay off war debts. But in general, tax rates on the rich were highest in the United States. “For almost fifty years in the middle of the 20th century, the era Americans commonly consider their golden age of prosperity and power, the wealthiest among them – fewer than 1 per cent – were paying federal income tax at an average rate of 81 cents on the dollar.” The reason this was politically possible was, according to the French economist Thomas Piketty, because of a belief that the rich were responsible for the Depression, and because of a concern that without high tax rates America would become as class-bound as “Old Europe.” When George Harrison sang, in Taxman, “There’s one for you, nineteen for me,” he probably had America to blame for his 95% marginal tax rate on top earnings.

One of the mysteries of the present age, then, is how the rich managed to escape blame for the current crisis, when it was driven by the finance class every bit as much as the crisis of the 1930s. But part of it is probably the long ideological assault on social democratic ideas since the mid-1970s, when, of course, Britain reached the high water mark in terms of equality.

Universal networks

The assault on tax was part of that. Meek reminded us that all sections of society now pay less tax than they did in 1977—except for the poorest 20%.

In 1977, the least well-off fifth of households paid 37 per cent of their gross income in direct taxes (like income tax) and indirect taxes (like VAT), against 38 per cent for the richest fifth. In 2014, the tax take from the poorest group had gone up to 37.8 per cent, while the taxes paid by the richest had gone down to less than 35 per cent.

The tax take underestimates the effect. The poorest are also more likely to be gouged by privatised utilities. Meek positioned a set of “universal networks,” including energy, water, transport and even housing that society deems essential such that people should have access to them at all times. Following privatisation these monopolies are more expensive for the poor. Health and education are also universal networks, and just about remain free at point of use, but the process of what he called “autonomisation” via Health Trusts and educational Academies make these networks ripe for financialisation as well.

Bandits

The bandit, as Hobsbawm implied in his book, is essentially a pre-modern figure, living in the spaces left by an underdeveloped state. In most countries, bandits essentially disappeared as the state became more centralised, although they do reappear when the state’s influence contracts. (As in Mexico, for example). Conversely, equality reached its height (as in Britain in the ’70s) when the state was at its strongest.

Although Meek didn’t explore this in his fascinating lecture, it does open up a line of argument that says that rather than being inevitable, globalisation was a political strategy by the holders of capital to deal with what they saw as too much equality. The level of panic in the mid-to-late 1970s is hard to credit now. But the effect was that they set about weakening the state. On this argument, globalisation was a social construct rather than (to take some of the competing narratives) an inevitable effect of technological or economic change.

Sedition and treachery

A second reflection is that when James Meek speaks of national myth being available to “any individual”, he is, in a way, using the languge of “open source”, that the “source code” of such myths is open to us all. And open source code can always be “forked“.

And when you look at the history of the Robin Hood myth, it took around two hundred years for the idea of explicitly “giving to the poor” to emerge in versions of the story. Fifteenth century references to Robin Hood are longer on his being an outlaw or even an itinerant felon who has no livelihood. In 1605, Robert Cecil used the name of Robin Hood to associate the Gunpowder Plotters with sedition and treachery. One reading of Meek’s account is that it is just the powerful reclaiming a preferred narrative.

The limit of the Robin Hood myth is that, because he is a pre-modern bandit, there is essentially nothing political about his acts of robbery, even if the poor benefit from them. Bandits, as Hobsbawm observed, make lousy socialists. And of course, in many tellings of the story, it requires the return of King Richard – the good King – to restore order and harmony to the land. It took a later generation of proto-modernists, the English Parliamentarians of the 17th century, to realise that it was in ourselves, not in our stars, that we were underlings, and to put on trial, and then execute, a King for treason.

Randen Pederson’s work can be seen on Flickr

It seems that the rumbling story about HSBC’s Swiss branch has achieved what political pollsters know as “cut through” – meaning that it’s of interest to voters as well as to those reporters who are sentenced to watch Prime Minister’s Questions each week.

The story reminded me of a passage in Wolfgang Streeck’s 2014 article ‘How Will Capitalism End?’ in which he explores the drivers of change that could bring about, well, the end of capitalism. The article deserves more space here on another occasion, but for the moment I just wanted to quote what he writes about his fifth driver, corruption:

Finance is an ‘industry’ where innovation is hard to distinguish from rule-bending or rule-breaking; where the payoffs from semi-legal and illegal activities are particularly high; where the gradient in expertise and pay between firms and regulatory authorities is extreme; where revolving doors between the two offer unending possibilities for subtle and not-so-subtle corruption; where the largest firms are not just too big to fail, but also too big to jail, given their importance for national economic policy and tax revenue; and where the borderline between private companies and the state is more blurred than anywhere else, as indicated by the 2008 bailout or by the huge number of former and future employees of financial firms in the American government.

So far, fairly familiar, if admirably concise. The more important element here is that what this has done is broken the moral story about capitalism – work and the Protestant ethic and all that – that writers such as Max Weber spent so long trying to assemble at the end of the 19th century and the beginning of the 20th.

Capitalism’s moral decline may have to do with its economic decline, the struggle for the last remaining profit opportunities becoming uglier by the day and turning into asset-stripping on a truly gigantic scale. However that may be, public perceptions of capitalism are now deeply cynical, the whole system commonly perceived as a world of dirty tricks for ensuring the further enrichment of the already rich. Nobody believes any more in a moral revival of capitalism. The Weberian attempt to prevent it from being confounded with greed has finally failed, as it has more than ever become synonymous with corruption.

Of course, the idea that capitalism has a moral purpose still floats around in political discourse such as “wealth creators,” a lost signifier loking for something to signify.

Flavours of vanilla

This issue – about how we understand the “story” of capitalism – is why scandals such as HSBC are so damaging. In particular, they remind us that the rich do live in a different world from the rest of us. And Lord Fink’s entertaining spat with Ed Miliband on the precise level of his tax avoidance demonstrates precisely this (and is actually more damaging, not less, because it was only – as the good Lord put it – “vanilla” tax avoidance).

Because what Lord Fink said, when he got round to explaining himself to the Evening Standard, was that he’d “set up some simple family trusts” while on a posting in Switzerland between 1996 and 2000.

Really what I was trying to do was, not like a living will, but to allocate a very small shareholdings to each of my children so they could pay deposits on houses in London one day after we returned,” he told the paper. “There was nothing complex, and they weren’t aggressive tax planning.

My family and I paid tax on all the dividends, both in Switzerland and the UK. They were done because my children were under 18 and I wanted them to have something to help them make their way in the wider world.

A whole lot of things jump out of that. Most people in the UK wouldn’t know about a “simple family trust” if it fell on their head. And Lord Fink’s idea of “very small shareholdings” is probably askew if they’re also substantial enough to pay deposits on houses in London. (The average London house price went past £500,000 last year.)

And just to put all of this in perspective, half of UK households – households, not individuals – had “gross financial wealth” of less than £8,400 in 2010/12, accoridng to the Office of National Statistics. Now there’s a number that Lord Fink would probably think was “very small.” It would barely cover the accountant’s fees.

Indeed, the cartoonist Martin Shovel summed up this gap in comprehension on Twitter:

Rich boy

Back in 1926, just before the The Great Crash, F. Scott Fitzgerald wrote in his story ‘The Rich Boy‘:

Let me tell you about the very rich. They are different from you and me. … They think, deep in their hearts, that they are better than we are because we had to discover the compensations and refuges of life for ourselves. Even when they enter deep into our world or sink below us, they still think that they are better than we are. They are different.

And banks, clearly, like the money of the rich better than they like ours because (as in Hemingway’s literary riposte) they have more of it. Oddly, the Swiss tax avoidance story has resonated more than, for example, HSBC’s money-laundering of funds belonging to Mexican drugs cartels, which led to a fine of almost $2 billion by the US authorities.

And I think the reason is in that line of Fitzgerald’s: that when the rich appear and explain that it is normal to avoid doing something that the rest of us do as a matter of course, they’re also telling us – on 24-hour news – that they still think that they are better than we are. But once the idea that capitalism has a moral order is broken, they’re just a huckster in expensive clothes.

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The image at the top of the post is from Channel 4 News, and is used with thanks.