As Nation-States Falter, Capitalism Shines

The world has been ruled by nation-states throughout modern history, ever since kings and queens were put out to pasture, but nation-states may be on the brink of extinction, similar to monarchies over the past 50-200 years.

Nation-states are not meeting the basic needs and requirements of the people, and, in particular, the legacy nation-states are bleeding through the gills. They’re taking on historic levels of debt while prospectively cutting social services wherever possible. This is a prescription for failure. The main problem is a shortage of revenues for the treasury.

But, capitalism, embodied within transnational corporations, does not require upbeat nation-states to thrive. They’re doing beautifully regardless of the drag of some of the world’s biggest countries. Worldwide, several major stock markets have recently set new records; meanwhile, nation-states sustain abnormally high unemployment levels and badly deteriorating finances. The contrast between the two is breathtaking. For example, the Eurozone unemployment rate is now over 12%; meanwhile, the major European bourses have recorded new highs over the past month.

It’s all about power and money. As such, “capitalism,” which is a nickname for global corporate interests, has all of the power and the money. For example, Apple has enough cash on hand to eliminate Cyprus’s debt with plenty of change left over. And, just the five largest NASDAQ high tech listed companies have combined revenues equal to the 30th largest country (Venezuela) in the world. Moreover, corporate balance sheets make most of the world’s leading countries look like financial dolts.

In point of fact, society is witnessing one of the biggest socio-economic disruptions in history as capitalism, consisting of transnational entities, overwhelms, and cripples, the capabilities of nation-states to function.

The inchoate corporate state is a reality, and it knows no borders or allegiances beyond other corporate interests. This is transnationalism at work, and it is feverishly conquering the planet, pushing aside weakened nation-states, which are powerless in the face of rampant, unchecked capitalism.

Twenty years ago, Gus Tyler (1911-2011), the ubiquitous radio commentator and author, conjectured as follows: “The rise of transnational companies has undermined a nation’s ability to manage its private economy. How can national political institutions cope with a global economy that dissolves national boundaries?”1

And, furthering his point, Tyler quoted Keynes, circa 1930: “The outstanding faults of the economic society in which we live is its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”

It now appears both Keynes’ and Tyler’s forebodings were on the mark. Although, they would likely be surprised by how emphatically their words are ringing true as capitalism’s transnationalistic rise to power is unrivaled. In this pursuit of unrivaled power and influence, corporate interests unabashedly toss high-priced labor into the dustbin of nation-state unemployment rolls in favor or low wage/low regulatory jurisdictions even as these same transnational corporations shirk their responsibilities of paying a fair share of the obligations of the nation-states. And, they get away with it!

For example, Google’s UK subsidiary may have sales of over $3 billion in the UK, but they only pay the UK $6 million in corporate taxes, or 0.002%, somewhat similar to Amazon, Starbucks, and the list goes on. Major multinational corporations sell products in high tax counties but book the same sales in low tax countries.

According to Google’s Executive Chairman Eric Schmidt, “I don’t think companies should decide what tax policies should be. I think governments should… All of us are operating in a very, very longstanding tax regime that was set up for various reasons that don’t necessarily make sense to me or anyone else. But they are the way the global tax regime works.”2

In short, everybody else is doing it, so why not Google?

And, isn’t Mr. Schmidt really stretching the credibility quotient when he states tax policy doesn’t make sense to “me or anyone else.”

The “longstanding tax regime,” referenced by Mr. Schmidt, is all about who has power over the purse. More precisely, the “long-standing tax regime” is the result of supply-side economic theory and globalization embraced by politicians who are beholden to global corporate interests. Over the past 40 years, corporate interests lobbied and supported political operatives to pass the very regulations, and loopholes, criticized by Mr. Schmidt. As it goes, Mr. Schmidt’s statement is an example of the fox lambasting the fox in the henhouse.

Recently, Robert Reich, Chancellor’s Professor of Public Policy, University of California at Berkeley elegantly summarized the issue, as follows: “As global capital becomes ever more powerful, giant corporations are holding governments and citizens up for ransom – eliciting subsidies and tax breaks from countries concerned about their nation’s ‘competitiveness’ – while sheltering their profits in the lowest-tax jurisdictions they can find.”3

As it goes, “who pays how much” to the U.S. federal government tells a big story: According to the U.S. Budget Office, “Tax Receipts By Source As Percentages of GDP: 1934-2015,” since 1950 and up to, and including, 2010: Individual tax payer contributions to the U.S. Treasury as a percentage of the country’s Gross Domestic Product (“GDP”) have rocketed upwards by 60% while corporate tax payments as a percentage of GDP, over the same time frame, have plummeted by 70%.

All the same, if a corporate CEO is confronted with this fact, he/she will explain how the top corporate tax rate is 35%, the same as individuals, but they omit to say that average individual taxpayers cannot conveniently move assets offshore to avoid taxes altogether (although, as for the wealthy, Mitt Romney, who has numerous offshore accounts nestled in prototypical tax havens, proved otherwise, and everybody knows he only pays a tax rate of 15% on the portion of his income that he ‘declares’ for taxes), and individual taxpayers, compared to multinationals, cannot declare taxes in low tax jurisdictions outside of the country where their income originates. This is the domain for corporation interests, not individuals.

Additionally, corporate interests have discovered fascinating ploys whereby corporate officers are enriched at the expense of all individual taxpayers. Here’s how it works, as only one example of many other tax dodges: The companies pay top executives a hefty amount in “stock options,” for which the tax code allows corporations to deduct the appreciated value of the stock. This means corporations eliminate some taxes by enriching executives. This is a win-win for corporations and their officers, and it is a lose-lose for individual taxpayers and the U.S. Treasury.

Indeed, this tinkering with the tax code provides a skillful and surreptitious methodology for grossly rich corporate executives to make tons more money, and allegedly, the “trickle down theory” claims they will invest these funds to create more jobs. This supply-side theory has worked wonders these past several years… correct?

The point to be made is this: Capitalism’s prime beneficiaries now control every aspect of economic power from political office to the tax code as well as unhindered blatant avoidance of taxes. As it follows, individual citizens of the nation states are left holding the bag and nation states are going broke. How long can this continue? The answer is: As long as nation-states can manage to carry more, and more, and more, and more debt, but Greece has already demonstrated a day of reckoning lurks around the corner.

Is it possible that one of the big time legacy nation-states might be next?

Japan: Case Study of a failing Nation-State

Japan, the world’s third largest economy, is a dead ringer for economic free-fall, but nobody knows for sure when it will happen. Japan’s government debt/GDP is double Greece’s.

Japan’s debt level is approximately 25 times tax revenue. Japan’s tax revenues are 43 trillion Yen (¥) of which 10 trillion ¥ pays for annual interest on outstanding debt. And, this inordinate complexity is with interest rates below one percent (1%). Imagine what will happen to Japan’s interest expenses when rates go up!

Furthermore, the country’s tax revenues are 43 trillion ¥, but they spend 102 trillion ¥, more than double tax collections. It is no wonder the country has had 10 finance ministers over the past 5 years!

As a result, large Japanese corporations are acquiring or merging businesses outside of Japan, and in typical transnational fashion, they’re looking to get out while the getting is good.

One respected U.S. economic newsletter says of Japan’s economic situation: “It’s a bug in search of a windshield.”

Market economies historically implode when public debt levels exceed five-to-seven times tax revenues for an extended period of time. In Japan’s case, their debt level is more than one quadrillion ¥ or a ‘billion billion’ ¥, which represents twenty-five times revenues of 43 trillion ¥. Along these lines, the ‘bug’ analogy is more than fitting.

Transnationalism Reigns Supreme

In turn, some Japanese multinationals are exiting stage left in order not to get caught in Japan’s continual deflationary anti-bubble. “So far this year, Japanese firms have made more than $52.5 billion in global acquisitions, compared with $34.34 billion in all of 2010. Overall, Japanese companies are the second-largest acquirers in the world this year… according to Dealogic, a deal-tracking firm… It’s a trend that analysts expect to continue, and possible accelerate, as Japanese companies diversify their operations away from Japan’s stagnant economy….”4

Meanwhile, as a short-term preventative measure, and grasping for straws whilst in a quiescent panic mode, the government of Prime Minister Shinzo Abe has opened up the monetary spigots like Niagara Falls during the high season. This rapid devaluation of the yen, i.e., printing money like its going out of style, reminiscent of 1920s Germany, is jacking up Japan, Inc.’s worldwide competitiveness over the short term, as Japanese goods become cheaper versus the world because of intentional devaluation of the yen, but this damages economic interests with other countries, including the U.S., not to mention negative consequences for Japan down the line.

As an example, Toyota will book an extra 35 billion ¥, or 352 million USD, for every one Yen devaluation against the dollar. Regardless, Toyota announced plans to start building Lexus sedans in Kentucky as part of its plan to “become free of currency risk.” Hence, even though Toyota appreciates the short-term pop in earnings because of a rapidly depreciating yen, they continue to move operations offshore.

The Japan-Toyota scenario demonstrates the flexibility of transnationals. They can see a precipice on the horizon even though they do not know how imminently it will arrive. So, on a cautionary note, they move some operations to other countries. But, Japan cannot move the country’s governmental operations, infrastructure, schools, power plants, etc. Along these lines, as transnationals seek greener pastures overseas, Japan increasingly loses its tax base as its aging population over 60 grows to 30% versus a worldwide average of only 8% of the population over 60. To say this is a daunting problem is only too obvious.

At the end of the day, the country of Japan is left with an aging population and enormously high debts. Who’s going to care for the aging society? Not transnationals… they hire overseas workers where operations are relocated. Plus, they adroitly maneuver sales to where taxes are lowest. Thus, and increasingly, nation-states are left with the baggage, i.e., costs of infrastructure, unemployed, and medical expenses for the aging as well as depleting tax bases, meanwhile transnationals move on to new frontiers.

In this fashion, nation-states stagnate whilst multinational corporations thrive because of the flexibility to move wherever taxes and labor costs are most favorable. But, by definition, the legacy nation-states like Japan do not meet the criteria necessary for transnationals looking to move operations into their country because they provide too many costly social services and high wages!

The Trend for Nation-States

Over the past 40 years, with the onset of globalization in combination with transnational interests as dictated by the WTO, NAFTA, the World Bank, the IMF, the EU, the U.S. and other extra-international organizations long-standing policies and tax regimes have become embedded such that many of the policies required to maintain nation-states are flippantly at risk to the whims of transnationals. The complexity behind this favorable arrangement for tansnationals vis-à-vis nation-states is beyond the reach of average voting citizens and beyond the power of nation-states.

As it happens, unless the trend of transnational omnipotence, which is capitalism on steroids, is broken, it is probable that the legacy nation-states, like the U.S., will continue to limp along into an ever-deeper pit of indebtedness as social services are slowly disassembled. This trend is accentuated by continuing weak economic behavior within the nation-state, but paradoxically, and regardless, capitalism thrives and shines!

The upshot of this Gordian knot is destined to result in increasing enforcement via police state tactics while the crumbling apparatuses of nation-states threatens outbreaks of civil disobedience. Then, one has to wonder which frontier transnational elites will conquer next.

As follows, it may be in the best interests of the capital class to avoid this pitfall by calling for a return to an equitable distribution of taxes paid to the treasuries of the nation-states. Otherwise, they may run out of frontiers.

  1. Gus Tyler, The Nation-State vs. the Global Economy, Challenge, March-April, 1993. []
  2. Cameron Hails Tax ‘Turning Point’ After Google Criticisms, BBC News, May 22, 2013. []
  3. robertreich.org, Global Capital and the Nation State, May 20, 2013. []
  4. Kathy Chu, Japanese Companies Look Outside for Expansion Opportunities, USA Today, Sept. 28, 2011. []

Robert Hunziker (MA, economic history, DePaul University) is a freelance writer and environmental journalist whose articles have been translated into foreign languages and appeared in over 50 journals, magazines, and sites worldwide, like Z magazine, European Project on Ocean Acidification, Ecosocialism Canada, Climate Himalaya, Counterpunch, Dissident Voice, Comite Valmy, and UK Progressive. He has been interviewed about climate change on Pacifica Radio, KPFK, FM90.7, Indymedia On Air and World View Show/UK. He can be contacted at: rlhunziker@gmail.com. Read other articles by Robert.