A Breed Apart

John Christensen’s piece in the UK’s Guardian newspaper highlights how the offshore world is creating fundamental tensions and contradictions in very foundations of market economics.

For example, tax haven activities warp David Ricardo’s classic theory of comparative advantage, which holds that economic activities should tend to gravitate towards the most geographically relevant areas. Instead, as a result of the tax havens world, economic activity is being shoe-horned into weird locations with no real economic connection to the underlying businesses. Many other tensions exist. Company managers feel they have a duty to deliver value to shareholders by minimising taxes, and yet they have a duty to the societies that made their businesses possible – by paying the right amount of tax. In theory, this tension is resolved easily enough: companies simply pay their taxes as required by law: no more, and no less. But the offshore world plunges companies into a huge grey area, where they can evade ever larger amounts of tax, using ever more elaborate schemes to do so. So we end up with many thousands of international companies operating out of a single building in the Cayman Islands, or African state oil companies using special purpose vehicles, registered in the British Virgin islands and organised from London, to hide assets from creditors, and from ordinary African citizens.

This is not real business. It is, in the words of U.S. Senate Budget committee chairman Kent Conrad, monkey business. As he says, addressing this problem has nothing to do with changing tax rates and doesn't need to imply raising overall tax levels. It just means that a charmed section of society should pull their weight, like everyone else. In fact, if these élite interests paid their proper taxes, the end result could be lower taxes for the majority for the same level of public services.

This state of affairs has emerged, to a large degree, from the unco-ordinated actions of an array of nations, acting in their own self-interest, playing a beggar-my-neighbour game to suck capital out of each other. But what kind of self-interest is this? Even Britain, a true champion of the offshore world, isn't reaping easy prosperity from its embrace of offshore tax avoidance and secrecy. Another article in the Guardian two days earlier suggests why: the richest one percent of Britons now own a quarter of its wealth, while the bottom fifty percent own just one-twelfth of the total – and their share is falling. Britons from the poorest parts of the country now have a life expectancy eleven years lower than those from the richest parts. Britain now has the second highest child death rate among the 24 richest countries in the world, with infants in the UK twice as likely to die before the age of five as children in Sweden. (The worst of all is the United States, and the tax haven of Ireland is not far behind.) Is this prosperity, built on a foundation of dirty money which is eroding the underpinnings of market economics, shareholder capitalism and democracy, really what we want?

It probably seems so for some of the global mandarins who, as Christensen points out, have set themselves up as a breed apart. It doesn’t look quite so good for the rest of us.

The Tax Justice agenda is catching on

Tax havens and international financial secrecy cause poverty, corruption and instability. This is the core of TJN’s argument. We are a relatively new, and relatively small organisation, and there are formidable financial and political interests ranged against us. And yet these interests are unable to present credible intellectual defences against the agenda we are setting.

In the last few months, the arguments have started breaking through properly into the mainstream, particularly in the United Kingdom. It looks as if the mood is starting to change.

Today’s comment piece in the Guardian Newspaper, in which the anti-poverty group War on Want argues against tax avoidance, is a case in point. Two weeks or so earlier, the Financial Times, in an article entitled Tax Haven London, argued that supposedly “onshore” financial centres like the UK and US “need to practise what they preach on reducing tax avoidance.” Shortly before that, The Observer newspaper produced a long article pointing out that “London has become home to the wealthiest people on the planet because it allows them to part with relatively little cash while they live here. . . . to critics, letting the super-rich pay a tiny fraction of their earnings in tax undermines faith in the political system and encourages capital flight from developing countries.”

All this followed an IMF working paper a few days earlier, identifying the United Kingdom as an Offshore Financial Centre. At around the same time, the World Bank was launching its Stolen Asset Recovery Initiative which, for the first time, endorsed findings by the U.S. money laundering expert Raymond Baker, whose book Capitalism’s Achilles Heel should be required reading for anyone investigating international flows of dirty money. Baker’s findings -- that proceeds from criminal activity, corruption and tax evasion are estimated at $1-1.6 trillion dollars per year – half from developing and transitional economies – illustrate the scale of the problem that TJN is fighting against. For every dollar of foreign aid into Africa, five dollars flows back out as dirty money under the table.

A few weeks before that Eva Joly, the magistrate in Paris who broke open the “Elf Affair” – Europe’s biggest fraud investigation since the Second World War – said in the journal Development Today that tax havens constitute “one of the biggest problems the world faces today” – and that dealing with tax havens must now constitute “phase two” in the corruption debate. She is right. And this is not just an issue for poor countries: it affects us all. In February U.S. Senator Barack Obama and two colleagues introduced the Stop Tax Haven Abuse Act, saying that “Offshore tax havens have declared economic war on honest U.S. taxpayers.” They are right too.

Until now, the elephant in the room has been hidden behind a veil of complexity, and the tax experts – almost all of whom have a vested interest in seeing the current system continue – have all but captured the policy arena and made it their own. International civil society organisations, and anyone else with an interest in protecting democracy and tackling poverty, have been discouraged from getting involved partly because the issues are so complex and hard to understand. The Tax Justice Network seeks, among other things, to provide expertise to allow others to engage with this issue.

The mood needs to change decisively if we are to get serious about tackling poverty. From the evidence of the last few weeks, it looks as if that time is now coming.