Rule of the vigilante is not the way to handle business misconduct

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Big, bad companies are firmly in the sights of politicians. Last week UK Labour party leader Ed Miliband announced a headline-grabbing scheme to fund cancer testing by a levy on the profits of tobacco groups. This follows earlier commitments to pay for youth training by taxing bankers’ bonuses and to fund expanded spending on the National Health Service with a mansion tax. Labour has form on such policies. When it was returned to office in 1997, its New Deal for the young unemployed was paid for by a levy on privatised utility companies.

The European Commission is targeting alleged tax avoidance by Google. It is not difficult to see why this company joins Starbucks and Amazon in the dock. All three are American businesses with a high consumer profile.

Then there are the fines. For US banks, laying out billions to settle allegations of past malpractice, often without acknowledgement of wrongdoing, is a regular cost of business. Even so, the near $9bn extracted from BNP Paribas was eye-watering. It is now common practice for several regulatory agencies to share the loot.

Pharmaceutical companies are also being shaken down; campaigners are aiming at other targets, such as businesses that feed obesity. State attorneys have joined in as their governments eye new revenue to supplement the existing tobacco settlement.

Europe is only getting into its stride. George Osborne, UK chancellor of the exchequer, has announced that the fines levied on banks for their part in fixing the Libor benchmark lending rate will go to armed forces charities. Larger penalties still will probably be imposed for abuse in the foreign exchange market.

There are good reasons for state action in areas of business misconduct. Financial abuses should be punished. Tax avoidance by multinational companies is at unacceptable levels. Tobacco companies behaved badly; their products have caused great social damage.

But announcing ad hoc measures against companies in the news is the wrong way to deal with these issues. The amounts extracted appear arbitrary. The random incidence of penalties and the distant relationship between the sums obtained from the corporation and the individuals responsible means that the deterrent effect on future conduct is weak. The process increasingly resembles an armed gang roaming the streets, picking on unpopular individuals and extorting money, with strangers particularly liable to assault. The gang justifies its bullying by handing some of the proceeds to needy friends.

There are compelling reasons why advanced societies have abandoned the rule of the vigilante in favour of careful, dispassionate, deliberative processes. Proper judicial proceedings are free of the pressures of 24-hour news. Frontier justice often emerges when the existing law is too slow and cumbersome, and too much in thrall to established interests, to respond to the legitimate anger of the public – and this is a fair characterisation of what has happened in finance. But the right answer is to reform the law, not to act outside it.

There are similarly compelling reasons why, as far as possible, tax should be based on general principles applicable to all individuals and companies. There is danger, too, in hypothecating tax revenues to popular items of public expenditure. We also need tax revenues for unglamorous items of spending – such as effective tax collection and proper regulation of business – and a considered mechanism for assessing priorities among them. Revenue hypothecation is always opposed by the fiscally prudent because it undermines effective public expenditure control.

The erosion of constitutional proprieties in favour of populist slogans is a danger to which all democracies are vulnerable. More vigilance than ever is needed to guard against it.

 

This article was first published in the Financial Times on October 22nd, 2014.

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