June 19, 2009
Why Tax Havens Are Bad
Quite often people stumble across this blog after putting “Why are tax havens bad?” or “Why should I care about tax havens?”, or variations thereof, into search engines.
Accordingly, I thought it would be good to have a handy – though by no means complete – summary of why one might care about tax havens.
So here are you are:
10 Reasons Why You Already Care About Tax Havens
1. If you care about the current global financial crisis, then you care about tax havens. Although the global recession has a great deal to do with trade imbalances – particularly between China and the West – it is at least in part due to the debt securitization processes which created systemic instability in financial markets, and the “shadow financial system” which operated outside the remits of the (admittedly fairly useless) financial regulators. Tax havens did not cause the present global crisis – but they certainly helped it happen. And their continued presence is a block to reform and an invitation to repeat the mistakes of history.
Professor Sol Picotto has more (or here if you don’t want to pay the FT). Indeed, just yesterday the Norwegian Commission on Capital Flight from Developing Countries concluded that:
Tax havens increase the risk premium in international financial markets . . . (they) enhance counterparty risk and information symmetry between different players, which undermines the working of the international financial markets and contributes to higher costs and risk premiums for all countries.
2. If you care about undermining the domestic tax revenue authorities of your country – which means undermining hospitals and schools and all the other good things that tax makes possible – then you care about tax havens. In Britain, an estimated £18.5 billion is lost each year to tax havens. That’s money which should have gone into the social pot to help everybody, but was instead stuffed into the pockets of already wealthy individuals and corporations.
3. If you care about a fair tax distribution, then you care about tax havens; if you think it’s wrong for the burden of tax to be shifted towards the poor and away from the rich, then you care about tax havens. This is because tax havens are only open to the wealthy, who can afford to employ financial advisers and lawyers to help them move their money out of the reach of domestic revenue authorities. To make up the shortfall, revenue authorities must increase the tax burden on the poor, who can’t move their money offshore. As the Tax Justice Network points out, if that £18.5billion hadn’t been lost by the UK to tax havens, it could have been translated into a 4.5p cut in the basic rate of UK income tax.
4. If you care about Government hypocrisy and inconsistency, then you care about tax havens. In the UK, the Department for Work and Pensions in 2009 ran an advertising campaign entitled “We’re Closing In”, which publicly targeted benefit fraud (people claiming for state assistance – e.g. disability benefit – that wasn’t properly due to them). Benefit fraud is predominantly perpetrated by the poorest in society. It costs the UK economy about £1billion a year (definition changes in accounting reports make an exact figure hard to obtain). Tax avoidance and evasion is perpetrated by the richest individuals and corporations. In February 2008 Britain’s Trades Union Congress published a report estimating that £25 billion annually is lost to the UK from tax avoidance. This is made up of £13 billion p.a. from tax avoidance by individuals and £12 billion p.a. from the 700 largest corporations. It doesn’t all go into tax havens – but tax havens are at the heart of the avoidance industry. Yet where is the Government campaign to close in on rich tax avoiders, who cost us 25 times more than benefit fraudsters?
5. If you care about the plight of developing nations, then you care about tax havens. Christian Aid estimates that 1000 children die every day in the developing world because of tax dodging, much of it facilitated through tax havens. Oxfam estimates that developing countries miss out on up to $124 billion in lost income from offshore assets held in tax havens each year. Some $11.5trillion dollars is held in offshore accounts across the world. Because developing nation tax authorities are unable to touch this money, the Tax Justice Network estimates that developing nations effectively lose $250billion dollars per year. This is the equivalent of five times the 2002 United Nations estimate of what is needed to finance the Millennium Development Goals of halving world poverty by 2015 – goals which nobody now expects to be met.
6. If you care about international terrorism, then you care about tax havens. After 9/11, the USA orchestrated a concerted effort to close down the bank accounts and seize the assets of the Al Qaeda cells which attacked New York and Washington. This was done successfully – showing how quickly international financial impropriety can be curtailed when the will is in place. Yet the underlying infrastructure which allowed Al Qaeda to finance its attacks – which took years of international planning and preparation – has been left untouched. Tax havens are at the heart of international terrorism. The secrecy they provide allows terrorist organisation to move huge sums of money illicitly. The 9/11 attacks, the insurgency in Iraq and the Taliban resurgence in Afghanistan are all funded by dirty money which is held in and passed through tax havens. Tackling terrorism means, in part, tackling tax havens.
7. If you care about international drug running – and the vast amounts of power and wealth it puts in the hands of international criminal gangs – then you care about tax havens. In Mexico, 5,612 people were killed because of the drug trade in 2008. This pales into insignificance when compared to Columbia, which has one of the highest murder rates in the world, much of it a result of organised criminal drug violence and political unrest fuelled by the cocaine trade. As a United Nations Office on Drugs and Crime report put it:
The biggest problem is that in parts of Colombia, the State does not have a monopoly on the use of force. Highly organized criminal structures such as drug trafficking mafias and paramilitary groups are well armed and dangerous. There are many private security companies, some of which use illegal weapons. Most Colombians who die from bullets do not die through indiscriminate violence. Rather, firearms are being used in the “professional” exercise of violence.
In Afghanistan, opium production in 2007 soared 34% from alrady record levels in 2006 – much of that production putting money into the hands of the Taliban and Al Qaeda.
Tax havens and the drug trade are intimately entwined, because criminal gangs controlling the drug trade use tax havens to clean their dirty money. The drug trade is profitable, in part, because the money made from selling drugs can be transformed from dirty into clean by laundering it in tax havens. The banking secrecy and ‘no-questions-asked’ approaches which underlie tax havenry ensures that no customer is turned away – no matter where their money came from, or how much blood needs washing off.
8. If you care about human trafficking, then you care about tax havens. Each year, an estimated 600,000-800,000 people are illegally trafficked across international borders. 70% of this number are female, and 50% are children. The vast majority of trafficked workers are forced into the sex industry. Most of the others are trapped by gangmasters, working as illegal aliens for exploitative slave-wages. The profitability of people trafficking is in part – like the drug trade – because the kingpins controlling trafficking operations can launder their dirty money and transfer it into respectable bank accounts, allowing them to get very rich. Tax havens are what make this possible.
9. If you care about fighting corruption, than you care about tax havens. Corruption blights the ability of developing nations to prosper, distorts trade, hampers efficiency, redistributes wealth from poor to rich and subverts the democratic process. Tax havens are at the heart of national and international corruption in the modern world. They allow corrupt politicians and business leaders to ferret-away their ill-gotten gains, and they facilitate the very processes of corruption in the first place. In his excellent book Capitalism’s Achilles Heel, Raymond Baker explains how the current president of Pakistan – Asif Ali Zardari – and his assassinated former Pakistani president wife – Benazir Bhutto -used tax havens to facilitate contract kick-backs that made them very rich indeed:
“Letters in 1994 promised “consultancy fees”, meaning kickbacks, of 6 percent and 3 percent to two British Virgin Island companies…controlled by Bhutto and Zardari. Payments of $12 million were made to Swiss bank accounts of the BVI companies.”
“Then there was the deal to import $83million worth of tractors from Poland. Ursus Tractors allegedly paid a 7 percent commission to another of Zardari’s Caribbean companies. Bhutto waived import duties on the tractors, costing the Pakistani government some 1.7 billion rupees in lost revenues.”
“Without missing a beat [French aviation companies] agreed to pay a “remuneration” of 5 percent to…yet another of Zardari’s British Virgin Island companies. This would have generated a tidy $200million for the Bhutto-Zardari couple, but unfortunately for them she was driven from office before they could collect.”
Pakistan is merely one example – and it’s not even the most extreme. Nigeria and Indonesia are – according to Baker – certainly worse. Corrupt regimes and individuals around the world systematically use tax havens to enrich themselves and rob the people they are supposed to serve.
10. If you care about democracy, then you care about tax havens. This is because tax havens undermine democracy, a fact which has already been perfectly well laid-out by Richard Murphy, here. But to quote Mr Murphy directly, and to bring our list to a fitting conculsion:
“[the] tax rates, levels of spending and the allocation of reward within a society should be determined by the people of each state in free and democratic elections. If the people of a state wish to have a high rate of tax, and resulting high levels of public service, or even of income redistribution, then that is their choice. No one, especially a small group of financiers who have taken effective possession and control of the legislature of a small jurisdiction should be allowed to try to undermine that democratic process being undertaken elsewhere. Those who demand that these financiers have such power through such locations are in effect saying that the democratic process is one to which they do not subscribe.
The message is simple: tax havens are being used to undermine democracy. They are a threat to fundamental part of our way of life.”
The above is not intended as a complete or comprehensive list. But it should serve as introduction to a basic fact about the modern world: tax havens are at the nexus of all that is going wrong with global financial capitalism. And because global financial capitalism affects everyone, everyone should care about tax havens.
Tax Research UK » Why tax havens are bad said,
June 20, 2009 at 7:05 am
[...] Sagar, whose a great blogger, and a fairly new member of the Tax Justice Network team wrote a classic blog on Friday. He said: Quite often people stumble across this blog after putting “Why are tax havens [...]
Why tax havens are bad | called2account said,
June 20, 2009 at 8:20 am
[...] Sagar, whose a great blogger, and a fairly new member of the Tax Justice Network team wrote a classic blog on Friday. He said: Quite often people stumble across this blog after putting “Why are tax havens [...]
Dan said,
June 29, 2009 at 9:33 pm
2) For one thing, the $18.5 billion is not ‘lost,’ it simply doesn’t end up in the hands of the state. Now, I’m sure you really do believe that allowing private individuals to spend their own money as they see fit is tantamount to wasting it, but there really isn’t any difference between a pound spent by the state and one spent by an individual. Except, of course, that the individual will spend it on something they actually want rather than something they’re coerced into buying.
3) You’re absolutely right that people who care about a fair tax burden should care about tax havens – it’s true that only the rich who can afford fancy advisers can benefit from them. However, there is another way to rectify the disparity (which, interestingly, you choose to omit) – abolish the confusing and confused tax system and replace it with a flat tax. There would be very little scope for the kind of tax avoidance schemes currently in favour under one, and therefore no need for tax havens. But of course, it’s not the disparity you care about so much as soaking the rich, which is why you don’t mention it.
4) Again, almost ad nauseam in this debate, the distinction between tax evasion (which is illegal) and tax avoidance (which is an entirely legal practice) is being ignored.
5) This is perhaps the most egregious of all the points on here. You (and Christian Aid, to be fair) are skirting a rather important assumption here – that the extra tax revenue would actually go towards helping the impoverished of the third world, rather than just paying for shiny new militaries or filling the pockets of corrupt governments. What third world countries need is a system of stable property rights, better governance and free markets – the only tried and tested way to lift whole populations out of poverty. There is no evidence that increasing government revenues correlates positively with any of these things, and plenty to suggest the opposite.
6) You’re conflating two different things here. The fact that the US was able to freeze Al Qaeda assets without clamping down on tax havens suggests that the two problems are indeed independent of each other.
7) The real reason that vast amounts of power are concentrated in the hands of drug lords is not the existence of tax havens but the unconscionable and ineffective policy of drug prohibition – I get that you really, really don’t like tax havens but this is pretty blatantly not addressing the real underlying issue here.
8) Again, the international sex trade is a terrible thing – but what evidence do you have for saying that clamping down on tax havens is going to do anything in addressing the problem? I’d be surprised if much of the laundering of its proceeds actually goes through tax havens rather than through ‘front’ businesses in the countries it is being operated in.
10) This strikes me as an incredibly bizarre objection – if you’ll excuse the Godwin violation, tax havens undermine democracy in the same sense that, say, countries which harboured Jews from the Nazis undermined democracy. That is, yes, some democratic action is being thwarted. But in the absence of any good reason to think that action is legitimate in itself, this is no problem. And unless you want to explicitly argue that governments are the morally justified owners of all of the resources and money which putatively belong to their citizens, there doesn’t seem to be any reason in thinking that this money is legitimately theirs.
Paul s said,
June 29, 2009 at 9:56 pm
Dan,
We’ve been here before, many times.
You hold a political world view so radically at odds with mine that I just don’t think there’s enough common ground between us to even begin to engage.
I honestly believe your libertarian views are evil. Evil. I don’t think you are evil: from what I can tell, you have nothing but good intentions. But the road to hell, and all that.
Maybe I will reply to your points in a couple of days. The problem is, even engaging with your hyper-right wing views makes me angry. After a day at work, I don’t really have the energy to respond to you, because I get so worked up about how somebody evidently so intelligent can hold views which are so monstrous – and convince themselves that they are speaking in the name of freedom and justice.
James Arnold said,
June 30, 2009 at 6:01 pm
Dan,
> there really isn’t any difference between a pound spent by the state and one spent by an individual.
Except, the money doesn’t really go to ‘individuals’: it just becomes extra profit for corporations. However much you hate the state, corporations are far more authoritarian, they are completely unaccountable, and they do far less for the public good.
> What third world countries need is a system of stable property rights, better governance and free markets – the only tried and tested way to lift whole populations out of poverty.
Absolute twaddle. It is well known that the market liberalization programs pushed by the IMF and the WTO (amongst others) have severely damaged, not just third world economies, but basic human rights (have a read of Human Rights and Structural Adjustment by Abouhard and Cingranelli). You really can’t have read any of the literature on the effect of free market reforms on the Global South if you’re coming out with crap like this.
> tax havens undermine democracy in the same sense that, say, countries which harboured Jews from the Nazis undermined democracy. That is, yes, some democratic action is being thwarted. But in the absence of any good reason to think that action is legitimate in itself, this is no problem. And unless you want to explicitly argue that governments are the morally justified owners of all of the resources and money which putatively belong to their citizens, there doesn’t seem to be any reason in thinking that this money is legitimately theirs.
This is absolutely bonkers. Firstly, Nazi Germany was not a democracy, and Hitler did not have a democratic mandate to wipe out the Jews. Secondly, Paul’s argument does not rely on the obviously ridiculous premise that “governments are the morally justified owners of all of the resources and money which putatively belong to their citizens”. It relies on the much more reasonable premise that the people of a country have the right to determine the level of tax within that country. If the people decide the government should not be allowed to tax over, say, 50%, that means the government have no mandate to appropriate more than 50% of their citizens’ incomes. In other words, you’re just using a strawman argument.
Incidentally, I do think there are some aspects of tax policy that are worth criticising. For example, I believe that many would feel aggrieved if they were to learn that nearly £40 billion p.a. goes on the military, whereas less than £30 billion goes on housing and the environment combined. We could improve democratization of the tax system by giving the public greater control over what taxpayer money is spent on. But the criticisms you make rely on a crude anti-statism, that neglects the distributive and social injustices inherent in capitalist economies.
Dan said,
July 1, 2009 at 11:16 pm
Paul,
Wow, I didn’t know you took it so personally. I certainly don’t. If you don’t want to engage in conversation, that is of course your decision, but I think it’s a shame.
James,
Firstly, suppose for the sake of argument that you’re correct and that all the money in tax havens simply goes to corporations (which would, it seems, invalidate many of the points in the original post). How this means the money doesn’t go to individuals, I really don’t know – what do you think happens to corporate profits? Do they vanish down a gigantic hole? No, profit is distributed among individuals, usually employees or stock holders. As for reasons to prefer the state to corporations, I don’t think there are any – I particularly don’t think it’s plausible to say that a firm in a competitive market forced to obtain the voluntary consent of its customers to stay in business is somehow less accountable than a government.
Secondly, what part of “stable property rights, better governance and free markets” do you think is satisfied by the WTO and the IB, both government agencies? What makes you think I support the kinds of state-capitalist market ‘liberalisation’ that these organisations support? It may come as a shock to your point of view but not everyone over here on my side of the fence thinks that the WTO is a good idea. It actually pisses me off no end that the rhetoric of free markets has been so successfully co-opted by the authoritarian right, but there’s not a lot I can do about that. Having said that, I really don’t think that the evidence you cite regarding human rights is so unequivocally in your favour. It says
“Compliance with structural adjustment conditions causes governments to lessen respect for the economic and social rights of their citizens, including the rights to decent jobs, education, health care, and housing”
which is certainly true – but given that there are, in my opinion, no human rights to a job, an education, health care, or housing, this is not so troubling to me. It continues:
“However, the results of our study show that structural adjustment has
not led to a worsening of protections of all human rights in developing
countries…We found that longer exposure to structural adjustment conditions was associated with more democracy in developing countries – one of the human rights also found to be associated with rapid economic growth… Governments involved with structural adjustment the longest have better-developed democratic institutions. They have elections that are freer and fairer. Their citizens have more freedom to form and join organizations, and they have more freedom of speech and press.”
Now these sound more like the rights we should care about.
Finally, on to Hitler: it’s certainly debatable that the Nazis were not democratically elected – in March 1933, they got 43.9% of the vote (to put this into perspective, in 2005 Labour got 35.3%). It’s not implausible that the German people knew what they were getting themselves into by electing Hitler, given his published material. On to the substantive premise: you say it’s that “the people of a country have the right to determine the level of tax within that country,” as though this contradicts my “governments are the morally justified owners of all of the resources and money which putatively belong to their citizens.” But of course, having the right to determine the level of tax in a country assumes the right to override private property rights which makes, in effect if not in name, the government the true owner of all the resources in that country.
James Arnold said,
July 4, 2009 at 11:47 am
> How this means the money doesn’t go to individuals, I really don’t know – what do you think happens to corporate profits? Do they vanish down a gigantic hole? No, profit is distributed among individuals, usually employees or stock holders
This isn’t quite true: much of the money will be reinvested in real capital. However, insofar as your point is correct, the same point applies to your contrast between individuals and the state (“there really isn’t any difference between a pound spent by the state and one spent by an individual”). Of course, it is trivially true that institutions are composed of individuals, but the point I was making is that your argument avoided an important dimension of analysis; namely, the difference between governments and corporations.
“As for reasons to prefer the state to corporations, I don’t think there are any – I particularly don’t think it’s plausible to say that a firm in a competitive market forced to obtain the voluntary consent of its customers to stay in business is somehow less accountable than a government.”
Nonsense. We vote for the government, in (relatively) free, fair and regular elections, in the full knowledge that the government which receives a majority will have a democratic mandate to pursue their policies. I would be the first to admit the current system is imperfect in significant ways (there is an obvious “democratic deficit”), but we have to recognise the system for what it is: namely, one of the most representative governments that exists. (Also, not to be seen to be praising the British system too much, there are examples of countries with much more vibrant democratic systems, e.g. Bolivia.)
The slight influence we do have over corporations – namely, the option to boycott them – is in no way comparable to the universal suffrage enjoyed in the governmental arena. We do not directly elect the executives and managers of corporations. Moreover, the government – for all our complaining about spin and propaganda – are significantly more open than corporations, and have less protection from public scrutiny. Compare, for example, the volume of reporting on the complicity of British intelligence services in the torture of Binyam Mohamed and others, to the comparatively low level of reporting of UK corporation Shell in the torture and murder of Nigerian human rights activists such as Ken Saro Wiwa.
James A said,
July 5, 2009 at 5:16 pm
> the WTO and the IB [sic], both government agencies?
They may be government agencies, but they are promoting the interests of major transnational corporations, and effectively have their policies shaped by them: http://www.commondreams.org/headlines03/0828-02.htm
> It actually pisses me off no end that the rhetoric of free markets has been so successfully co-opted by the authoritarian right, but there’s not a lot I can do about that
You can campaign against corporate power, by supporting the various organisations which constitute the global justice movement.
> given that there are, in my opinion, no human rights to a job, an education, health care, or housing, this is not so troubling to me.
This touches deep questions about the derivation of human rights, if indeed there are any such rights. In my view, human rights protect people’s autonomous control over their lives. I view jobs, education, healthcare and housing provision as integral to people’s ability to make autonomous decisions which direct the course of their lives. So, I think there are corresponding rights in these areas.
> I really don’t think that the evidence you cite regarding human rights is so unequivocally in your favour
You are seriously distorting the evidence! You portray it as if Abouharb and Cingranelli claim that only so-called “second generation” rights are made worse by SAPs. That is bollocks. What, for example, about the following?
“…we show that governments undergoing structural adjustment for the longest periods of time have murdered, tortured, politically imprisoned and disappeared more of their citizens.”
What about the role SAPs have played in undermining worker protection?
“…pressures from the World Bank and IMF…have encouraged the leaders of developing countries to reduce protections of workers from exploitation [such as] internationally recognized core worker rights to freedom of association at the workplace, collective bargaining, and protection of children from exploitation.”
Moreover, if you go on to read chapter 10 – where they present evidence that SAPs are associated with increased formal democracy – they also qualify their result by arguing that it is consistent with those formal democratic institutions not being “meaningful”, as a wide range of socio-economic policies are effectively without the remit of those institutions. Thus the overall effect of SAPs is to promote democratization insofar as it is severely limited and “not meaningful”.
> it’s certainly debatable that the Nazis were not democratically elected
I did not say that the Nazis weren’t elected. I said “Nazi Germany was not a democracy”. I don’t think a party being elected is a sufficient condition for democracy. Democracy means, amongst other things, that the party can be removed in subsequent free and fair elections if they do not follow the will of the people. But once the Nazi party were in power they dismantled democratic institutions and civil liberties, creating a totalitarian, one-party state. Moreover, the attempted genocide of the Jews would not have happened if Nazi Germany was not a totalitarian state.
> having the right to determine the level of tax in a country assumes the right to override private property rights which makes, in effect if not in name, the government the true owner of all the resources in that country
I claimed that the *people* have the right to determine the level of tax. They are the ones who empower the government to redistribute resources, *on their behalf*. That makes the people of a country the true owners of all the resources in that country. And so they are.
Radical Steps? « Bad Conscience said,
August 28, 2009 at 9:04 am
[...] Tax Havens will again be on the agenda at the September G20 – and rightly so. There are two things in particular that tax justice campaigners should focus on demanding from the [...]
Four reasons why tax avoidance makes us all worse off | Liberal Conspiracy said,
February 14, 2011 at 9:07 am
[...] Paul Sagar pointed out earlier: Tax havens and the drug trade are intimately entwined, because criminal gangs controlling the drug [...]