Feudal lessons in tax avoidance

At the top of David Cameron’s agenda when Britain hosts the G8 this year is tax avoidance. In a presentation in Davos in January he called for an internationally co-ordinated clampdown on companies that pay too little tax. In his view companies that don’t pay their fair share needed to “wake up and smell the coffee, because the public who buy from them have had enough.” But he was then quick to point out that the UK had a “great offer” to companies because it was cutting its rates of corporation tax. The speech was strangely schizophrenic, castigating those who did not pay enough tax while trying to seduce at the same time by offering a lower tax rate. A bit like being nagged by a prostitute in fishnets.

The big problem facing the Western world at the moment is that governments are essentially bankrupt. They can’t afford the promises and commitments that they have to the general populace. They need more money which means more taxes and so the corporate sector is an obvious target. But this is not a new problem. It fact, it is so old that it goes all the way back to a time before companies, and even nation states, existed; all the way back to feudal times.

The feudal relationship between a king and his nobles was one of personal obligations: the use of land owned by the king in return for loyalty and military service. Over time wars, intermarriage and complicated inheritance customs resulted in a patchwork of decentralised authority with many overlapping jurisdictions. Nobles could own land in several different kingdoms therefore owing fealty to several different kings. This caused friction and feudal history is, essentially, a history of the struggle for power between kings and nobles with each looking to bribe, cajole or conquer the other.

As the economies in Western Europe developed, trade and wealth began to be concentrated in cities which disrupted the old feudal arrangements. In essence, the cities became a third player in the struggle between the nobles and the kings. This ‘three way’ game had different outcomes in different countries. In Germany, weak kings meant the cities banded together to form leagues (such as the Hanseatic League) to protect their interests against the nobles. In Italy, the cities became large and strong enough to defend their own economic interests and so formed independent city states that resisted the authority of the Emperor or Pope. In France, the cities and the king banded together against the nobles creating a strong central bureaucratic state. The cities and the king had many interests in common, both benefiting from a uniform legal system, a standardised  tax system, good transport infrastructure and a standing military force to keep the peace. In the end, the French model proved to be the most successful and in the Treaty of Westphalia in 1648 most of Europe followed suit and the modern notion of the nation state was born.

What lessons can we learn from this history? We can cast the struggle in catataxic terms like this. In feudal times, the king had legislative authority, the nobles had power (particularly military power) and the cities had wealth. The alignment of the wealth creating cities with the highest legal authority (in the form of the king) against the political power of the nobles was the winning combination.

Now let us replace the feudal chess pieces with their modern equivalents. In this case, the EU is the highest legal authority and the wealth creators are the multinational companies. The nobles with the political power are the national governments. In other words, David Cameron is the equivalent of a feudal baron. If history repeats itself, you can expect the multinationals to club together and pay corporate taxes directly to the EU rather than to national governments. Both parties would benefit from a truly single borderless market in legal and taxation terms. It is the nobles, in this case the national governments who could have the most to lose…

 

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