We Live in Financial Times, 2008 Advertising campaign, Campaign Agency: DDB UK, Illustrator: Denis Scott © DDB UK

The social contract upon which modern Western democratic institutions rest is usually taken for granted by the average citizen. And though this contract needs to be updated to cover the whole picture of our ever-changing societies, its presence is of inestimable value. Politics, under the social contract, is meant to give humans back the freedom that civilisation’s dynamics can easily steal. The configuration of our societies required a recipe that allowed us to live together in harmony without renouncing to our individual freedom, that is, without subordinating ourselves to the stronger force of others. And the social contract gave us precisely that recipe. We, as equal human beings, decided to play by the rules of the collective will, configured based on our preferences and agreements. So, in other words, the social contract helped us build a big boat wheel meant to rotate in perfect synchronicity with our common will.

However, sailing the stormy seas of our sometimes-ruthless capitalism, it seems that the wheel is rotating asymmetrically. The stronger-in-capital hands have taken contol and are enforcing a particular direction, while we all say goodbye to the social contract from a boat we cannot redirect.

The ruling principle of a representative democracy is a fair, equal and consensual bargain. What happens when the capacity to bargain is constrained by the available capital? Should capital have a better bargaining position than labour?

I will evaluate this political asymmetry using three different and well-known examples. First, I will introduce the concept of tax avoidance and how it constraints the portfolio of available political choices by undermining fiscal sovereignty of the state. Secondly, I will take a look at a particular actor, vulture funds, and how their activities lead to powerless states. And lastly, I will analyse the shift in the political agenda caused by lobbyist practices. All of these examples pretend to illustrate how unbalanced is in many cases the weight of political preferences and how, as a consequence, the social contract is severely harmed.

In his insightful book, Catching Capital: The Ethics of Tax Competition (2015), Peter Dietsch points out the alarming ethical issues that tax competition and the attached tax avoidance bring. More precisely, from the variety of issues that the author mentions, I would like to focus on the effect of tax avoidance on the democratic decision-making process.

As any other public policy, fiscal policy should encompass the whole democratic preferences of a country’s citizens, no matter the particular country’s conception of social justice, nor the global desire of more or less redistribution of wealth.

We understand tax competition as the strategic design of a country’s tax policy to attract investment originally located in another country. It is clearly incentivised by opportunistic capital movements, and its consequences can severely impact a state’s fiscal autonomy. This recent editorial of Le Monde after the Paradise Papers: «Paradise Papers» : l’évasion fiscale met en danger nos démocraties analyses precisely the first example I try to cover in this article.

When a government faces the tax evasion of multinational companies, tax rates can no longer reach a hard to follow mobile capital. Instead, if the government wants to maintain the revenues demanded by the population, it has to shift the burden to labour or consumption. So, it either becomes a more regressive fiscal regime or it is just not able to accommodate the citizen’s preferences and must therefore sacrifice their original projects. Hence, it eliminates from the public debate certain redistributive options. “A recent joint report by Citizens for Tax Justice and the Institute on Taxation and Economic Policy shows that out of 288 Fortune 500 companies that were profitable in every single year between 2008 and 2012, 111 of them (39%) paid zero taxes or less in at least one of the five years. For MNEs, not paying taxes has become part of what it means to stay competitive” (Dietsch, 2015). Is it fair that an unregulated capital has a predominant political position over labour? Does capital make any difference in our social contract framework or are we all equal citizens under it?

Construction workers work near posters that read “Enough vultures, Argentina united for a national cause” in Buenos Aires June 18, 2014. REUTERS/Enrique Marcarian (ARGENTINA – Tags: BUSINESS POLITICS CRIME LAW) – RTR3UG0T

This dominant position of capital over labour, reaches its ultimate expression when it becomes a dominant position over the state itself. One dramatic example is the polemic modus operandi of vulture funds. These speculative enterprises buy public debt of countries on financial difficulties, facing a price far from the real value. When external help (in form of creditors) provide financial relief to the countries, the vulture fund sues the country, using courts around the world, with the aim of getting the full debt plus interest, paid. The country at that moment faces not only the financial obligation with the creditors but also the demand of the vulture fund. If we add to this situation the pressure on government revenues that tax avoidance creates, then it is hard to imagine a fiscal policy portfolio at all. It was not until last year when the Argentinian case was settled after a long fight and not surprisingly, in 2010, the UK approved a law that prohibited the use of the UK courts by vulture funds to subjugate the world’s poorest nations.

A perhaps less polemic example, but that could be considered a flagrant violation of the social contract as well, is the unbalance in the political agenda caused by lobbyism.

As I stated before, our democratic polity implies the equality of the different individuals in the public arena. But even when we depart from traditional understanding of lobbyism as a form of exchange or persuasion and we framed it as a form of legislative subsidy, as Hall & Deardoff (2006) argue for the United Sates context; we can conclude that politicians will “work harder primarily on behalf of the interests that can afford the high costs”. Again, we are facing the same distortion of representativeness in favour of Capital. In this precise case, in favour of those groups that can afford the resources required for an influential lobbying strategy. But why should the political agenda behave like a weathervane, turning with the winds of capital?

The post-war period brought us one of the greatest advances of democracy. The social contract between capital and labour, between all the individuals that form our societies. The current landscape has given a small fraction of citizens the benefit of disentangling themselves from the inherent social contract while at the same time taking advantage of its constraints and the services it provides. We do not need a radical revolution to take the wheel back. A review of the roots of our democracy and the conception of consensual global strategies among countries could lead us in the right direction. 

References

Richard L. Hall and Alan V. Deardorff (2006) Lobbying as Legislative Subsidy: The American Political Science Review, Vol. 100, No. 1, pp. 69-84.

Peter Dietsch (2015) Catching Capital: The Ethics of Tax Competition

https://www.theguardian.com/business/2010/apr/08/vulture-funds-developing-nations-debt

https://www.nytimes.com/2016/04/01/opinion/how-hedge-funds-held-argentina-for-ransom.html

http://www.lemonde.fr/idees/article/2017/11/06/paradise-papers-l-envers-de-la-mondialisation_5210798_3232.html

Jean-Jacques Rousseau (1762) The Social Contract or Principles of Political Right


Ignacio Bañares Sánchez is a first year MPA student, originally from Spain. He studied in Madrid and Chicago and holds a Bachelor’s and Master’s degree in Industrial and Energy Engineering. His academic background previous to LSE is focused on sustainability and energy challenges. He worked as an Engineer and Economic Analyst and as a Consultant in the financial sector. After the discovery of a late vocation, he started his studies in Public Policy at the London School of Economics.

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