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OpEdNews Op Eds    H1'ed 6/4/13

When It Comes to Business Profits, It's the Plutonomy versus the Realonomy -- and the Plutonomy is Winning

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Message Salvatore Babones
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A new report from the International Labour Organization shows that across G20 countries corporate profits are up, up, up. Since the year 2000 corporate profits as a proportion of total national incomes have risen by 2.2% in major high-income countries and by 3.4% in major middle income countries.

Along with corporate profits, executive pay has hit record levels as well.

All around the world the plutonomy -- the economy of big corporations and their CEOs -- is doing quite well, thank you. But the realonomy -- the real economy in which ordinary people live and work -- remains stagnant.

And what are all those big corporations and wealthy individuals doing with their ever-increasing wealth? They are sitting on it, mostly by hiding it in offshore tax havens.

"The cash holdings of publicly-listed enterprises in advanced, emerging and developing economies combined, increased from 2.3 trillion USD in 2000 to 5.2 trillion in 2008 and continued to rise further during the crisis, reaching 6.5 trillion USD in 2011," according to the ILO.

It's not just ordinary people who are losing. Small businesses are losing, too. The ILO reports that large firms are roughly three times as profitable as small firms. No wonder the large firms are taking over.

Big profits, tax avoidance, cash hoarding, and the decimation of small businesses are not separate trends. They are all part of one big trend. Our small firms are disappearing because big firms don't play fair.

They don't have to.

Small companies operating in single countries have to pay taxes on the profits they make. They have no choice. There is nowhere to hide.

Big companies can and do choose what countries they want to claim their taxes in. Obviously, most big companies choose to park their profits in countries where they pay no tax.

A small company that pays taxes will never be able to out-compete a big company that doesn't. So the small companies are disappearing.

The big companies that replace them make more money, but have to keep it holed up in international tax havens to avoid paying taxes on it. Thus the cash hoarding.

A bizarre and tragic side-effect of all this is that rates of business investment have collapsed. All that money just sits offshore in tax haven bank accounts instead of being used to boost productivity through meaningful investment.

In the long term, the solution is to close the tax havens and make sure that big businesses pay their fair share of taxes. We can get there, but it will be a long slog. You can be sure that the world's largest multinational corporations will fight tooth and nail to maintain their domination over the global economy.

In the short term, however, governments can solve the investment shortage by ... investing. The world needs investment, and the world needs jobs. Instead of sitting around waiting for a multimillionaire CEO to invest his company's multibillions, we can just invest for ourselves.

In the middle of a six year (and counting) recession it is ridiculous that governments in North America and western Europe are cutting back on public investment. Greater austerity is not the answer to underinvestment. Investment is the answer to underinvestment.

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Salvatore Babones is a senior lecturer in sociology and social policy at the University of Sydney in Australia and an associate fellow at the Institute for Policy Studies (IPS) in Washington, DC.
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