Dec 01, 2016
Josh Eisen and Richard Swift ring the alarm bells over the looting of the public purse.
Floating on top of the world – a well-heeled client enjoys himself in the infinity pool of the luxurious Marina Bay Sands hotel overlooking Singapore’s financial district (where discretion is guaranteed).
© Paolo Woods & Gabriele Galimberti/INSTITUTE
Should I declare it? It’s a question many of us ask as tax time rolls around. Aside from the fear of getting caught, why do we actually pay taxes? After all, anyone’s individual taxes don’t amount to very much in the overall scheme of things. Who would miss them? And then there are all those irritating things governments waste our taxes on – corporate subsidies, expensive military hardware, big salaries for high-handed bureaucrats.
But in the end our taxes are also part of the social bond that ties us together as a society: giving us basic services we all need, supporting the most vulnerable of us and restraining the predatory tendencies to which capitalism seems preternaturally inclined. If we look at it this way, taxes are the gift we give each other. When we lose faith in that simple truth, we move a little bit closer to the abyss of the ‘war of all against all’.
This year has been a bad one for tax cheats. The New York Times’ October disclosure that Donald Trump likely used a variety of accounting tricks to avoid paying nearly a billion dollars in federal taxes was only one in a string of shocking revelations that shed new light on the unfair tax practices of transnationals and the ultra-rich. From Apple Ireland’s spat with the European Union to the Panama Papers and Bahamas Leaks, this year has seen tax dodgers in the limelight as never before. And with public pressure mounting, even the political class has taken notice, with David Cameron – himself the not-so-proud beneficiary of an offshore trust – vowing last May to ‘push… corruption to the top of the international agenda’.1 Given the heat, it’s easy to imagine tax cheats sweating in their designer suits.
Or maybe not. After all, this is hardly the first time tax dodging has gone under the microscope. In the wake of the 2008 financial crisis, G20 leaders came together to proclaim ‘the end of financial secrecy’. As far back as 1961, John F Kennedy was asking US Congress for legislation to drive tax havens ‘out of existence’.2 Yet since the 1960s, the amount of wealth held in tax havens and secrecy jurisdictions – the term experts use to refer to the 70-odd offshore financial centres whose low tax rates and loose regulations draw tax cheats the world over – has increased astronomically. Since 2008 alone, private wealth parked in tax havens increased by a staggering 25 per cent.3 While exact figures are hard to come by, French economist Gabriel Zucman estimates – conservatively – that $7.6 trillion is currently held offshore, eight per cent of total global financial wealth.3 James Henry, senior advisor at the Tax Justice Network, puts that number much higher, at anywhere from $21 to $32 trillion.4
While economists continue to quibble about the exact figures, all agree that the offshore economy is massive. More than half of all banking assets are routed offshore, as is about half of global trade. Like it or not – and most of us have many reasons not to like it – the offshore world isn’t going anywhere.
The life offshore
What is ‘offshore’? The word conjures images of swaying palm trees, expensive cigars and lax tax laws – sleepy islands where corrupt plutocrats and cunning mobsters quietly squirrel away their ill-begotten millions. And while this is certainly part of the offshore equation, it only scratches the surface. In essence, offshore is anywhere that allows its clients – a mix of criminals, corporations and the very rich – to get around the pesky taxes and regulations imposed by other jurisdictions. While Caribbean tax havens still play an important role, some of the biggest players in the offshore world are not islands at all. The City of London sits at the heart of a colonial network of secrecy jurisdictions and offshore financial centres comprised of its crown dependencies and overseas territories. American banks offer tax-free accounts and secrecy services to illicit foreign capital, making the US one of the biggest players in the offshore economy. Many of offshore’s biggest clients are establishment figures like Iceland’s former prime minister Sigmundur Gunnlaugsson and familiar brands like Pepsi, Google and Facebook.
Campaigners help force consumer-sensitive Starbucks to pay $9.7 million in UK taxes – which corporate avoiders are next in the crosshairs?
Jenny Matthews/Alamy Stock Photo
Today the offshore world comprises an economic system, a complex web of tax havens and secrecy jurisdictions that is simultaneously separate from and integral to the functioning of the global economy. Each cog within this system has its own special function: from offices in London or New York, the wealthy use arcane accounting arrangements to squirrel away billions in Cayman-domiciled hedge funds, where the money multiplies tax free. Transnationals use complex ‘transfer pricing’ arrangements to shift billions in profit from the large, high-tax nations where they do business to single-employee letterbox subsidiaries in havens like Jersey, Bermuda and Luxembourg. Investment banks and other financial desperadoes take advantage of the low taxes and loose regulation offered offshore to engage in the kind of financial chicanery that destroyed Enron and led to the 2008 credit crunch.
Today, the offshore world has become an essential part of the bloated international financial sector that lies like deadweight on the possibility of a fair economy based on a simple first principle: meeting the basic needs of ordinary people. The system can seem complicated, and that’s the point; tax cheats rely on soporific tax law and fragmented international regulation to shield their money from tax authorities.
An example: a British entrepreneur plans to leave millions to her children, and wants to avoid hefty inheritance tax. She might set up a Bahamian trust to administer the money, which it in turn deposits in an account in the tax-free Caymans. The trust’s directors might be ‘dummy nominees’ – professionals paid to manage hundreds of similar companies. Its beneficiary might turn out to be an anonymous Delaware corporation whose director, a Panamanian lawyer, is bound by attorney-client privilege to conceal the company’s ultimate beneficiaries: in this case, the woman’s now wealthy children.
If the British tax authorities want to look into the money, they will have their work cut out for them. By exploiting strict secrecy laws in tax havens and taking advantage of the arcane tangle of legislation that exists across multiple jurisdictions, cheats are able to dodge tax almost completely, often while staying within the letter of the law.
A story: the Cayman Islands is what’s known as a ‘pure’ tax haven. It imposes no direct tax, meaning that there is zero tax on corporate profits, income, inheritance, or capital gains. As such, it has become a magnet for mobile capital looking to escape the hands of ‘revenuers’. Today, the Caymans are the world’s sixth-biggest banking centre, home to 40 per cent of the world’s hedge funds and thousands of transnational subsidiaries controlling some $1.4 trillion in liabilities.5
More than half of all banking assets are routed offshore, as is about half of global trade
In 2004, the Caymans were hit by Hurricane Ivan, a category-five storm that caused major damage, cutting power and destroying infrastructure across the islands. When the storm cleared, several people were dead and more than a quarter of the islands’ dwellings had been left uninhabitable. This should have had the global financial elite panicking. But markets barely registered Ivan. McKeeva Bush, then leader of Cayman government business, reported that the islands’ financial services industry ‘offered continuity of service throughout the hurricane,’ cheerfully noting that ‘as a consequence of the multi-jurisdictional nature of many Cayman Islands firms, financial service provision continued at a high level.’6
This story underscores an essential point about the offshore world. While the Caymans may be home to 100,000 registered companies, very little substantive economic activity takes place there. Apart from the legion of parasitic lawyers and accountants who have set up shop to facilitate tax dodging, almost all the money in the Caymans – whose citizens derive little benefit from the islands’ outsized financial industry – passes through only on paper on its way to Wall Street or the City of London.
What capital values about the Cayman Islands is not any special technical or productive capacity, but rather its sovereignty; the islands, like most offshore destinations, are a ‘legislative elsewhere’: a financial wild west where the wealthy shape lawmaking and escape cumbersome taxes and regulations.
What’s wrong with tax avoidance?
Tax cheats are careful to stress the difference between evasion and avoidance. While evasion is illegal, avoidance – using complicated accounting tricks and complex multijurisdictional structures to slash tax bills – is not only legal, but imperative. Indeed, many corporate tax avoiders speak proudly of ‘tax neutralization’ strategies, arguing that they owe a ‘fiduciary responsibility’ to shareholders to pay as little tax as possible.
This thinking rests on a neoliberal reformulation of taxation. Most of us still see tax as the price we pay for the social infrastructure – roads, schools, healthcare – that makes democratic life possible. But as a neoliberal ethos of austerity and self-interest comes to dominate our politics, any sense of our social obligations to each other goes out the window. If we are just a conglomerate of isolated individuals, if fortunes really are ‘self-made’ rather than resting on myriad unquantifiable social investments, then tax can only ever be experienced as a ‘burden’. This is why Donald Trump can project himself as the neoliberal hero par excellence, ‘brilliantly [using]’ tax laws to avoid federal taxes.
In this climate of unmitigated greed, tax havens are thriving like never before. Economists estimate that governments lose about $400 billion in tax revenue each year to the offshore economy, more than twice the annual global aid budget.3 This flow of wealth offshore has a corrosive effect on democracy, fuelling inequality and austerity and pushing the burden of taxation onto small local businesses and middle- and working-class taxpayers who cannot afford teams of accountants and lawyers.
Politicians who receive kickbacks and campaign contributions from tax abusers continue to drag their feet
As taxation becomes an optional matter for those with means, those without begin to wonder why they have been left to foot the bill. In countries like Greece and Italy, and large parts of the Global South, a contagion of tax avoidance is spreading throughout the economy, undermining all revenue collection and drying up the fragile glue that holds society together.
The offshore system also drives harmful tax competition, pushing down tax rates worldwide. In a globalized economy, where capital is free to choose where to set up shop, national economies must compete with each other in order to attract and keep jobs and investment. If transnationals don’t like a particular tax or regulatory regime, the threat of relocation is often enough to get policymakers to see things their way. If not, there is always somewhere else eager to offer lower tax and other sweeteners. Whether it is Belgium’s fiscal incentive scheme aiding McDonald’s and some 35 other corporate freeloaders, or sweetheart tax deals offered to the mining industry from East Africa to the Nevada desert, politicians of all stripes live in fear of the ‘jobs hissy fit’ that corporate CEOs are so good at throwing if they don’t get their way. Tax competition further undermines democracy globally, wrestling control of tax policy from elected governments and forcing countries into a Hobbesian race to the bottom. Some experts believe that in 10 years, corporate taxation will be a thing of the past.
The offshore system has had a particularly devastating impact in the Global South, where a combination of rampant corruption and decrepit tax administrations has amplified its impact. It’s estimated that between 2004 and 2013, more than $7.8 trillion flowed illicitly from developing economies to offshore accounts; many such economies lose more to tax havens than they receive in aid and foreign investment combined.7 In sub-Saharan Africa, the problem is so bad that experts estimate the continent has lost 80 cents for every dollar of external debt accrued since 1975.8 While Western politicians are quick to point a finger at supposedly endemic ‘third world’ corruption, little attention is paid to the role of tax havens, including both the US and the City of London, in actively abetting the illegal transfer of wealth from developing economies.
When will it end?
Little is being done to curb tax avoidance and rein in the offshore system. While it’s true that, after years of half-hearted and ineffective legislation, pressure from civil society is finally forcing governments to take tax cheats seriously, the response is still surprisingly lacklustre. Yet the technical problems are not insurmountable, and economists have offered ambitious but doable proposals on how to begin tackling tax dodgers. Britain could, with the swoop of a pen, reform the vast network of crown dependencies and overseas territories over which it has ultimate political control – it exercised this power in 2000 to decriminalize homosexuality in its Caribbean territories.9
The problem is political will. The offshore system continues to survive and thrive because there are powerful interests – one-per-centers and transnational corporations – who want it that way. Lawmakers seeking to reform the system are continually met with fierce resistance from powerful lobby groups like the Coalition for Tax Competition. Politicians who receive kickbacks and campaign contributions from tax abusers continue to drag their feet. Many politicians are themselves enthusiastic participants in the offshore economy: the Panama Papers revelations have compromised political luminaries such as Ukrainian President Petro Poroshenko, the King of Saudi Arabia, and close relatives of Syrian Dictator Bashar al-Assad. In this climate of rampant greed and corruption, the impetus falls on regular citizens to hold tax cheats to account. No-one else will do it for us.