America is changing colours from Capitalist hue to pink

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Companies which bang the hardest on the CSR drum also strive the hardest  to avoid paying taxes.

By Suresh Kr Pramar

America is changing political colours, from the capitalist hues painted by Adam Smith and Milton Freidman to shades of socialist pink. To those uninitiated to political colours pink in politics denotes the weakest shade of Red. Red stands, in American parlance, for a communist, who for Americans has long been a cause of anger and fear.

Americans regard themselves as champions of capitalism. They are world leaders followed by most countries of the west. With the spiraling economy of the past America could ignore the call for a more economically equal society. However in recent years the have nots, largely those under the age of 40 years, have been clamouring for a better life. They are demanding  strong curbs on big business and Wall Street operators (sentinals of capitalism).

Those following the American election will not miss the evidence that Americans, especially young Americans, are casting their lot with those who are opposed to pure capitalism. The evidence is very sharp in the Democractic Party which was expected to nominate the darling of Wall Street Hillary Clinton, with ease.

Bernie Sanders has offered stiff resistance to Hilly Clinton. Starting off with  3 percent popularity Sanders and his crowd almost put the spanner in Hillay’s attempt to notch the nomination. Gathering massive support from those opposed to the manipulations of Wall Street Bernie almost upset Hillary’s campaign.

In the end though Hillary has won the nomination she and her supporters have had to incorporate several of Bernie’s left leaning demands on the economy. To survive and bring the Democractic Party together Hillary Clinton has incorporates several demand put forward by Bernie and Elizabeth Warren, both of champions of regulatory capitalism.

What is being witnessed in America is evident in other parts of the Western world. Youth in these countries are agitating for better living conditions and curbs on the unfettered activities of big business and the world capital markets. In many parts of the western world sit ins have been organized by young people to protest raw capitalism.

The poorest half of the world’s population has received just 1 percent of the total increase in global wealth, while half of that increase has gone to the top 1 percent

More and more young people around the world are agitating and demand an end to inequalities not only within their own countries but around the world. Year after year at their annual World Economic Forum at Davos-Klosters, Switzerland, world business and political leaders pontify on the need for sustainable, inclusive development, ignoring the fact that inequality is depriving large sections of the world’s population their rightful share in the world development cake.

At the Davos Summit this year as every year Oxfam released its report “An Economy for the 1%,” containing shocking statistics on inequality, days before the global elite and gathered at Davos. The Oxfam report has highlighted that inequality is rapidly getting worse. In 2010 the wealth of 388 individuals was equivalent to that of the world’s poorer bottom half. Today a mere 62 individuals had the same wealth as 3.6 billion people, the bottom half. Since the turn of the century, the poorest half of the world’s population has received just 1 percent of the total increase in global wealth, while half of that increase has gone to the top 1 percent.

The Report reveals that the wealth of the richest 62 had risen by 44 percent in five-years  while the assets of the poorer half had declined in value by 41 percent. The wealth owned by the bottom half of humanity has fallen by a trillion dollars in the past five years. According to Oxfam, “Far from trickling down, income and wealth are instead being sucked upwards at an alarming rate.” Credit Suisse recently revealed that the richest 1 percent have now accumulated more wealth than the rest of the world put together.

Our economic system is heavily skewed in their favour, and arguably increasingly so  Instead of an economy that works for the prosperity of all, for future generations, and for the planet, we have instead created an economy for the 1 percent

The global inequality crisis is reaching new extremes. Power and privilege is being used to manipulate the economic system to increase the gap between the richest and the rest. A global network of tax havens enables the richest to stack away $7.6 trillion. Tax avoidance by the owners of capital, and governments reducing taxes on capital gains have further added to the wealth of the top one percent.  As Warren Buffett, world’s fourth richest, famously said, he pays a lower rate of tax than anyone in his office, including his cleaner and his secretary.

According to Oxfam a powerful example of an economic system that is rigged to work in the interests of the powerful is the global spider’s web of tax havens and the industry of tax avoidance, which has blossomed over recent decades. It has been given intellectual legitimacy by the dominant market fundamentalist world view that low taxes for the rich are necessary to spur economic growth and therefore good news for us all.

The wealthiest individuals and companies, those who should be paying the most tax, use this global architecture to avoid paying what they owe. It also indirectly leads to governments outside tax havens lowering taxes on businesses and on the rich themselves in a relentless ‘race to the bottom’. As taxes go unpaid due to widespread avoidance, government budgets feel the pinch, which in turn leads to cuts in vital public services. It also means governments increasingly rely on indirect taxation, like VAT, which falls disproportionately on the poorest people. Tax avoidance is a problem that is rapidly getting worse.

Oxfam analysed 200 companies, including the world’s biggest and the World Economic Forum’s strategic partners, and has found that 9 out of 10 companies analysed have a presence in at least one tax haven.  In 2014, corporate investment in these tax havens was almost four times bigger than it was in 2001. This global system of tax avoidance is sucking the life out of welfare states in the rich world. It also denies poor countries the resources they need to tackle poverty, put children in school and prevent their citizens dying from easily curable diseases.

The Report says, “One of the key trends underlying this huge concentration of wealth and incomes is the increasing return to capital versus labour. In almost all rich countries and in most developing countries, the share of national income going to workers has been falling. Workers are capturing less and less of the gains from growth. In contrast, the owners of capital have seen their capital consistently grow (through interest payments, dividends, or retained profits) faster than the rate the economy has been growing.

While many workers have seen their wages stagnate while chief executive salaries have rocketed

The world of work, the gap between the average worker and those at the top has been rapidly widening. While many workers have seen their wages stagnate, there has been a huge increase in salaries for those at the top. The share of income going to labour compared with capital is declining, the gap between wages and productivity is growing and income inequality is slowing overall growth, further hurting the poorest people most and preventing millions of people from escaping poverty. The demand in the USA today has consolidated over the issue of raising wages for labour

Meanwhile, chief executive salaries have rocketed. CEOs at the top US firms have seen their salaries increase by more than half (by 54.3 percent) since 2009, while ordinary wages have barely moved. The CEO of India’s top information technology firm makes 416 times the salary of a typical employee.

It is unimaginable that the CEO of a tobacco company in India is as productive as 439 of his employees combined, or that the owner of a UK clothing retailer can produce the same as more than 2,000 garment workers. But the gap between the richest and the rest continues to grow. It would be perverse to argue that the contributions of 62 individual billionaires are worth the same as those of 3.6 billion other people.

The increase in the CEO-to-average pay ratio in the UK has grown even since Oxfam published its inequality report in 2014 and now stands at 183:1.89 For capital owners and executives the rewards continue to grow, while the average worker receives less for additional contributions as the gap between workers’ productivity and workers’ wages widens.  In India, 46 percent of billionaires have made their fortunes from sectors that depend upon market power, influence or preferential access to licensing

The world’s business leaders do express  concern about the growing inequalities but only to the extent that it affects the Corporate bottom line.  Surveys by the World Economic Forum since 2012 have indicated that “severe income disparity’ is a serious source of risk both for social and political stability and for the expanded purchasing power so vital for the Corporate bottom line. Instead of calling for a complete overhaul of the existing economic system the WEF, in a paper titled ‘ The Inclusive Growth and Development Report  2015,’ would like the present business system to continue so as not “ to miss the fuller opportunity to adapt or ‘structurally adjust the economy’”

David Sagge,  Associate of the Transnational Instutute, Amsterdam and Nick Buxton, California based communication consultant,  in a recent article in the Ecologist, titled “  The Davos Solution to inequality? Another Corporate Power Grab,” have revealed ,  “  rather than just seeking  to sustain the existing system, WEFs delegates are seeking to entrench it by reducing the role of nation-states in governance, and promoting Corporations as the new ‘global citizens’.

Voluntary corporate social responsibility codes

The two writers question the practice of Corporates in voluntary corporate social responsibility codes. According to them “a comprehensive and damning answer comes from a major three year research funded by the European Commission involving 17 European business schools and think tanks that probed the impact of CSR as practiced by more than 5000 Europe based companies.” The study concludes “the aggregate CSR activities of European companies in the past decade have not made a significant contribution to the achievement of the broader policy goals of the European Union.” The study has pointed out that most of the CSR activities are managed by public relations departments and that it rarely enters core business strategies.

A research coordinated in the University of Oregon’s Lundquist College of Business  to compare “the effective tax rates paid by a sample of American firms  between 2002 and 2011 with a measure of those companies CSR programmes” revealed  “that companies which bang the hardest on the CSR drum also strive the hardest  to avoid paying taxes.” Much more revealing is the finding that “companies with high CSR scores tend to spend the most on lobbying to lower their tax. Most Corporations use CSR as a public relations gimmick and as a substitute for taxes they should be paying.” Oxfam had found that 9 out of 10 of the WEFs corporate partners are registered in tax havens

Oxfam Report points out “Wealth has the potential to capture government policy making and bending the rules in favour of the rich, often to the detriment of everyone else.  The consequences of this include the erosion of democratic governance, the diminishing of social cohesion and the reduction of equal opportunities for all. The fight against poverty will not be won until the inequality crisis is tackled Growing economic inequality is bad for us all,  it undermines growth and social cohesion

This is necessary for economies to work better in the interests of the majority and in particular in the interests of the poorest people, who have the most to gain from a fairer distribution of income and wealth. Governments in particular must work for citizens, representing the will of the people rather than the interests of big business, and must tackle extreme inequality. This goes hand in hand with effective governance. The public interest should be the guiding principle of all global agreements and national policies and strategies.

Concluding their article  Sagge and Buxton say that Davos has “failed to turn its rhetoric on social responsibility into any real practice, it continues to advocate policies that will exacerbate inequality Worst of all, they are seeking to build a system of multi stakeholder governance that will keep power and policies under elite control. Real solutions to inequality will, as they have always done, come from movements ’from below’ demanding redistribution of wealth and power’” The fight against poverty will not be won until the inequality crisis is tackled Growing economic inequality is bad for us all – it undermines growth and social cohesion.

Cartoon Courtesy: Zapiro Sun Times

Suresh Kr Pramar(Suresh Kr Pramar is a renowned journalist and consultant writing on CSR issues.)

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Disclaimer: The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of India CSR.

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