Tag Archives: Britain

What the Brexit Vote Teaches Us about Direct Democracy (and the Future of Democracy)

Yesterday’s Brexit vote was widely seen as a referendum on referenda. The populist right across Europe now routinely is demanding to take issues directly to the people in order to bypass the parliamentary process which has not produced desired outcome–a process The Economist recently dubbed Referendumania. The United Kingdom Independence Party (UKIP) has demanded for years that important issues like EU membership should be voted on by the electorate. Prime Minister David Cameron gave in to the demands in order to win the last election, feeling confident that he would win the vote and thus quiet the right-wing opposition. The gamble backfired: Cameron lost both the vote and his job.

The price Britain will pay for playing with the populist fire is potentially steep. Scotland voted overwhelmingly in favor of staying in the EU and now wants a second vote on independence. In Northern Ireland, the vote opened up old confessional lines of cleavage: Protestant Unionists voted for the Brexit, Catholics against. And the City of London may lose its position as premier financial market in Europe. Most importantly, the British economy will face an uncertain future. The EU is unlikely to sign off on free trade arrangements of the sort Norway and Switzerland enjoy because such a deal would encourage other member nations to leave as well. Furthermore, it took Switzerland a couple of decades to arrive at its current, admittedly cushy relationship with the EU.

Governments in other European countries no doubt will try to avoid this populist trap. This will enrage the masses even more, and demands for more democracy will become ever louder. In the wake of the British vote, the German right-wing party Alternative for Germany (AfD) has demanded more direct democracy for Germany. Marine Le Pen, the leader of the Front National, promised a referendum on the Frexit if she is elected president of France next year. And the Dutch right-wing leader Geert Wilders announced a push for the Nexit.

One real concern is that this type of referendum is susceptible to lies and deception. The Brexit campaign was run entirely as a post-truth campaign. Its most visible element was the Vote Exit campaign bus run by Boris Johnson, the former mayor of London and possible successor as prime minister. The inscription on the side of the bus made a bold claim: “We send the EU £350m a week.”

False claim on Boris Johnson’s Vote Exit campaign bus: “We send the EU £350m a week.” (Reuters)

As it turns out, the figure is wrong. It disregards the massive rebate Britain has received since 1985, and it does not include the EU payments that flow back to British institutions. But facts just did not matter in this campaign that was ruled by anger and fear and dominated by issues like immigration and sovereignty. Michael Gove, co-chair of the Leave campaign and current minister of justice, was asked to name a single independent economic authority who thought Brexit was a good idea. His response: “I think people in this country have had enough of experts.”

The counter-example to this narrative is Switzerland. Swiss voters go to the ballot box four times a year to decide three or four issues each time. Direct democracy in Switzerland has grown organically into the fabric of Swiss politics since the late 19th century. Both the government and the media generally do a good job to inform the public on the facts and on the pros and cons of the issues to be voted on. As a result, Switzerland has developed a polity that is structured from the bottom up and that allows voters to participate in decision-making processes on all levels of government. This system has produced an educated and knowledgeable electorate that is much less likely to be fooled by deceptive populist rhetoric.

Political systems create political cultures as much as political cultures shape political systems. Countries like Britain and Germany have a strong tradition of parliamentary democracy. Voters elect leaders who represent them in parliament that in turns forms a government which it controls. This mechanism does not really allow for an alternate decision-making process, for instance in the form of a referendum, as the political culture does not have the tools to deal with it. A system that works exceedingly well in Switzerland therefore could turn toxic for Britain, with the potential of doing the same in other European countries.

There are two reasons why the current populist anger is directed at the European Union and why referenda could accelerate the unraveling of the EU. The European Union has been an elite project. It has done a poor job explaining to Europeans how it has brought peace and prosperity to a continent that had been ravaged by two world wars, how it helped Spain, Portugal and Greece transition away from fascist dictatorships, and how it supported countries formerly in the Soviet bloc both politically and economically. But it also created institutions that are not transparent and that delegate too many decisions to bureaucrats in Brussels. And it has thoroughly mismanaged the Greek debt crisis. Thus it has become an easy target for malcontents.

The second reason is that Globalization has contributed to the de-industrialization of Western Europe (as well as North America). This has created massive wage stagnation and chronic unemployment among the working classes, and it has spawned unprecedented levels of global migration. European populists successfully managed to blame the European Union for both. In reality, 1.5 billion workers, mostly in China and India, have joined the global labor market over the past quarter century which has created extraordinary pressures. On top of that, the digital revolution has begun to make human labor redundant–a trend that may lead to massive unemployment in developed societies in the future. The EU is responsible for none of this: British voters will soon discover that leaving the EU will not lessen the competitive pressures on British industry, nor will it ease migration pressures.

Western democracies have become vulnerable to populist deception. Boris Johnson will be rewarded for his deceptive politics by inheriting the job of Prime Minister. He also wrote the playbook for Donald Trump on how to win a fact-free campaign that is not restrained by the limitations of truth. Maurine Le Pen is favored to win the French presidency next year. And Angela Merkel, the lone beacon of reason in European politics, may well stumble over the populist furor raised by the refugee crisis. Direct democracy which has given Switzerland unparalleled political stability and economic success may also become the political idea that will give the populist right the tools to undo the European Union.

 

So Why is Walgreens Moving to Switzerland? (And What Can We Do about It?)

The other day, a petition from Campaign for America’s Future ended up in my in-box. Its subject line read: “Why is Walgreens Moving to Switzerland?” Of course, Walgreens is not moving to Switzerland. My Walgreens still will by around the corner from my house. And most corporate jobs will remain in Chicago.  The first line of the e-mail reads: “Walgreens is an American success story.  Or, at least, they used to be.” Wrong again: it still is, and will remain so even after Walgreens moves its corporate headquarters to Switzerland. It just will not pay taxes in the US anymore. But that, too, is very American. Ever since Ronald Reagan declared the government the enemy of the people, paying taxes no longer is a civic virtue. Avoiding taxation altogether is considered smart because the money would only serve to bloat the government.

The planned move by Walgreens was precipitated by its merger with Alliance Boots, a British drugstore chain. Alliance Boots moved its corporate headquarters to Zug, Switzerland, in 2008 which caused the very same discussion about corporate citizenship in Britain. Alliance Boots never had more than a mailbox in Zug. According to The Guardian, the move comes at a cost of £100 million to the British taxpayer every year. In 2013, the company headquarters were moved to Bern as Alliance Boots already had operations there. While Zug is the quintessential corporate tax haven, the move to Bern, which was missed by Bloomberg News, does little to change the story. A move to Switzerland by the Walgreen Corporation would have similar benefits. A few weeks ago, analysts from UBS, a global bank based in Switzerland, claimed that stocks in the Walgreen Corporation would rise 75 per cent if corporate headquarters were to be moved to Switzerland.

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Modest multi-party office building at Baarerstrasse 94 in Zug. Alliance Boots was based here until 2013.

Clearly, Walgreens does not want you to read this. In 1904, Charles Walgreen traveled from his small-town home in Dixon, Illinois, to Chicago and opened a pharmacy and soda fountain. It is the quintessential American success story, but today’s corporation has little to do with its humble beginnings. Walgreens want you to believe that they are an American company that pays their taxes, that they are being a good corporate American citizen, and that they live up to their iconic status as a quintessential American corporation. In a wicked way, of course, they are: like so many other American corporations, they are moving their corporate headquarters offshore.

Large corporations are de-nationalized entities which nimbly navigate the global financial and fiscal system while maintaining the fiction of national citizenship for public consumption. Two years ago, Gregory D. Wasson, the chief executive of Walgreen Corporation, sought tax breaks from the state of Illinois the company is still based. At that point, he stated: “We are proud of our Illinois heritage. Just as our stores and pharmacies are health and daily living anchors for the communities we serve, we as a company are now recommitted to serving as an economic anchor for northeastern Illinois.” At the time Wasson made this statement, the merger with Alliance Boots was essentially a done deal.

Walgreens is not the first and probably not the last US corporation to move their headquarters overseas for tax reasons. But Walgreens is different in that it is part of daily life in the US. My Walgreens is not just a pharmacy, I go there as well when I am out of dish detergent or beer. When Transocean, the owner of the Deepwater Horizon platform which caused the huge oil spill in the Gulf of Mexico in 2010, moved its corporate mailbox from Houston to Zug in 2008, nobody took notice. But Walgreens lives off he daily contact with American consumers, and in that it is seen as a quintessentially American brand that cannot be relocated so easily. And herein lies the chance to create public pressure not just to prevent Walgreens from moving to Switzlerland but to expose the fraudulent global scheme of corporate taxation.

So what does Campaign for America’s Future want you to do about this? They want you to send them ten bucks so they can “expose this scam, pressure Walgreens to do the right thing, and shut down the tax loophole that allows this to happen.” You can also sign their “Tell Walgreens: Don’t Desert America” petition. While I cannot argue against closing tax loopholes, this approach is merely cosmetic.

In 1998, the OECD published a report entitled Harmful Tax Competition: An Emerging Global Issue which arrives at the stunningly simple analysis: “Where activities are not in some way proportional to the investment undertaken or income generated, this may indicate a harmful tax practice.” Ultimately, the OECD had to abandon its efforts to develop non-abusive global taxation standards due to resistance from the wealthiest countries. The OECD report makes it clear that it is unethical for Swiss cantons (and other entities) to allow foreign corporations to incorporate and that it is harmful for tax jurisdictions where the actual economic activity of these corporations takes place. This practice particularly hurts developing countries, as Nicholas Shaxson argues in Treasure Islands (2012), that as a consequence become more dependent on foreign aid. Yet, fighting individual predatory jurisdictions, like many Swiss cantons, would only be marginally productive as corporations easily can move their mailbox to a different, equally beneficial jurisdiction.

One of the OECD recommendations was that a global standard should be established by which corporations should be taxed where their economic activity is taking place. We need to vigorously push for this standard, and we need to seek a fundamental change in how corporations are taxed globally. Corporations need to be taxed where they are producing goods and services and where they are using the infrastructure, not where they are having their corporate headquarters, i.e. their mailboxes. Such mailbox headquarters create a windfall for the host tax jurisdictions which in turn allows them to drop the corporate tax rates even more to attract even more corporate mailboxes. The Swiss canton of Zug is a textbook example for that.

The only real solution, ultimately, is to end tax competition between jurisdictions. In competitive tax environments, corporations win and taxpayers lose. Corporations and their lawyers always can move more nimbly than politicians and the polities they represent. Corporations can move their mailboxes as they please, pick where they pay taxes, and play tax jurisdictions against each other. Tax jurisdictions cannot move their citizens or their infrastructures. Unless we change the very system of how corporations are taxed, the Walgreens of this world will always have their way and citizens will lose out.

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One of many mailboxes at Baarerstrasse 94 in Zug: Künzi Treuhand AG. About 50 corporations and business groups receive their mail here–meaning that this is where they are legally incorporated. One of their advertised specialties: helping foreign corporations set up and manage corporate headquarters here. This is big business, and there are many such companies in Zug.