Let's stop tax evasion

The Socialist Party's message in the parliamentary elections on September 25, 2021:Fourth offerpresented to voters around Pentecost:

SOCIALIST TAX POLICY PART II:LET'S STOP TAX EVASION

The breakdown and weakening of all oversight of companies and capital was part of the transformations of the neoliberal years. It was based on the idea that Ronald Reagan articulated: The government can never be the solution because the government is the problem. It was rejected that the state could improve the economy by following the demands of public authority; it was argued that the market would correct itself if an abnormal situation arose.

And this distrust of the supervisory role of public authority extended into the tax system. Tax changes were not driven to maintain justice but to meet the demands of corporate and capital owners for lower tax payments and less tax supervision. This was driven by the conviction that money was actually better off with the rich than in public funds. This was therefore a systematic attack on public funds, made to transfer power and financial strength from the democratic arena to the so-called market, which in reality is the domain of capital.

The breakdown of the tax system and tax supervision is now an international problem. State revenue generation has been weakened by tax competition between states, which has led to rapid tax reductions for capital and corporate owners worldwide. But tax reductions are only part of the problem; the biggest problem is the flight of capital to tax havens and an increasingly leaky tax system within states. Icelanders must participate in defending against this internationally and be at the forefront, but there is also something we can do on the home front.

Socialists primarily propose three points: to strip holding companies of independent tax status, to limit the ability to use capital costs for deductions before tax is levied, and to greatly strengthen tax supervision, especially of the wealthiest capital owners and large corporations.

II. Let's stop tax evasion: Abolish holding companies

Holding companies with no other operations than asset management are a channel for tax evasion and have primarily been established for that purpose. Profits from operating companies, real businesses that produce goods or services, are transferred up to holding companies where there are countless opportunities to defer tax payments and ultimately avoid all tax payments. In the years before the 2008 Crash, large sums were transferred in this manner to companies in offshore jurisdictions that paid no taxes in Iceland. After the Crash, tax laws were changed so that companies in foreign low-tax areas were disregarded, and their owners were taxed as if the companies did not exist, were not independent tax entities.

Now is the time to take the next steps and do the same with all holding companies, companies that have no other activity than asset management, and tax their owners directly as if the companies did not exist. Dividend payments to holding companies would then be immediately taxed as dividends to the owners in the same proportion as their ownership in the company, and the same would apply to its other income such as interest and capital gains.

Holding companies have no operational purpose beyond a regular bank account and absolutely no social purpose. They are the main tools of finance-driven capitalism, which has not only weakened society but also eaten away at real operating companies from within, weakened them economically, and confused their strategy. Therefore, there is no social purpose in viewing these companies as independent tax entities. They are primarily tools to siphon money from other companies and society and transfer it to their owners with the least possible tax payments.

II. Let's stop tax evasion: Reduce the weight of deductions

Companies are authorized to deduct expenses from income before income tax is levied. Among these expenses are capital items such as depreciation and interest. This has been misused in various ways for tax evasion. We know examples from aluminum smelters that pay high interest to their parent companies on all initial costs, so the profit of the operating companies is almost zero, and consequently, tax payments are small, if any. We know examples of fishing companies that buy trawlers that will last for thirty years but are depreciated in eight years to minimize tax payments.

All rules regarding the valuation of capital items must be tightened so that tax payments reflect the actual operations of companies. Tax authorities must be authorized to tax company operations based on income minus expenses before capital items are considered if there is suspicion of misuse of such deductions or if they are excessively high.

Excessive salaries should not be considered normal business expenses. Companies should be allowed to book salary costs up to three times the minimum wage, but salaries above that would not be considered expenses and would be entirely at the expense of the company owners, rather than partly paid through tax reductions as is currently the case.

The proliferation of evasion methods during the neoliberal era has not only reduced state revenues but also distorted the entire economy. The focus has shifted from operating companies with real operations, production, and sale of goods or services, to financial operations. There is more money to be made from circumventing taxes than from performing better in operations or serving consumers better. The system rewards cheating more than diligence.

II. Let's stop tax evasion: Tax investigations of large corporations

Tax investigation of large corporations and holding companies of the wealthy is far too weak in Icelandic society. It is known that tax fraud and tax evasion increase as people have higher incomes and own more assets. The main focus of tax investigations should therefore be on the tax compliance of the wealthiest capital owners and the largest companies. It can be asserted that no public sector activity will generate as much revenue for the state treasury as strengthening tax supervision of the wealthiest people and their companies.

Tax investigations have almost always been weak in Iceland, as it has been the goal of the party that has mostly controlled the Ministry of Finance to keep tax investigations to a minimum. This needs to be changed decisively, by building up a powerful office of the Director of Tax Investigations that has the capacity to build a staff capable of dealing with the cunning of auditors and lawyers of the rich. The goal is not only to strengthen revenue generation but also to improve the competitive position of smaller and medium-sized companies that pay their taxes in full against large corporations that have good opportunities for tax evasion.

Tax investigators should be regarded as key personnel in state operations, people who ensure that state revenue generation is active and fair. The public needs to be kept informed about the work of the Director of Tax Investigations and the methods used to avoid normal payments into public funds.

II. Let's stop tax evasion: Socialist offer

The socialists' fourth offer to voters for the autumn elections regarding defenses against tax fraud is to prevent the misuse of holding companies for tax evasion, reduce companies' ability to lower tax payments through abnormal capital costs, stop deductions for excessive salaries, and greatly strengthen tax investigations of large corporations and the wealthiest capital owners.

This is not only necessary to strengthen state revenues but also important to counteract the financialization of the economy, which has weakened and harmed it. The tax changes of the neoliberal years were not just raids on public funds but also distorted all the rules of society, shifting the focus from the value creation of the economy to how the few rich and powerful could accumulate as much wealth as possible.

And this is nowhere more apparent than in the breakdown of societal goals and the privatization of public resources. The third goal of the tax policy of the economy of care is therefore to reclaim the resources of the land and nation for the public so that they become a driving force for community building based on justice, equality, and humanity.

Here you can read Part III of the offer:Resources for the publicApproved at a joint meeting of the executive and policy committees of the Socialist Party of Iceland on the Saturday before Pentecost, May 22, 2021