The EU: 5 Things David Cameron Wants.

 

David Cameron didn’t really want Britain to have an EU referendum – he has made it clear he wants Britain to stay in the European Union.He promised in the last General Election that there would be a referendum, though. Why? Because he was worried about losing voters and party members to UKIP – the UK Independence Party headed by Nigel Farage whose lifeblood comes from wanting to leave the EU.

Why do the richest 62 own 50% of the world’s wealth?

 

“In 2015, 62 individuals had the same wealth as 3.6 billion people – the bottom half of humanity.” This is the latest from an Oxfam report. So 62 people have more wealth than 50% of the world’s population, and the richest 1% now control more wealth than the rest of the world put together.

Does Climate Change Cause Violent Conflict?

 

Bernie Sanders, Prince Charles and Charlotte Church may have little in common, but we recently discovered that they agree on at least one thing.

All three have recently stated that climate change has played a big part in causing the ongoing civil war in Syria, and if we want to end violence in the long-run, we should get more serious about tackling climate change.

Tax Avoidance; how do big companies escape paying tax?

Big companies like Starbucks and Amazon makes millions of pounds each year. Yet somehow they seem to be paying less tax than the rest of us. Say what?

 

Tax avoidance 101: what do companies pay tax on?

Companies in the UK must pay corporation tax. This is a tax on the profits a company makes. It’s worth mentioning that profits are not the same as sales. Profits are your total sales, minus your costs. Basically what’s leftover at the end.

At the moment the corporation tax rate in the UK is 20%.

So if your company makes £100 in profit, you would need to pay £20 in corporation tax to HM revenue and customs.

All good in theory. Yet in reality many large companies are bringing in big profits, but paying low amounts of tax.

[SOR tax evaders video]

According to charity group Actionaid the UK’s top 98 companies are using tax havens. These are countries which offer businesses and individuals low tax rates.

Errr… how do big companies end up paying so little tax?

Two key terms: tax avoidance and tax evasion. They sound the same, but are actually very different.

Tax Avoidance - Scene from "Empire" I don't do taxes

Tax Evasion and Tax Avoidance – know the difference

Tax avoidance is legally using loopholes in the law to reduce the amount of tax that you pay. We’ll repeat again, legal.

Tax evasion is illegally escaping paying taxes, usually by hiding your income.

When we hear about big companies in tax scandals, we’re probably hearing about tax avoidance. In these cases the companies haven’t broken the law. They’ve just worked the system to lower their tax bill. Sneaky or what?

There are a variety of ways that companies can legally lower their tax bill. Most involve lowering profits – as low profits mean you pay less tax.

However, if the profits were actually lowered then the company would be making less money. Cue lots of anger from investors.

Stephanie Flanders from the BBC explains how moving money around within a company can reduce profits (therefore reducing tax) and save you a lot of £££.

 

 

Still confused? Tim Bennett from Money Week goes into a little more detail;

 

In nutshell: UK section of the company buys and sells to other branches overseas – the cost of doing this reduces the company’s profits (which reduces the tax bill) while most of the money remains within the company.

Or in other words: UK tax law is a f@%king mess.

 

Why should I care?

People get very angry about big business seeming to have an opt-out from paying taxes, whilst most mere mortals have no choice in the matter.

Tax Avoidance - TV host Jimmy Fallon looking outrages

People be like “WTF, mate”

The current debate over tax avoidance erupted around the time of the Occupy Movement. This is an international organisation campaigning against social and economic inequality. Occupy’s slogan “we are the 99%” highlights how the 1% minority seem to play by different rules to the rest of us.

Large companies can afford to pay teams of legal experts to find potential loopholes in tax law.

They can also afford to set-up and run their business from countries with lower tax thresholds. Both of these are options that smaller companies potentially don’t have.

 

 

Big companies be like "err.. we do pay tax.."

Big companies be like “err.. we do pay tax..”

Our taxes pay for public services like roads, schools, hospitals and the police.

Anti-tax avoidance campaigners argue that companies avoiding paying tax are depriving the country of money which goes towards these things. They believe that companies which operate and benefit from a country should all pay the same tax as the rest of us.

The Robin Hood Tax idea goes even further, suggesting we should charge a tax on all large financial transactions which would pay for public services.

However big multinational corporations say that they do pay the correct amount of tax. Legally this is true. Who’s to say whether this is a “fair” amount or not?

 

As Toby Young explains there is no real definition of a “fair” share of tax. Therefore if we think the fair share is actually higher than the rate set by the government then everyone who fails to volunteer to pay more tax is guilty of tax avoidance. Slightly awkward.

 

Tax Avoidance - a group of people raise their hands

Hands up who’s avoided tax buying stuff in Duty Free?

There is also the elephant in the room – that most of us have probably avoided tax at some point in our lives.

Picked up some cheap booze at the Duty Free stand after a holiday?

Yep, that’s technically avoiding tax. Perfectly legal though.

So, do we only care about tax avoidance when it is large companies involved? If so, there’s something of a double standard going on here.

 

Even if it seems like tax avoidance is bending the rules, a 1936 court case sets the precedent that this is fine. A ruling by Lord Tomlin on the Duke of Westminster’s tax arrangements stated;

 

“Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”

Meaning: people may not like it but as long as you’ve stayed within the law then it’s all good.

 

What to do next?

Boycott Starbucks over tax evasion

Is boycotting a long-term option?

Many people who disagree with tax avoidance protest by boycotting the company involved.

For Starbucks this is easier than you think. I’ll just get my soy double shot espresso macchiato from another shop. Amazon? OK, fine, I’ll have to do my shopping in real life. Slightly annoying but all for a good a cause.

Boycott Facebook? Riiiight, so how are people going to see my latest selfie?

How about Google? WELL HOW THE HELL AM I GOING TO KNOW HOW TO GET ANYWHERE??!*

Sooo… boycotting may not work long-term.

However, you could write to your MP raising the issue, or join any one of the many organisations campaigning against tax avoidance. Or maybe you think the tax system works just fine. Let us know in the comments below.

 

* We hear great things about paper maps.

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Chinese Economy Explained; China’s got economic problems

China’s economy is slowing down and the Chinese Stock Market is about to crash. What does this mean for the rest of the world?

 

What’s so special about China’s economy?

Economy; “the state of a country in terms of the production and consumption of goods and services and the supply of money within the country”

So a strong economy is one which grows at a stable rate, increasing the amount of money in the country. A weak economy is one that is unstable and may shrink, decreasing the amount of money in the country.

The Chinese economy is made up of a vast amount of goods and services – just think how many technological goods, clothing and cars are produced in China. China has a population of around 1.3 billion people and Chinese labour costs are exceedingly low. These factors make China’s economy the second largest in the world (the USA is the largest).

For the past few decades the Chinese economy has been steadily growing by around 10% each year. That all changed this summer. Economic growth slowed down and the Chinese Stock Market saw a massive drop in value.

 

 

Chinese Economy Explained:
1) The Chinese Economic Model supposedly doesn’t work anymore, but first, what is that?

Chinese Economy Explained: a container ship passes through Queensferry

Chinese Economy Explained: China makes most of its money from exporting good to other countries

The Chinese economy relies on investment from other countries. This is because it’s economic model is based on exports. This means selling goods and services to other countries.

China is the largest exporter of goods in the world. The export model means the majority of Chinese goods are exported to other countries, rather than being consumed and used within China itself.

This doesn’t mean that goods made in the country can’t be sold to the Chinese people, but for the moment most companies are focusing on selling abroad. China’s top export products include computers, telephones and office equipment. Last year China’s exports were valued at $2.34 trillion. Wowzers.

Like China, other Asian countries like Japan, Thailand, Indonesia and South Korea use the export model to make money and increase living standards. Nevertheless there is and was a catch: the model is not sustainable.

 

“Not sustainable”

The Export model made China one of the leading economies in the world. It aims to bring money into the country by industrialising. For China this meant encouraging investors to build factories and transport links in order to build and sell even more products.

China encouraged foreign investment from other countries by establishing “special economic zones” in the 1980s. These zones are areas in the country with special tax benefits for foreign investors. Offering lower tax rates to companies means they are more likely to set up shop in the country.

Chinese Economy Explained: empty Chinese factory

Chinese Economy Explained: China invested in building lots of factories but the recession meant other countries bought less Chinese exports

Foreign investment means more money coming into the country. China’s low wages means manufacturing costs are kept low, meaning more profit for businesses. However, as the China Business Review notes, it didn’t matter how cheaply China could make things as “developed economy demand for manufactured products cannot increase without limit”

In plain English: eventually there will be a limit to what other countries can afford to buy from China.

The Economist agrees that the model is “only a part of the answer to establishing a sustainable economy”.

Economic strategist Patrick Chovanec explained to the Washington Post how “after the financial crisis in 2008, there were signs that… other countries could not afford to go deeper into debt to consume that much. So you started to see a significant falloff in Chinese exports”.

Meaning: China’s exports were dropping, as countries couldn’t afford to buy as many Chinese goods. Given the Chinese economy depends on exporting to other countries; this was a big problem.

 

Chinese Economy Explained:

2) The Chinese Government has a plan; apparently it’s problematic

To understand Chinese government’s plan to boost the economy we need get our heads around the Stock Market. Don’t panic if you didn’t study business (we didn’t either).

 

The Stock Market works like this:

Businesses need money in order to expand and grow. To raise this money quickly the bosses sell off part of the company.

One way of doing this is to sell shares in the company. A share is literally a share in the ownership of the said company. The more shares you have, the more of the company you own.

Think: Dragon’s Den (Shark Tank if you’re American).

Investors buy into the company by purchasing shares. The company uses the cash they receive to grow and expand. Investors hope that the value of the company will increase. If it does their shares (the part of the company they own) also become more valuable.

This is sometimes called owning Equity or Stock in a company.

Shares are bought and sold on Stock Markets. Some, like the New York Stock Exchange, are actual locations where stock traders meet to buy and sell. Others, like the Nasdaq, are virtual market-places where traders complete deals via computer.

 

Now within the context of the Chinese Economy?

Chinese Economy Explained: two traders in the lobby of the Shanghai Stock Exchange

Chinese Economy Explained: shares in companies are sold on the Stock Market

After the Global Financial Crisis China’s economic growth began to slow. Within a few years the growth had dropped from 10% to around 7%. This seems like a small change but it was not good news for China.

The Chinese government wanted to boost economic growth. One of their ideas was to change the rules of the Chinese Stock Market. For the first time many ordinary Chinese citizens could buy shares in companies.

 

Chinese government thinks: more local investment = bigger economic growth.

 

Government-owned media (newspapers, TV, radio) encouraged people to invest. Many Chinese families borrowed money to buy shares, or invested their savings. They hoped that their shares would eventually grow in value.  Between 2014 and 2015  more than 40 million new stock market accounts were opened. However, many of these new investors had no understanding of the financial market. Doesn’t exactly sound like a recipe for success.

Chinese Economy Explained: a stock trader looks at share prices on a computer

Chinese Stock Market Explained: millions of new investors pushed up the price of shares by investing borrowed money

As millions of new investors started placing borrowed money into the stock market, share prices were pushed up to inflated levels. The Chinese government realised that allowing people to buy all these shares with borrowed money was a bad idea.
First, if people ended up losing money by making a bad investment then they would then owe a lot of money. Second, these inflated prices were bound to drop at some point.
When they eventually did, investors panicked and sold off their shares to pay back the money they had borrowed.

This mass selling pushed share prices down even further and in June 2015 the market crashed downwards. The equivalent of $3 trillion was lost as a result of the drop in share prices. Not a good day to be in finance.

The government tried to encourage business by reducing the value of the Chinese currency, the Yuan. This was meant to make Chinese goods cheaper, encouraging other countries to buy them. So far it hasn’t worked. Investors around the world still fear the problems in the Chinese economy will spread abroad. This isn’t just paranoia BTW; it could actually happen.

 

Chinese Economy Explained:
3) The Chinese Economy affects the rest of the world

London City Skyline

Problems in the Chinese economy have an effect on the London Stock Market

At the moment only 1.5% of Chinese shares belong to foreigners. Despite this fact, the slowing of growth in the Chinese economy and their recent stock market crashes are affecting financial markets in the UK, Europe and America. Put simply: when the Chinese economy goes a bit wobbly, we all feel the effects. Yes, “wobbly” is a technical term.

The BBC reports how stock markets in London, New York and Paris are also seeing drops in value. The value of the FTSE 100 (the UK’s top 100 companies) dropped by around 5% – the largest fall in value this year. These British companies lost the equivalent of £60 billion as a direct result of China’s economic problems.

To recap: there is strong evidence to suggest that China’s export model isn’t working. Economists argue China needs to switch to an economic model called Domestic Consumption (whoever said economics wasn’t sexy?!). In this model goods and services created in the country are bought and used within China.

To achieve this the Chinese government needs to encourage Chinese people to consume more. For example; they attempted to increase the number of washing machines sold to Chinese people in rural communities by distributing coupons and offering a discount.

We’ll have to wait to see if the issues in the Chinese economy lead to trouble around the world. But things don’t look good.

 

Chinese Economy Lessons; to make money from exports you need someone to export to.

What happens in China… affects all of us. For the latest on the Chinese Economy explained subscribe to our weekly news digest The Week: Decoded, like us on Facebook and follow @scenesofreason