British tax dodging - again

There is a good article in the London Evening Standard about how only a sixth of of Britain's wealthiest citizens seem to be paying their taxes properly. The rest, it says, "use a battery of sophisticated but legal techniques to avoid paying." Blog comments underneath the article indicate the indignation that ordinary people feel about this. As The Independent put it recently: One rule for the super-rich, another for everyone else. The latter article continues the furore over private equity in Britain and the United States (which we have covered already) and which continues to rumble on. A letter in the Financial Times exposed some weasel words from private equity practitioner Guy Hands, who had tried to defend the idea of private equity billionaires paying less tax than their office cleaners by saying that this money "is risk capital and should be taxed as such." As the letter in response to this claptrap explained:

As little as 0.01 per cent of the fund value is subscribed as capital into a limited liability partnership. The managing partners contribute 20 per cent of that capital sum. The remaining 99.99 per cent of the fund's de facto investment capital is loaned on an interest-free basis by the primary investors. The managing partners do not subscribe (risk) any further funds as loans, but they ultimately receive 20 per cent of the final profits of the fund, if it is successful.For a $1bn fund which returns $1.5bn after management and other charges and costs, this implies that a $100m profit can be obtained for a nominal investment of $20,000 in the "carry". Mr Hands may call that a reward for "risk capital", but most people would call it a very, very large employee bonus.

The sentiment was echoed by Adair Turner, former director-general of the Confederation of British Industry, and the thought was extended by Lord Parry Mitchell, whose own company was bought out by a private equity company recently. As he explained, in another letter to the FT:

This is only half the story. Many of the principals in UK private equity are also non-domiciled residents and as such pay no tax on non-UK income. Combine taper relief with non-dom status and in a jiffy any good tax adviser will be able to devise a structure that will leave some of the richest people in this country paying some of the lowest tax rates. Surely that can't be right?

And as for the claims that if the tax regime is tightened, these peripatetic entrepreneurs will be off to Switzerland, Monaco or Luxembourg, my response is simple - get on the M4, exit at Junction 4 - at the end of the road you will find Heathrow. You know what to do.

Pimping the Bottom Billion

The development expert Paul Collier has written an interesting new book called The Bottom Billion. Collier is a former director of development research at the World Bank and now directs the centre for the study of African Economies at Oxford University, and despite this rather technocratic background, he has written a surprisingly accessible book.

"For forty years the development challenge has been a rich world of one billion people facing a poor world of five billion people,” he writes. Now, he adds, most of those five billion, about 80 percent, live in countries that are indeed developing, often amazingly fast. His book is about the last 20 percent: the bottom billion, most of whom live in Africa. Since the terrorist attacks in New York in September 2001, many people are waking up to the fact that the plight of these people is not just a question of morality or guilt. “A cesspool of misery next to a world of growing prosperity is both terrible for those in the cesspool and dangerous for those who live next to it,” Collier says. TJN, like many other groups of people from many different parts of the political spectrum, agree.

Collier reaches some surpising conclusions. For example, he is sceptical about what foreign aid can achieve: it can help, he writes, but is subject to diminishing returns and suffers from problems associated with mineral resources: it can exacerbate “Dutch Disease” effects and it undermines the healthy relationships of taxation where rulers tax citizens, and citizens demand accountability in return. Some years earlier, Collier and his partners Anke Hoeffler and Cathy Patillo had studied capital flight out of poor countries, resulting in a widely-quoted 1999 paper which estimated, among other things, that by 1866, Ugandans held two thirds of their private wealth abroad; by 1990, 39% of Africa's private wealth was held abroad, and the end of military rule in 1998, Nigerians were holding around $100 billion of capital overseas. "Africa has by far the lowest capital per worker, which makes massive capital flight from Africa all the more distinctive," he said. "Despite being chronically short of private capital, the Bottom Billion are integrating into the global economy through capital flight rather than capital inflows. .. Don't count on global capital mobility to develop the bottom billion, capital-scarce as they are. It is more likely to reinforce the traps."

Collier also writes about something else close to TJN’s core concerns.

The societies of the bottom billion might become safe haven for criminals, terrorists and disease. Paradoxically, sone of this is reciprocal: the rich countries have been a safe haven for the criminals of the bottom billion. One grotesque form of this safe haven role has been that western banks have taken deposits looted from the bottom-billion societies, held the money in great secrecy, and refused to give it back. . . The banking profession has a responsibility to clean up its act, just as de Beers did in respect to diamonds. At present, a small minority of bankers are living on the profits from holding deposits of corrupt money. We have a word for people who live on the immoral earnings of others: pimps. Pimping bankers are no better than any other sort of pimp. They have to be driven out of banking.

Collier’s recipes for cleaning up are not especially sophisticated, but the general thrust is dead right. (Perhaps his notion of "pimping bankers" could be combined with John Christensen's notion of a "pinstripe infrastructure" of corruption-enablers to create a new term: pinstripe pimps.) Now that mainstream development theorists like Collier have spotted the problem – and it is staggering that the development community (whatever that means) only appears to be waking up now to this gargantuan issue (which, as it happens, goes far beyond the pimping bankers he criticises) this will add new tailwinds to TJN’s campaigns. Step by step, the world is waking up to the scandal of offshore.

Leopards

In May 2007 the US Senate Committee on Finance held a hearing under the title "Offshore Tax Evastion: Stashing Cash Overseas." Two senior officials from the UK tax havens of Jersey and Guernsey made written submissions to the committee, saying that these islands are complying with the requirements of international tax agents and other regulatory authorities. In other words, they claim to have cleaned up. In a piece entitled "The Leopards have not changed their spots," Richard Murphy explains how these jurisdictions have tried to hoodwink the Americans.

Jersey is deliberately creating structures and procedures for use by its financial services industry that will result in information not being available for exchange under internationally agreed arrangements, so nullifying their effect.

As pressure mounts for tax havens to exchange information,they are reacting by ensuring that they either do not have that information, or by providing mechanisms that make it both harder to secure, and easier for it to flee. The result is that corruption in places like Jersey can no longer be tackled at the transaction level. Put simply, transaction data will soon be unavailable or will be in perpetual transit between tax haven locations. As such offshore corruption can now only be tackled at the systemic level. This requires a changed approach. The corrupt user of tax haven services is no longer the problem; the corruption of the tax havens is the problem now.

As Richard puts it, it is time to tackle the suppliers of corruption services if the integrity of the world’s economy, taxation systems and democracies is to remain intact. Tax havens are at the heart of this challenge to the way we live.

America: is the mood changing on tax?

Misguided ideologies can take a long time to die, but die they eventually do when confronted with incontrovertible evidence. Such will be the fate of an ideology, widely supported in the United States in particular, that holds that taxes should be low in all cases, all the time, and anything that will serve to drive taxes down can only be a good thing. (TJN does not support high taxes or low taxes - just tax levels that voters want, and a level playing field with as few distortions as possible.) As Grover Norquist, one of the most vocal proponents of this low-tax-at-all-costs ideology put it, "My goal is to cut government in half in twenty-five years, to get it down to the size where we can drown it in the bathtub."

The new architects and proponents of this simplistic ideology were, until quite recently, in the ascendant; the Iraq war is probably the biggest reason why the pendulum is now swinging back to normality. As is happening in the UK, newspapers across the political spectrum in America are currently exercised about distortions in the tax treatment of private equity. Why should Blackstone Group, the New York Times wonders, pay a tax rate of just 1.3%?

But distortions are not the only concern. Inequality is another growing worry, and is now also provoking a queasy feeling on both left and right. Globalisation appears, among other things, to have had some good effects (such as increasing the world’s wealth, on aggregate) and bad effects (like increasing inequality -- although technology has probably played an important role here too.) One of TJN’s main concerns is that tax havens and tax competition between countries intensify the bad part and neutralise the tools that can be wielded to tackle it. Redistribution of wealth through taxation is, of course, a powerful tool for tackling this problem, which is not just about wealth and poverty but has important political dimensions.

Now it appears that serious people on the other side of this ideological divide – including Matthew Slaughter, one of President George Bush’s former advisors, has signalled that he recognises the dangers that stem from neo-conservative ideologies on taxation. Writing in the prestigious American journal Foreign Affairs, he now argues that the United States needs a “New Deal for globalisation - one that links engagement with the world economy to a substantial redistribution of income.” He, and others, are especially worried about the effects of inequality on protectionism, (although there are many other reasons to worry about inequality too.) Here are some excerpts from the article:

Over the last several years, a striking new feature of the U.S. economy has emerged: real income growth has been extremely skewed, with relatively few high earners doing well while incomes for most workers have stagnated or, in many cases, fallen. Less than four percent of workers were in educational groups that enjoyed increases in mean real money earnings from 2000 to 2005; mean real money earnings rose for workers with doctorates and professional graduate degrees and fell for all others. In contrast to in earlier decades, today it is not just those at the bottom of the skill ladder who are hurting. Even college graduates and workers with nonprofessional master's degrees saw their mean real money earnings decline. By some measures, inequality in the United States is greater today than at any time since the 1920s. . .

Advocates of engagement with the world economy are now warning of a protectionist drift in public policy. This drift is commonly blamed on narrow industry concerns or a failure to explain globalization's benefits or the war on terrorism. These explanations miss a more basic point: U.S. policy is becoming more protectionist because the American public is becoming more protectionist, and this shift in attitudes is a result of stagnant or falling incomes. . .

Public support for engagement with the world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor. . . . U.S. policymakers must recognize and then address the fundamental cause of opposition to freer trade and investment. They must also recognize that the two most commonly proposed responses -- more investment in education and more trade adjustment assistance for dislocated workers -- are nowhere near adequate. Significant payoffs from educational investment will take decades to be realized, and trade adjustment assistance is too small and too narrowly targeted on specific industries to have much effect.

The best way to avert the rise in protectionism is by instituting a New Deal for globalization -- one that links engagement with the world economy to a substantial redistribution of income. In the United States, that would mean adopting a fundamentally more progressive federal tax system.

Policy is becoming more protectionist because the public is becoming more protectionist, and the public is becoming more protectionist because incomes are stagnating or falling. . .
There is reason to worry even if one does not care about social equity. The time has come for a New Deal for globalization -- one that links trade and investment liberalization to a significant income redistribution that serves to share globalization's gains more widely.

The pendulum appears to be swinging, in favour of more democratic tax systems, and away from one-size-fits-all ideologies. As we have been saying recently, tax justice seems to be catching on.

Uncompetitive countries

Much hot air has been talked about how "competitive" some countries are. As the Financial Times commentator Martin Wolf put it in his book: "The notion of competitiveness of countries, on the model of the competitiveness of companies, is nonsense." He's right: countries and companies are two very different things, of course, and "compete" in very different ways. On an intuitive level, however, some countries are clearly more "competitive" than others. The World Bank, the World Economic Forum and the African Development Bank, have just produced an Africa Competitiveness Report 2007, based on a series of judgements about property rights, public trust of politicians, quality of infrastructure, inflation, and various other things. Oil-rich Angola is at the bottom of the table -- the world's least competitive country. Which raises interesting questions.

Angola, according to the UN, was also the world's fastest growing economy last year (based on fast-rising oil production -- and the IMF is now forecasting Angola's GDP will grow at an astonishing 35% this year.) Those who routinely equate "competitiveness" with economic growth would need to explain this. Countries are not just moneyboxes: there are so many other things going on, and those who argue that floods of money into a country are always a good thing are clearly mistaken. Here's another interesting fact about Angola: its 2007 budget, at $31 billion, is the same size as all foreign aid from OECD countries to all of sub-Saharan Africa last year -- and yet, according to the UN, Angola has the world's second worst child mortality -- worse, even than Afghanistan. Taking a broader view of this question, one might raise the same question about a country's financial-services industry -- Britain's, for example -- does inviting dirty money from overseas to wash into an economy really cause widespread prosperity? As we have pointed out below, 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. (Questions like this are explored in more depth in an interesting report on taxation by the Canadian Center on Policy Alternatives.)

Yet there is another point that Angola's paradoxical performance brings up. As our recent EITI blog, below, highlights:

It is hard for many people to accept that great wealth can produce great poverty, but academic research, particularly over the past decade, has confirmed this relationship to be robust. Tax is a central reason for this paradox: in “normal countries” like France or Sweden, citizens pay tax and demand accountability from their rulers in return. It works well enough. In mineral- dependent countries like Angola, however, rulers tax oil companies, and their citizens are left out of the loop. Accountability evaporates, and rulers can behave as badly as they like, for their revenues are guaranteed anyway by the taxes flowing from the mineral industries.

The proponents of the idea that tax competition between countries is essential to drive tax rates relentlessly downwards don't seem to be able to deal with the central role that healthy taxation plays in fostering healthy political relationships between rulers and ruled.

And, finally, there is one more thing they aren't so keen to advertise. Moving from the Africa Competitiveness Report to the Global Competitiveness Report, here is some more interesting data. As the World Economic Forum puts it on its front page, "good institutions and competent macroeconomic management, coupled with world-class educational attainment and a focus on technology and innovation," are the keys to success. There is no mention of tax rates. Three of the world's five most "competitive" countries are among the highest-tax countries in the world: Finland, Sweden and Denmark -- and all are judged to be more competitive than the United States, for example. The friends of tax competition should try to explain that away too.

Bada-Bing!

The Economist magazine and the Tax Justice Network disagree on many things. But we agree on many points too. And this highlights a key point about this network: our core goals cannot easily be characterised as either left-wing or right-wing. We are worried about corruption. We want to protect democracy. We oppose tax avoidance and evasion. (This does not mean we are calling for higher taxes: if the avoiders and evaders paid their share, that could mean lower taxes for the rest of us.) We hate distorted taxes and we support a level playing field in the world economy. We are worried about secrecy too, and the shelter this provides criminals, crooked dictators and terrorists. All of these conerns transcend old, entrenched left-right ideologies. TJN is a network, after all, containing a broad rainbow of views.

So it should be no surprise that both The Economist and TJN firmly agree that when private equity executives pay less tax than their office cleaners, something is amiss (“Carried Away, June 9th, and see the blog post below too.) This tax distortion stems from a long-established discrepancy – that capital gains get gentler tax treatment than income, which in America dates back to the 1920s. “The critics are right. The rules should be changed,” the magazine said in a leader article. “In theory, an efficient tax system would tax both income and capital gains at the same rate – and allow people to make their decisions on merit alone . . . private equity does not need an unfair tax break.” Well said The Economist.
But elsewhere, we part company with this esteemed magazine. See, for example, our two blog posts demolishing their error-strewn, ideologically-blinded survey on Tax Havens, here and here. A key thrust of that survey was that tax havens have cleaned up (“Today's successful tax havens thrive not because of crookery, but because they are well run and well regulated,” it said.) Anyone tempted to swallow this laughable claim could start by reading “The Plot Thickens” on p38 of the hard copy latest edition, outlining how Britain’s rulers have knocked down the police and the Serious Fraud Office to squash a corruption probe into arms sales to Saudi Arabia by the arms firm BAE Systems. The Guardian newspaper covers this in more depth: to get a flavour of the tax haven angle, try, for example, “Questions Over Secret Bank Transfers;” starring the British Virgin Islands; “Nobbling the Police,” featuring Jersey and Switzerland and the now-infamous Riggs Bank in Washington; or “Prince used cash in BAE-linked account for palace,” involving Saudi Prince Bandar, the Vatican Bank, Riggs Bank, the Pope, Margaret Thatcher, the head of the CIA, Chilean dictator Augusto Pinochet, and Obiang Nguema of Equatorial Guinea. (This is just a taster of this byzantine unfolding affair, which one might describe as the Anglo-Saxon version to the Elf Affair in Paris: oil, arms, corruption in both oil producing and oil consuming countries, and, yes, tax havens at the heart of it all.)

In its latest article about the BAE scandal, The Economist skipped neatly over the tax haven angle. However, in the same issue its Lexington column, headlined "Bada-Bing!" did mourn the end of the remarkable American television series “The Sopranos,” involving the troubled mafia character Tony Soprano, who planned his thuggery and corruption from an office in his strip club, the Bada-Bing! Would Tony have been able to find a way to facilitate his crimes by using tax havens, now that they are, as the Economist put it, “well run and well regulated”? We can only wonder.

Private Equity and Tax

John Christensen was asked recently how TJN judges its success. He replied that he likes to measure it in terms of how TJN's concerns and issues become the mainstream perceptions of others. As the last few blog posts highlight, this is happening, in a big way. For starters, traffic in recent months to Richard Murphy's Tax Blog, also flagged on the TJN web site (above this blog), has been surging. Material backing TJN’s positions is appearing constantly in high-level media across the political spectrum from left to right. Currently, the message is resonating especially loudly in the United Kingdom. On June 3 the Financial Times carried on its front page an interview with Nicolas Ferguson, who built what is now Europe’s biggest private equity company. The FT said that Ferguson has "broken the sector's taboo on tax." Here is an excerpt from what he said:

“Any common sense person would say that a highly-paid private equity executive paying less tax than a cleaning lady or other low-paid workers, that can’t be right. . . I have not heard anyone give a clear explanation of why it is justified.”

Polly Toynbee responded to this article in her latest comment piece in the Guardian newspaper: Gordon Brown, she said, “will be asked why, as in most other countries, private equity cannot be made more accountable, why it shouldn't post bonds to protect pensions and, above all, pay taxes like everyone else?” Quite right Polly. The next day, the FT published chancellor Gordon Brown's response, in another front page story, with the tantalising headline: "Chancellor pledges justice on tax rates." Brown pledged, in relation to private equity and in response to Ferguson's remarks, to "make sure there is justice and equity in the treatment of tax arrangements in that area." As the FT story outlines, Brown looks like he is starting to act too. Paul Kenny, general secretary of the GMB union, drew his own conclusions from Brown's comments: "the fat cats are losing the argument on tax, and it was very noticeable that he (Brown) did not leap to the defence of the industry which he has done before."

From a different perspective, the poverty campaigners War on Want are building their own campaign on tax dodging. Tax, they say, is a key weapon in the fight against poverty, adding that "the UK is a major part of the global problem of corporate tax dodging. We believe it should be part of the solution." Quite right too.

All this looks rather like tax justice, catching on fast.

EITI and the Resource Curse

Word is out on the “Resource Curse.” Countries that depend upon minerals like oil tend to be harmed by them, especially if they are poor and badly governed in the first place. For example, latest World Bank data shows that Nigeria’s Gross National Income (GNI) per capita is lower than the average for all countries in sub-Saharan Africa, despite nearly $400 billion in oil revenues since 1960. It is hard for many people to accept that great wealth can produce great poverty, but academic research, particularly over the past decade, has confirmed this relationship to be robust. Tax is a central reason for this paradox: in “normal countries” like France or Sweden, citizens pay tax and demand accountability from their rulers in return. It works well enough. In mineral-dependent countries like Angola, however, rulers tax oil companies, and their citizens are left out of the loop. Accountability evaporates, and rulers can behave as badly as they like, for their revenues are guaranteed anyway by the taxes flowing from the mineral industries. Since the late 1990s – notably with the publication in 1999 of A Crude Awakening by the London-based NGO Global Witness -- people have been getting more interested in transparency as a potential tool in the fight against the “Resource Curse” in places like Africa. The big push these days is the Extractive Industries Transparency Initiative (EITI), which seeks to get producer governments to work with mineral-producing companies to publish data about financial flows from their resource industries, voluntarily. Richard Murphy, a senior advisor to TJN, and Nicholas Shaxson, who has been providing TJN with consultancy services, have written a comment article in the Financial Times about EITI, using TJN's unusual perspective to expose grave weaknesses in this initiative, which is backed by the World Bank, the IMF, numerous governments, and a number of companies extracting oil or other minerals around the world. In conclusion: EITI is still a good thing, and it should continue, but the time has now come to start looking beyond this limited scheme.

TJN web site

Tax Justice Network is in the process of upgrading its website. We apologise for the gaps in the site – these will be filled in over the coming weeks and months. Nearly all of the material that was there before is still there. The most important changes now will be that we are adding new research sections under the heading “Resources,” which will help people and organisations to make sense of the bewildering world of offshore. One of these sections, called “Offshore: Magnitudes and Measurements,” is now available. Others will be added in due course.