The influence and destructiveness of tax havens
January 2011 saw the publication of Treasure Islands: Tax Havens and the Men Who Stole the World, by Nicholas Shaxson. We have read and discussed this book, and concluded that the global tax haven system represents the free market growth based economy at its most powerful and damaging. As such it is a major, if not the greatest obstacle to the development of a sustainable low or no growth world economy. The power of tax havens also contributes massively to economic and social inequality both within countries and worldwide, the impact for poor countries being the most severe. We believe that it would be helpful to FWCC to be aware of this issue in relation to the forthcoming meeting on global change.
Tax avoidance by means of tax havens is a world-wide phenomenon involving not only places such as Switzerland, Jersey, or the Caymans, which many people will have heard of. Other more significant jurisdictions include the UK via the Corporation and City of London, and the USA, both governments colluding with the system. While there are no agreed criteria for defining tax havens, on a broad definition the City of London and New York City can be regarded as the two largest.
Corporations and individuals use a jurisdiction as a tax haven when it has low levels of tax, or none at all. Then little or no regulation of at least some of its financial institutions allows transactions and the identities of their beneficiaries to be kept secret. Such places allow money to be passed through them by elites, including those from developing countries, as well as from criminal sources. The amount of money lost to tax in the countries where really it is owed is staggering. More than half of world trade passes, often just on paper, through tax havens; also more than half of all banking assets and a third of all multinational corporations’ foreign direct investment. The UK’s National Audit Office found in 2007 that a third of the UK’s biggest companies paid no tax at all in Britain in the previous boom year. Other research[i] showed that over a 35 year period capital flight from 40 African countries was $420 billion while their debt was $270 billion. The financial assets from these countries were hidden in offshore jurisdictions, while their populations were saddled with external debts.
Since 2000 the Organisation for Economic Cooperation and Development (OECD) has made some improvement to international tax cooperation by agreeing a form of bilateral information exchange between its members (rich countries)and jurisdictions used as tax havens. The OECD now recognises that further work is required to help developing countries. Developing countries do not have bilateral agreements with tax havens. OECD standards still set the burden of proof required to make a successful information request very high, too high to be feasible for poor countries[ii]. Moreover, the limitation of current arrangements is that one needs to know what one is looking for in order to make a worthwhile request. Only an automatic exchange of information relevant to taxation among all jurisdictions will lead to true transparency and the possibility of eliminating tax avoidance.
The existence of tax havens very obviously leads to greater inequality of wealth and income, and hides information about the wealth, income and profits of individuals and corporations. It increases destruction to the environment by the free market growth oriented economy since it provides increased post tax profits with no check through accountability on any form of investment, however harmful.
Thus all who are concerned about climate change and inequality need to inform themselves about the nature and influence of tax havens. The description above scratches the surface of a very complex subject. Shaxson’s book is, however, easy to follow despite the wide range of information and explanation it covers. A more academic treatment is provided by Palan[iii]. Information can also be obtained from the Tax Justice campaign[iv], from a review of the book[v], from an excellent report by Christian Aid[vi], and information on the Action Aid website[vii].
[i] Univ. of Mass. Political Economic Research Institute 2008
[iii] Palan, R., et al (2010) Tax havens: How Globalisation Really Works, Ithaca: Cornell University Press