Tuesday, July 31, 2007

Laying Rupert Bare

It looks as if Rupert Murdoch will win his battle for control of the Wall Street Journal. This potentially bodes ill for a tax justice agenda. While TJN does not see eye to eye with the Wall St. Journal in some respects, the newspaper has been very active in exposing tax dodging and other corporate abuses. Will Murdoch curb this kind of valuable journalism in future? We are worried, for his flagship company News Corp. is a poster child for tax avoidance. A while ago The Economist once prodded into its tax affairs, and what it found was not pretty.

In keeping with his anti-statist philosophy, Mr Murdoch hands very little of his profits to governments. In the four years to June 30th last year, News Corporation and its subsidiaries paid only A$325m ($238m) in corporate taxes worldwide. In the same period, its consolidated pre-tax profits were A$5.4 billion. So News Corporation has paid an effective tax rate of only around 6%. By comparison, Disney, one of the world’s other media empires, paid 31%. Basic corporate-tax rates in Australia, America and Britain, the three main countries in which News Corporation operates, are 36%, 35% and 30% respectively.

Finding out the specifics of News Corporation’s tax affairs is difficult because of the company’s complex structure. In its latest accounts, the group lists roughly 800 subsidiaries, including some 60 incorporated in such tax havens as the Cayman Islands, Bermuda, the Netherlands Antilles and the British Virgin Islands.

This structure, dictated by Mr Murdoch’s elaborate tax planning, has some bizarre consequences. The most profitable of News Corporation’s British operations in the 1990s was not the Sunday Times, or its successful satellite television business, BSkyB. It was News Publishers, a company incorporated in Bermuda. News Publishers has, in the seven years to June 30th 1996, made around £1.6 billion in net profits. This is a remarkable feat for a company that seems not to have any employees, nor any obvious source of income from outside Mr Murdoch’s companies.

British taxpayers have been forced to pick up a particularly large slice of Murdoch's tax bill: since June 1987, The Economist reported, the group made £1.4 billion in profits yet paid no net British corporation tax at all.

Even the Economist, which seems to have a soft spot for the corrupt world of tax havens, choked on this, and asked why so many other companies avoid such byzantine offshore gymnastics to dodge their tax bills.

Perhaps their tax lawyers are not as bright. Perhaps their boards are stuffed with conventional people who would be embarrassed to shelter profits in tax havens. Or, more likely, they may conclude that there are costs to Mr Murdoch’s way of doing things. In particular, the complexity of News Corporation’s structure baffles analysts and puts off institutional investors. Money men suspect that the company’s profits may be based not just on the returns from Mr Murdoch’s businesses, but also on financial wizardry vulnerable to changes in tax law. This may be one reason why its share price has underperformed the American stockmarket over the past five years. A low share price makes investment more expensive for Mr Murdoch than it would be were he an empire-builder with a more transparent business structure.

This article is, admittedly, a bit long in the tooth. It was published in March 1999. TJN does not have the resources to investigate 800 or more subsidiaries to update this story. Perhaps Rupert Murdoch has had an epiphany since then, and has decided to stop his anti-social behaviour. We are not convinced that this has happened.

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Tax patents?

Here is a worrying headline from the New Jersey newspaper NJ Biz, entitled "When Does It Make Sense To Patent Tax Strategies?"

Growing concern over a federal agency’s four-year-old decision to grant patents on tax strategies has some CPAs in New Jersey and elsewhere worried about counseling clients on tax planning.

But “if drugs can be patented, why not tax strategies?” asks E. Martin Davidoff, a Dayton CPA and tax attorney, referring to a decision by the U.S. Patent and Trademark Office to extend patent protection to tax strategies.


This is a terribly dangerous idea. Once again we turn to Richard Murphy, who points out why.

Suppose the government wants to outlaw a patented tax strategy. Does that mean they will have to pay compensation to the patent holder for loss of royalty income? In a society like the US that is on obvious risk. And in that case the right to legislate on tax has been privatised. That’s why not, Mr Davidoff.

Tax is a public good. The problem our profession has is that it sees it as a public bad. And that is undermining not just our profession, but the stability of our society as a whole.

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Monday, July 30, 2007

Geldof, Bono, Baker and the IMF

Take a look at this entry in Richard Murphy's blog, about Bono and Geldof, and marvel at the hypocrisy at the heart of their positions on poverty and development. These two people have a vested interest in opposing changes that would do far more to tackle poverty than anything they have ever done. These two rock stars advocate a massive rise in foreign aid.

In fact, in academic circles, foreign aid itself is controversial. Countless studies have been done on whether foreign aid works at all. Some have found that it has, some have found that it has not - and that it may even harm growth. Needless to say, the aid industry has seized upon the upbeat reports, which have circulated widely, and ignored the others. Whose reports should we believe? A new IMF working paper gives a clue. This is not just another IMF working paper. Its authors are big hitters inside the IMF: Raghuram G. Rajan, the IMF's director of research, and the prolific Arvind Subramanian. Both know a thing or two. While most papers on this subject choose a set of rather narrow criteria for measurement; this one looks at the relationship in a much wider variety of settings, and it is careful to strip out the possibility that aid flows could go to countries that are doing particularly badly, or to countries that are doing well, creating a spurious correlation between aid and growth.

Their conclusion?

We find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others. Our findings suggest that for aid to be effective in the future, the aid apparatus will have to be rethought.

This is depressing stuff. But it is important too.

TJN does not oppose foreign aid per se. People in the aid industry are quite capable of learning from past mistakes, and different ways of designing and delivering aid policies might work in future. As we have argued so often before, we believe that tax -- viewed at a global level, as well as at a national level -- has to be a central part of rethinking the aid apparatus. Why are the aid agencies so averse to discussing it?

Not everyone is averse, though. As this IMF paper was being filed away in TJN's archives, another IMF working paper, written two years ago by the same two authors, came to our attention, which had similar findings. One of their main explanations for the disappointing results from foreign went like this:

Even though aid resources are initially additional to the budget, eventually the country becomes more lax on raising tax revenues, and more aid is necessary just to keep the country on even keel. If that aid is not forthcoming, and if the country’s tax raising mechanisms have atrophied, all the short-term beneficial effects of aid may dissipate over the long run as it creates a culture of dependency (see Azam, Devarajan, and O’Connell, 1997, and Adam and O’Connell, 1999). A related explanation is that by expanding a government’s resource envelope, aid relaxes their need to explain their actions to citizens, which may have a corrupting influence even on the best intentioned of governments in the long run. In sum, aid may not have discernible effects in the long run because it weakens institutions, and this offsets any positive effect it may have in the short run.

Now take a look at this recent presentation by Raymond Baker, a world authority on dirty money. We've flagged this presentation before. But what this does is illustrate the sheer scale of what is at stake here, and illustrates the sheer magnitude of the rock stars' foolish hypocrisy.

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Tangled Taxes

The Financial Times has published a welcome editorial comment on the complexity of taxation in the UK and US. In the UK, it says, tax activism by the chancellor (finance minister) Gordon Brown, who is now Prime Minister, has been behind a lot of the tax complexity. In the US, by contrast,

Bewildering complexity in the tax code has sprung not from the exertions of one pathologically interventionist finance minister, but from a kind of tax-code anarchy, in which a roiling crowd of legislators – sometimes loosely herded by the White House, often not – has tweaked and nudged the system in every possible direction, seeking advantage for this group or that, supporting or deterring one thing or another.

In terms of strategic objectives, the code is no longer intelligible, though partly by accident it plainly over-taxes saving and investment, subsidises borrowing massively, asks most of the very rich to pay too little, and most of the working poor to pay too much.


TJN strongly supports simplication. Another FT story about a survey of companies' attitudes to aggressive "tax planning" illustrates nicely the links between taxation and companies' recognition of their links to society: companies with a higher public profile tend to be aware that aggressive tax "planning" can damage their health.

Companies with few shareholders are more likely to use aggressive forms of tax planning, a study by Revenue & Customs has suggested. Businesses that are household names appear to be more risk-averse, according to provisional conclusions of the research into the attitudes held by large groups’ tax departments.

A survey showed that some of the more aggressive companies were also those with fewer shareholders, especially where senior management was also a major shareholder; and that the most risk-averse tended to be organisations with a ‘household name’ quality, which placed a more explicit value on their public reputation,” it said.

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Friday, July 27, 2007

Tax and house prices

Property prices are in the news. In the US, they are falling, spreading worry into other financial sectors. In the UK they are not falling - though that may well still happen. What has happened in the UK is that people are beginning to wake up to the social consequences of a recent huge rise in property prices. While many owners of housing are delighted with the rise in value of their properties, some of the more enlightened ones feel uneasy about their being granted what seems like free money, and wonder who is picking up the tab. The answer is: this process involves a huge transfer of wealth to older people (who bought before prices soared) from younger people and poorer people without housing (who face paying huge sums in order to get onto the "housing ladder.")

The UK government has tried to address the supply side of the housing crisis, but is curiously timid to look into the demand side. Could this be because one of the factors driving crazy house prices is London's status as a global tax haven, attracting wealthy property speculators from around the world who are attracted by the tax advantages of London property? And the authorities are scared of confronting the financial-services industry and the enablers?

A new FT comment piece written by Martin Weale, director of the UK's National Institute of Economic and Social Research, provides an interesting perspective. It is written for the UK, but the message would have wider relevance .

Given that most house prices can be estimated relatively straightforwardly, a (good) idea is to levy a property tax on the capital value. If one assumes a notional return of 4 per cent per year, a tax at 1 per cent of the capital value would amount to a tax on notional income at 25p in the pound. Such a tax levied last year on the basis of 2005 values would have delivered revenue of £33bn, compared with council tax of £22bn and about £5bn from stamp duties on residential property. So a change to a 1 per cent tax would allow room for a cut in other taxes, such as a cut in the standard rate of income tax by 2p in the pound.

The redistributional effect of the tax would be substantial. Current council taxes do not tend to rise in proportion to the value of the property, whereas a property taxes would. What is more, property taxes would be collected from Britain's controversial and privileged "non-domiciled" taxpayers who significantly escape the UK tax net - many of whom own UK property.

In a country where 70 per cent of the population are owner-occupiers it is easy to see the obstacles to serious reform of housing taxation. But a few years ago rising house prices were seen as unalloyed good news; now there is much more understanding that they create very real economic problems for young people.

Britain's housing market is broken. Part of the reason is that the UK is a tax haven. Here is an interesting idea that could provide a way to limit the damage.

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Thursday, July 26, 2007

John Edwards: shaping the debate

John Edwards, let us be clear, is unlikely to win the Democratic presidential nomination. But he is shaping the debate, and his ideas are hard to argue against. Even the tax-adverse magazine The Economist, in a recent article entitled "A man of the left", has plenty of kind words to say about him, and indicates that many of his words resonate across the political spectrum.
Mr Edwards is a man of big plans. No other presidential candidate, of either party, can match the sheer quantity, let alone the ambition, of his policy ideas. . . He is intent on helping the poor more than soaking the rich; his inspiration is Robert Kennedy, not Huey Long. The Edwards campaign openly evokes RFK's 1968 presidential bid, which combined vocal opposition to an unpopular war with a telegenic focus on alleviating poverty. . . even if the man himself does not make it, the Democrats' presidential platform will be shaped by Mr Edwards's plans.

It is good that he has influence, for the tax plans that he announced today, as the Associated Press reports, are intriguing, and seem to go beyond the Stop Tax Haven Abuse Act co-sponsored by his rival Barack Obama.

"The engine of our economy is not Washington, D.C., or Wall Street. It is the tens of millions of men and women in offices, factories and fields across America who go to work every day trying to do right by their families,'' he said, adding that about $300 billion a year in taxes go unpaid, and about $1.5 trillion in personal assets of U.S. taxpayers are held offshore. He said he would allow the IRS to investigate offshore tax havens, and he pledged to crack down on peddlers of tax shelters and cooperate with other countries to fight tax havens' efforts to undercut other nation's tax bases.

"Drug and insurance companies write our health care laws, oil companies and power utilities write our energy laws and big banks write our lending laws,'' Edwards said. "It's no coincidence that regular families are finding it harder to get ahead.'' Read John Edwards' July 26 speech here. It contains some remarkable statistics.

Citizens of many other countries would sigh in recognition at his words. If America struggles to crack down on the tax dodgers, just think how much harder it is for poor countries to try to do the same.

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A formula for development?

An excellent story in the New York Times about the U.S. drugs industry has exposed one of the great canards of international tax theory: that tax breaks (we should call them tax subsidies) are a good way of creating jobs. The newspaper cites a big tax amnesty two years ago.

Drug makers were the biggest beneficiaries of the amnesty program, repatriating about $100 billion in foreign profits and paying only minimal taxes. But the companies did not create many jobs in return. Instead, since 2005 the American drug industry has laid off tens of thousands of workers in this country. And now drug companies are once again using complex strategies, many of them demonstrably legal, to shelter billions of dollars in profits in international tax havens, according to their financial statements and independent tax experts.

U.S. drug companies should pay up to 35 percent of their worldwide profits in U.S. federal taxes. Last year, according to the New York Times, Eli Lilly paid less than 6 percent, and since early 2005 the company has cut its U.S. workforce by over 8 percent. The American biotechnology giant Amgen cut its tax bill by claiming a profit margin of almost 100 percent on its foreign sales, but only 15 percent on its American sales. And so on.

Here’s the problem, as Michael J. McIntyre at Wayne State University in Detroit explains. When companies transfer products between divisions in different countries, they account for the sales internally through “transfer pricing.” But they have significant discretion in how they set prices for these transactions.

In one popular accounting move, companies declare their foreign markets as far more profitable than their American businesses — even though drug prices are typically higher in the United States than anywhere else in the world.

Under the rules of transfer pricing, if a company moves patents or other so-called intangibles from its United States division to a foreign subsidiary, the foreign unit is supposed to pay the American division a fair-market price. But outsiders have a difficult time determining if companies have properly assessed the value of patents, trademarks and other intangible properties. If they bring the money back to the United States to distribute to their shareholders, they still have to pay American taxes on it. But President Bush signed legislation in 2004 to let companies return overseas profits at a rate of 5.25 percent, far below the official tax rate of 35 percent, if they moved the money back by 2006.

This tax amnesty, which Democrats and Republicans supported, has expired, but it has emboldened companies to be even more aggressive about sheltering their money, expecting another holiday in the future. “Congress can swear on two stacks of Bibles that it’ll never do it again,” said H. David Rosenbloom, director of the international tax program at New York University “but they’ve lost their virginity.”

The United States is a grown-up country, and it can look after itself, one might argue. If a country as powerful as that struggles to tax its companies, imagine how hard it is for an African country to tax investors. Read this BBC story to find out how the Kenyan taxpayer is being diddled, using the same transfer pricing tricks. Charles Abugre, head of policy and advocacy at Christian aid, has pointed out just how important this issue is. It is, he says, “the missing link in the whole of international development campaigning." He is dead right.

More generally, in rich and poor countries alike, pernicious tax competition between jurisdictions has made this kind of tax-dodging easier, creating a trend to reduce taxes on business profits and generally on income from capital means that the tax burden increasingly falls on individuals (especially employees), as well as on indirect taxation, whose burden falls most heavily on the poor.

What is the simple answer to all this? Offshore tax havens are clearly central to the problem, and must be confronted. The New York Times offers another approach: a system of accounting rules in which companies would assign a portion of profit to each country where they made a sale, relative to the size of the sale. This would, among other things, tame the dangers of tax competition. Read more about this idea, which is known by the rather unwieldy phrase of “formulary apportionment” in this in-depth report from the Brookings Institution. As it says:

This system is similar to the current method that U.S. states use to allocate national income. The state system arose due to the widespread belief that it was impractical to account separately for what income is earned in each state when states are highly integrated economically. Similarly, in an increasingly global world economy, it is difficult to assign profits to individual countries, and attempts to do so are fraught with opportunities for tax avoidance.

TJN wants to bring these seemingly arcane matters to wider attention. Before too long we will be bringing out research on this subject which is aimed more at the UK, with the aim of linking up with the U.S. debate and on the European Commission’s work on a Common Corporate Consolidated Tax base. What is now needed is for journalists, academics, pro-democracy (and anti-poverty campaigners) and others to start grappling seriously with these issues, which have tax havens at their heart. These matters may seem arcane, they must be tackled urgently. As Raymond Baker rightly points out, the offshore world is “the biggest loophole in the free-market system.”

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Wednesday, July 25, 2007

Do we love globalisation?

The Harvard Economist Dani Rodrik has pointed out that the FT's conclusions from its latest survey on globalisation (which we covered recently) are shaky, at best, for the survey's results appear to conflict with the results of an earlier one. Rodrik concludes:

The FT reports citizens of rich countries view globalization as an "overwhelmingly negative force" . . . (the other survey) shows an overwhelming majority of Americans think globalization is mostly good.

So which is it? Do American love or hate globalization? Or does it not matter, since none of the relevant decisions will be made by majority vote?

(TJN does not oppose or support globalisation per se - like most people who've looked seriously into it, we think it has positive aspects, and negative ones.) Maybe the Oxford-based Alex Cobham can untangle Rodrik's conundrum:

A recent poll has been interpreted as showing that people oppose globalisation, and used to argue that politicians must do more to sell it. This is nonsense on stilts - the public have very specific concerns, and politicians have ignored these in favour of pursuing their own interests. It remains to be seen whether this is sustainable - but even if it is, it will be evidence not of a rejection of a globalisation but of a serious democratic deficit. . . . this poll is one more piece of evidence that the public in rich countries, while embracing many aspects of globalisation, are deeply concerned about the impact on their societies of unfettered and untaxed international financial flows. Policymakers should forget trying to sell this, and focus instead on the public's reasonable worries. There is no backlash against globalisation, only against growing inequality and social immobility. Failure to act will increasingly suggest a widespread democratic deficit.

And what is the answer? The New York Times, citing evidence that "excessive corporate tax breaks have done little for workers and have served mainly to concentrate wealth among the few," poses one answer in the form of a rhetorical question:

Where is the politician who will take an over-my-dead-body approach to future tax holidays and who will broach the need for new corporate taxes?

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Vipers and Enablers

The groups that subvert democratic tax systems can be divided into three: tax dodgers who avoid (legal) or evade (illegal) their taxes; "enablers" who help them do it: and the governments that create the right environment for these shenanigans in the first place. The enablers are a crucial part of this murky world, and Prem Sikka has written a lively article outlining some of the efforts by law enforcement bodies to try and police the line between the legal and the illegal.

Although KPMG has rightly been the focus of a lot of the probes, Sikka describes one of these schemes set up by Ernst & Young and challenged by the U.S. authorities:

It was known as "Vipers" (Value Ideas Produce Extraordinary Results) and sold its products, including the exotically named "Cobra" (Currency Options Bring Reward Alternatives), to rich individuals with incomes in excess of $10-$20m. The aim was usually to create a series of complex transactions to either eliminate or defer taxes. The schemes were mass-marketed to clients. Even the September 11 terrorist attacks were allegedly used to advance and sell avoidance schemes (paragraph 22). In case any rich individuals had doubts about the schemes, they were assured by what the justice department alleges were: "false and fraudulent opinion letters" (paragraph 15) issued by leading law firms for a fee of between $50,000-$150,000. Some of these were "back-dated" (paragraph 62).

Articles like this one always attract rash comments from the unhinged fringe. Here is one example:

"If the author doesn't understand the difference between 'avoidance' and 'evasion' he should not be given space here.The UK Revenue is not entitled to stick its shovel into any citizen's 'store' and remove what it likes. And any citizen has an inalienable right to order his affairs to mimimise the Revenue's depradations."

This illustrates the blindness, whether wilful or not, of those who would stick up for tax dodging. For one thing, it's important to recognise the dividing line between evasion and avoidance is extremely blurred. It's an arena of great complexity - and thus the source of big fees for enablers like KPMG and Ernst & Young. Another post underneath Sikka's article provides the correct response:


Whatever the legality, both are tax dodging, and both are harmful, for they allow the wealthiest parts of society - whose members can afford to set up increasingly complex tax-dodging schemes while ordinary people can't - to lessen their tax burden, leaving everyone else to make up the difference. This has two main effects. First, they widen inequality - and as we have seen recently in reports by the Rowntree foundation and the IMF, it is particularly high in Britain and growing faster than in other more equal countries. Second, they damage our democracy - by allowing élites to escape their responsibilities to the societies and governemnts that educate them, that protect them with police forces, that provide the roads that transport their children to school, that regulate to prevent market abuse, and so on and on.

Think about tax avoidance, and then think about this word: "loophole". That comparison alone should make you realise that something isn't quite right here.

Those who think that tax dodging is "completely ethical" are clinging to the difference between one form of tax dodging and another. Take an analogy: until the late 1990s, the oil-rich African state of Angola had a dual exchange rate, which allowed insiders to get access to cheap dollars, often at a rate of 10 or more to one. This was, in effect, free money for the rich, while everyone else lay in appalling poverty. The point here was: it was all perfectly, 100% legal! Tax avoidance in the UK is the same thing. We should see it for what it is: a corruption of the system.

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Monday, July 23, 2007

Dark Thoughts

A new Financial Times poll provides further evidence, if any were needed, that the pendulum is swinging decisively away from the demonisation of tax. Read this excerpt from the front-page story on the UK edition, revealing the results of a poll on globalisation:

Large majorities of people in the US and across Europe want higher taxation for the rich to counter a widespread belief that rewards are unjustified. . . In response to fears of globalisation and rising inequality, the public in all six rich countries surveyed wanted their governments to increase taxation on those with the highest incomes. . . The depth of anti-globalisation feeling in the FT/Harris online poll, which surveyed more than 1,000 people in each of the six countries, will dismay policymakers and corporate executives. Their view that opening economies to freer trade is beneficial to poor and rich countries alike is not shared by the citizens of rich countries.

You may be surprised to discover which countries have felt the strongest backlash, in this follow-up story:

The results open the way for populist politicians to win support by anti-globalisation rhetoric and promising greater regulatory control of economies. . . Even though defining globalisation defies many experts, the people in rich countries think dark thoughts when they hear the term. In no country polled did more people believe globalisation was having a positive effect on their countries than thought it was having a negative effect. Britain, the US and Spain stand out with less than a fifth of respondents thinking globalisation was beneficial. . . . And everywhere, in Europe and in the US, a large majority supports more taxation for the highest earners. Contrary to many preconceptions, the lowest support for higher taxes on the rich came in France, where a still-sizeable 52 per cent were in favour.

More than three-quarters of respondents in every country except Spain thought that inequality was rising, the survey showed. (They would be right, as recent research from the IMF shows.) In addition, studies of inter-generational inequality show that the children of the poor are much more likely also to be poor in the US and in the UK than in continental European economies. More market freedom, it seems, can make you less free, as our recent blog illustrates.

And then we turn to another story in the same edition, entitled "Global corporate tax rates fall. It starts like this: "Competition for investment is driving down corporate tax rates around the world." This was a study by KPMG, whose report, like so many of the company's utterances, said something quite ridiculous, illustrating the blindness of so many tax-related organisations to the real world, as they stumble about inside their politics-free moneyboxes. Raising indirect taxes to make up for cuts in corporate tax rates was "likely to be in the long-term interests of countries seeking inward investment. . . . Tax is having an ever greater influence on where companies choose to operate, according to nearly nine out of 10 companies polled in a separate KPMG survey of 50 UK-based multinationals." Yesterday, KPMG's head of tax said “It looks as if international tax competition has some way to go yet.”

We have demolished this blinkered thinking elsewhere. If you haven't done so already, read it. There should be a lesson here for the politicians. Trends in taxation are driving inequality wider. And ordinary people don't like it.

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Thursday, July 19, 2007

The trouble with Philanthropy

Who could ever oppose philanthropy? Well, er, TJN doesn’t oppose it. But it does make us a little anxious. British businessman Sir Tom Hunter announced recently that he would donate a billion pounds (2 billion dollars) to charity. Among the many people who noticed this was Polly Toynbee, a columnist for the Guardian newspaper, who feels a little queasy about the idea that their donations should be free of tax.

If the rich tire of one of their homes, which has no doubt risen vastly in value, they can give it to charity and pay no capital gains tax. Ditto any shares they donate.

But are tax breaks a good idea? All that capital gains tax would otherwise go into the exchequer to be spent according to the democratic decision of taxpayers. Instead the taxpayer sees their own money purloined and spent at the whim of the giver. Every time anyone donates to a cat sanctuary or cruelty to dogs in Japan, the taxpayer is obliged to contribute another 28% on top.

Her article about the pitfalls of charity is well worth reading. As she says, givers can direct their money exactly where they want. No doubt we'd all like to do that with our taxes, but the better way is to elect a government to spend it as rationally and accountably as it can. And this is the crux of a very important matter, for as we have remarked recently, the process of taxation is one of the most important foundations of accountable societies. Polly Toynbee advocates a better way for the wealthy to contribute to society.

Quite a small group of powerful clan chiefs of the City could change the tax-averse culture of the rich. They could shame the non-domiciled, the private-equity tax evaders, the trust fund inheritance tax cheats and their whole wicked tribe of tax advisers bent on denying the state as much money as possible.

Once again, quite right Polly.

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Wednesday, July 18, 2007

Back to a Victorian Age?

Two new reports on inequality in rich countries show just how much the income gap has been growing in recent years and decades. The first, from the IMF, looks at Europe, the United States and Canada. It concludes that for those countries that started with the greatest income inequality in the late 1970s – notably the U.S. and Britain -- the gap has grown the fastest. But in those places that started off relatively more equal, the gap has grown more modestly - and in some cases such as the Netherlands, France and Denmark, the gap between rich and poor has even narrowed.

The second, from the UK-based Joseph Rowntree foundation, focuses on Britain. “The gap between rich and poor is at a 40-year high and is leading to an increasing segregation in British society that is pulling the middle class apart,” one report from Bloomberg news described it. A leader article in the Guardian newspaper goes further, noting the role of taxation:

Out of sight, out of mind. That is the predicament of Britain's poor, at least if yesterday's report from the Joseph Rowntree Foundation is right. It charts a widening economic chasm between communities.

Economic apartheid works to entrench low expectations among poorer communities, undermining the social mobility that politicians of all stripes have been arguing is essential to ensure a strong economy, with the best people in the right jobs.

The rich are always with us - and they are richer now than ever. Rowntree finds that since 2000 the wealthiest localities have seen annual incomes rise fastest. Runaway City pay has played a part here, as has the government's failure to shift the tax burden significantly on to those best able to bear it.


Another, more colourful Guardian story pointed us backwards, to the time of Queen Victoria, with a headline about Urban Britain Heading for “Victorian” Levels of Inequality. “Beneath the helipads,” it said, “there lurks a growing cityscape of poverty and exploitation. . . Labour's clause 4 commits the party to putting wealth "in the hands of the many, not the few". Yet the economic privileges of the few look as entrenched as ever.”

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Tuesday, July 17, 2007

The perils of tax competition

Healthy market competition allows consumers to choose between suppliers of goods and services. This keeps companies on their toes, it keeps prices down, keeps quality high, and stimulates innovation. Most people would say it is a good thing.

But there is another kind of competition, an altogether different proposition. It is tax competition: the process by which countries (or states in a federation) vie with each other to attract mobile capital by dangling tax breaks, subsidies, and other forms of special incentive. Here, the healthy processes involved in normal market competition simply don’t apply. Citizens (except for a very wealthy globe-trotting tiny minority) cannot shop around between states to choose which one will provide them with the best public services. The incentives that result from tax competition do not enhance market efficiency, but instead they undermine it. For one thing, they completely distort Ricardo’s theory of comparative advantage, whereby investment flows to where it is most productive. Special, sectional exemptions fostered by tax competition are particularly pernicious and distortionary. As Greg Leroy said in a recent TJN newsletter (vol. 2 No. 4) describing an “economic war” that between U.S. states:

The bottom of the iceberg – in every sense of the word – is tax breaks. Those granted by states – income, sales and excise – are the least visible, least accountable, and most corrosive ways states fund economic development.

Ah, but the supporters of tax competition will argue, but governments need discipline, and external pressure to lower tax rates is a good way of doing this. Well, TJN does not have a position on whether any given country should have lower or higher tax rates: it is not for us, or any other interest group, to dictate how countries should conduct their domestic tax policies. But TJN does have a position on tax competition: we oppose it. The idea that external downwards pressure on taxation from tax competition is needed to “correct” the results of choices made by domestic electorates reveals a deep contempt for the very idea of democracy.

Tax competition is biting, and the threats to governments -- particularly the poorest ones that are least well equipped to deal with the pressures – appears to be growing. In a speech in July, deputy IMF managing director Murilo Portugal highlighted some of these challenges, and outlined some of the necessary steps forward, including the need for a global response:

Evidence of the impact of heightened tax competition for capital has been mounting. In the OECD countries, and the EU specifically, statutory corporate tax rates have declined sharply over the past decade. . . a shared feature of all four key challenges to fiscal sustainability—aging, climate change, globalization, and fiscal risks—is that they transcend the boundaries of national policymaking. The fact that large parts of the world economy will face the economic and fiscal consequences at the same time implies the danger of beggar-thy-neighbor policies, or, alternatively, scope for gains from cooperation, as we will discuss in more detail later. Similarly, many of the largest fiscal risks many countries face today are of a transnational nature, particularly those stemming from the financial markets.

A special section on tax competition is now up on our website. It exposes some of the fallacies that lie behind the arguments of those who advocate tax competition and who downplay its significance. It provides some pointers as to what the next steps need to be.

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Friday, July 13, 2007

Land of opportunity, land of the free?

Can more freedom make us less free? It seems like an odd question. But an editorial in the New York Times provides an interesting answer. It looks at the effects of unfettered markets.

When questioned about the enormous income inequality in the United States, the cheerleaders of America’s unfettered markets counter that everybody has a shot at becoming rich here. The poor, we are told, can use their own bootstraps. Unfortunately, the American dream is not that broadly accessible.

Why might they say that? Read on.

Recent research surveyed by the Organization for Economic Cooperation and Development, a governmental think tank for the rich nations, found that mobility in the United States is lower than in other industrial countries. One study found that mobility between generations — people doing better or worse than their parents — is weaker in America than in Denmark, Austria, Norway, Finland, Canada, Sweden, Germany, Spain and France. In America, there is more than a 40 percent chance that if a father is in the bottom fifth of the earnings’ distribution, his son will end up there, too. In Denmark, the equivalent odds are under 25 percent, and they are less than 30 percent in Britain.

America’s sluggish mobility is ultimately unsurprising. Wealthy parents not only pass on that wealth in inheritances, they can pay for better education, nutrition and health care for their children. The poor cannot afford this investment in their children’s development — and the government doesn’t provide nearly enough help.


Tax, of course, pays for education, nutrition and health care for children, and thus provides people with a route to more social mobility and more freedom to move up the rungs of the income ladder. The mood in America and other parts of the English-speaking world seems to be swinging away from the demonisation of tax, on all sides of the political spectrum. Globalisation is one reason why people worry: take, for example, the words of Matthew Slaughter, one of President George W. Bush’s former economic advisors, or of Murilo Portugal, an IMF deputy managing director. Or look at the debate over the distorted tax treatment of private equity that has been raging on both sides of the Atlantic. (Read more about it in these July 2007 stories in the New York Times, the Financial Times, and Newsweek; TJN has submitted evidence to the UK House of Commons' Treasury Select Committee examining private equity. Read about it here.)

The more level the playing field on tax, the more freedom people will have to prosper. And, while we're on the subject of freedom, better international tax co-operation and exchange of tax information between countries would also provide democratically elected governments with more freedom to set their own tax policies without having to succumb to the pressures exerted from crime-addled tax havens and other jurisdictions. We will be turning to this tax competition shortly . . . .

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Tuesday, July 10, 2007

Corruption: the great blind spot

The American economist Paul Krugman once remarked on how blind spots come about because economists often do not see what they cannot fit into models. TJN has identified a gigantic blind spot. If the field of corruption can be likened to a room, then this blind spot is hiding an elephant sitting in the corner, which most of the world's development institutions do not yet seem able to see. One reason for the existence of this blind spot is Berlin-based Transparency International, which is peddling a narrow ideology of corruption that almost entirely excludes one of the most fundamental reasons why poor countries stay poor. The time is coming for a revolution in international debates about corruption, and for the start of what Eva Joly, the former investigating magistrate who broke open the "Elf Affair" in Paris (and who won Transparency International's Integrity in 2001), calls "Phase Two" in the fight against corruption. TJN has just launched a new section on its website, called "Corruption and the Offshore Interface." Read it, and see what the World Bank can't.

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Monday, July 09, 2007

The Four "Rs"

When we think of tax, we normally think of two words starting with the letter “R” – that is, tax provides governments with Revenue (to pay for schools and police forces, for example), and tax can be a way to Redistribute wealth and income. There is a third “R” - tax can be used for Re-pricing (for example, taxing tobacco and carbon-based fuels can be a way to change behaviour.)

So far, so good. But there is a fourth “R” which is so often forgotten, and yet this fourth “R” may be as important as the first. It is Representation. American colonists rejecting British colonial rule in the eighteenth century knew all about it, famously demanding “no taxation without representation.” When citizens are taxed, they demand accountability in return for their hard-earned money, and this keeps governments on their toes.

In rich countries, people tend to take this fourth function of taxation for granted, and the debates about tax tend to focus instead on tax as a moneybox problem. Donors and tax specialists have mistakenly tried to transplant this skewed set of priorities onto poor countries – with disastrous results. Even those who have woken up to the scandal of offshore and the ability of what the Financial Times calls a tax-avoiding “global plutocratic class” to shift their financial affairs offshore to avoid taxes often forget this aspect of the harm that tax havens cause: how tax avoidance and evasion erodes the accountability of governments. TJN’s latest quarterly newsletter – the Accountability issue – examines these issues in more depth.

It is essential that this fourth “R” becomes a central part of the debate about poverty and international development. Good tax systems will not only help bring better governance to poor countries, but they should also help these countries reduce reliance on external funding and start financing public services from their own revenues. This should be the end game of foreign aid. Our editorial entitled "Wake Up, Donors," asks why they seem to be avoiding this issue.

In this edition, we also discuss TJN’s fledgling campaign to change international accounting standards for multinational corporations so that they report on a country-by-country basis, and we explain TJN’s even newer efforts to set up a code of conduct for taxation. Watch this space.

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Sunday, July 08, 2007

The Clueless Chancellor

Incoming UK Chancellor of the Exchequer Alistair Darling is renowned within civil service circles for being cautious and indecisive. Some just call him timid. He showed this quality in early July when, faced with mounting disquiet within Parliament and the serious press about tax subsidies for private equity firms and super-rich people and top-end City workers claiming non-domiciled status, he warned against "knee-jerk" reactions that might harm London's attractiveness.

Which planet does he live on? London is the pre-eminent global financial centre. In terms of scale and diversity, it has no competitor. It enjoys a significant geographic advantage through being mid-way between the Far East and the America's, straddling time zones to cover all the main global markets. It also has English as its first language and enjoys a Cool Factor which places it in a different league from rival centres like Luxembourg, Zurich and Frankfurt. Far from needing to sell itself cheap to attract global talent, it is in a position where no-one with serious career intentions in international finance can afford to not spend at least a few years working in the City. So why the need for subsidies?

For several years, TJN has enjoined the UK Treasury to justify the retention of the anachronistic non-dom policy. Proponents talk about vague but unquantified financial benefits, but the flip-side is the house price inflation across South-East England, and, of course, the wholly unnecessary harm to social equity. On the private equity issue, it has become clear in recent weeks, that fiscal distortions play a significant part in shaping this market, to the extent that buy-outs are being driven by short-term opportunities for financial engineering (read tax avoidance) rather than long-term prospects for genuinely building economic value. Another instance of City short-termism and welfare for the rich and powerful.

So our message to Mr Darling is as follows. Wake up: the knee jerk reaction was yours and yours alone. Britain's non-dom policy has been under review for decades, and whilst the current review -- initiated in 2003 -- grinds on, the numbers claiming non-dom status are sky-rocketing. In 2003/04, 65,000 people claimed to be non-dom. By2004/05 the figure had almost doubled to 112,000. We understand that the rate of increase of those claiming non-dom is accelerating, so expect somewhere in the region of 200,000 for 2006/07. Why should the already rich, and the ultra-high income earners benefit from these tax subsidies? And what does it say about the Government's commitment to equity and social inclusion when it remains too timid to take on vested interests, even when powerful voices within the City have already conceded that it is hard to justify tax treatments which leave them paying less tax than their office cleaners.

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Thursday, July 05, 2007

Tax Ghosts

The Tax Justice Network has been getting increasingly concerned with a worrying trend in international taxation called redomiciliation, which has been apparent in the last few years. It is one of the main concerns that TJN drew to the attention of the US Senate last week, in response to claims by the British tax haven of Jersey that it had cleaned up its act. (This is part of a wider pattern of bogus claims by tax havens, parroted in an error-strewn piece in The Economist recently, that tax havens, once dirty, have cleaned up.) Senator Walker, Jersey’s chief Minister, claimed that “it is no part of Jersey’s policy to assist directly or indirectly the evasion of taxes properly payable in other jurisdictions. Such business is actively discouraged.” It sounds good. But it is not, for Jersey is seeking to perpetrate a confidence trick: while they will comply with certain outside requirements for information exchange with other jurisdictions, they will then make sure that the information to be exchanged is simply not available in the first place – thus nullifying the effect of co-operation. One way of pulling off this spooky disappearing trick is through the art of redomiciliation. An excerpt from the TJN submission explains how this works:

Redomiciliation allows a company registered in one place to apply to be removed from registration in that location and to be re-registered in another country or territory. The company is not dissolved in the process. What happens is that, for example XYX Limited of Malta with company number 444555 in that location becomes XYZ Limited of Jersey with company number 777888 in that new location. The company carries on trading without change, it has simply shifted the country to which it owes legal duty by way of registration.

(Richard Murphy explains more about redomiciliation in a video and in a blog about TJN's submission.)

Redomiciliation (not to be confused with the non-domicile scandal in Britain) is a bit like a lock-stock-and-barrel version of flee clauses, which allow money to be spirited away from a territory at the first hint of investigation. But with redomiciliation it is not just the money, but an entire company, that disappears, wraith-like, into the byzantine corridors of the international financial system.

“We have been worried about capital flight for a long time,” TJN’s John Christensen says. “Now we have to worry about corporate flight as well. As pressure mounts for tax havens to exchange information, they are ensuring that they either do not have that information, or by providing new mechanisms make sure that data is harder to secure and that it is easier for it to flee. Once a company has shifted it becomes almost impossible to know where it is, unless you happen to chance upon it. If a company shifts from the British Virgin Islands to Cyprus – how would you find it there? Legitimate and proper investigation is totally stymied. This is an open invitation to criminals. What legitimate purpose could it serve?”

The forces of law and order should worry. Following her eight years leading an investigation into the “Elf Affair” in Paris, Europe’s biggest corruption investigation since the Second World War, the Norwegian investigating magistrate Eva Joly expressed her frustration with getting co-operation from foreign authorities on crime. The problem is the barriers erected between countries, which, like semipermeable membranes, let crooks through, but not the police or tax authorities who chase them. “The magistrates are like sheriffs in the spaghetti westerns who watch the bandits celebrate on the other side of the Rio Grande,”she wrote. “They taunt us—and there is nothing we can do.”

Redomicilation makes the crime-fighters’ work even harder: it not only puts the bandits out of reach, but allows them to disappear as soon as they are spotted.

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Monday, July 02, 2007

Riots on the Streets

John Moulton, the founder of UK buy-out firm Alchemy partners, is preparing for a hearing of the UK Treasury Select Committee about private equity. His words to the Financial Times are interesting.

“I’m not sure it is riots on the streets yet. But it may not be far away, the way things are going . . . The industry certainly pays very low tax and that is not easy to justify. . . .“Buy-out firms are stacking up cash offshore in ways that look bloody wrong to me,” he said, referring to the practice of locating funds in overseas tax havens and keeping carried interest (the share of profits paid to partners) rolling over.

The BBC, meanwhile, discovered that Saga and the AA, two companies that are owned by private-equity businesses and are merging incurred no liability for corporation tax last year, and almost zero in their two-and-a-half years of private equity ownership. In the same period, the private equity owners of these businesses - Permira, CVC and Charterhouse - generated gains for themselves of £2.5bn. Not only do they benefit from preferential tax rates on capital gains, but, as the BBC said, "they inject huge debts into their companies, and the interest paid on these borrowings wipes out all taxable profit - thereby minimising liability to tax." (For more background on private equity, Richard Murphy has created a video discussing some of the issues.)

In an editorial, the FT had some words of advice for incoming UK chancellor (Finance Minister) Alistair Darling, now that his predecessor Gordon Brown has become Prime Minister.

"Mr. Darling should simplify taxation and regulation so that British companies can concentrate on business success rather than making money from compliance with some Treasury rules and avoidance of others. The purpose of taxation is to collect money with minimal distortions. If Mr Brown had understood this, Mr Darling would not now be facing rows over the taxation of private equity bosses."

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An astonishing month

It has been an astonishing month for the Tax Justice Network agenda, particularly in the UK, where the mood has been changing decisively and rapidly. There has also been important progress in the United States, too, not least the remarkable outcomes from the conference in Washington on June 28.

As we have already noted, a healthy discussion has broken out on both sides of the Atlantic on the tax treatment of private equity, with remarkably similar views being aired by important folk. Following UK private equity godfather Nicholas Ferguson’s comments in the FT (“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,”) a resounding echo was subsequently heard in America, when Warren Buffett said, in a story published on June 28: “The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.” Even The Economist magazine, which has published much drivel in support of tax havens this year, was sympathetic to our position, and quoted TJN’s Richard Murphy in a story about the issue.

We have already covered the private equity issue in this blog. What is more remarkable, however, is the more broad-based coverage that is now emerging. This is exactly what TJN originally set out to do: change the terms of the debate. There has been plenty of it, but probably the most visionary entry came in the Financial Times, in an editorial on June 25th. It is worth quoting this one at length, for they have penetrated to the heart of the matter.

The survival of unchained financial capitalism cannot be taken for granted. It will endure only if a sizeable portion of humanity decides that it serves their interests. . . . At the core of the financial system remain the big banks, which are insured, explicitly and implicitly, by governments. Regulators have to ensure that excessive risk-taking is not going on, with the gains once again privatised and the losses shifted on to taxpayers. . . . Democracy rests on the perception of fair treatment of its citizens. Most people accept the wealth earned by successful business activity. Far less acceptable, however, is the ability of the rich to avoid almost all taxation. The case for a neutral tax system, with few loopholes, is stronger than ever. Regulation must be global. Moreover, such regulation must include taxation. As finance goes global, so must the depth of co-operation among fiscal authorities. A world in which a global plutocratic class pays little or no tax, while benefiting from the stability generated by taxes imposed on the "little people", will prove unsustainable.
On the same day, an editorial in The Independent newspaper aimed at incoming Prime Minister Gordon Brown with the headline: Here's one challenge Brown can take on... shutting down the world's tax havens). The article said this:

The populist potential of an international crusade to make the mega-rich pay their fair share is vast. First he could close the loopholes for foreign billionaires and private equity kings in Britain. Then, to stop the minority of the super-rich who would actually act on their threats to leave Britain, he could lead an international battle to shut down the world's tax havens, which act as stinking drains on progressive governments everywhere. This is the new centre ground of British politics, where even the moderately wealthy can sweatily see that a grossly unequal society is dangerous for us all.

All of this came in the context of a related, older political thread: worries about fast-rising inequality, as evidenced in two stories in the FT, one about a wall of Middle Eastern and Russian money pushing the price of top-end houses in London up by 46 per cent in the past two years, and another about individuals with incomes in the top 1 per cent of the UK’s taxpayers pulling away even from the merely well paid in the final years of Tony Blair’s premiership, with the incomes of the top 0.1 per cent having grown most strikingly of all.

We will finish off here with an article by Madeleine Bunting in the Guardian, quoting Lloyd Evans in the Spectator, highlighting the ridiculouslness of the London property wealth effect. "In theory, we're halfway to being millionaires. Yet we don't have a car, we can barely afford a holiday, and when we go for a drink, we sit on the green outside the pub, quaffing Tesco £2.99 Frascati to save money."The headline of her article summed up the mood: “The middle classes have discovered they've been duped by the super-rich."

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Norway promises a new era in tax haven politics

Raymond Baker, who is author of the groundbreaking book Capitalism’s Achilles Heel, as well as a guest scholar at the Brookings Institution, and Director of the Global Financial Integrity (GFI ) programme at the Center for International Policy, held a remarkably successful conference in Washington on June 28. It was attended by many influential people, including Daniel Kaufman, director of Global Programs at the World Bank; Eva Joly, the investigating magistate who broke open the “Elf Affair” in Paris – Europe’s biggest corruption investigation since the Second World War; Moises Naim, editor of the respected Foreign Policy magazine; Jack Blum, the lawyer who among other things exposed the Lockheed-Martin scandal in the 1970s and led the investigations into the spectacularly corrupt Bank of Credit and Commerce International (BCCI,) and Eric le Boucher, International editor, Le Monde.

Apart from a misfortune of timing – on the same day, Rodrigo de Rato announced his resignation as IMF managing director, meaning journalists had to leave the event to cover that instead – the conference appears to have achieved its main aim: to get the International Financial Institutions (the World Bank and the IMF) to measure global dirty money at last. It is quite astonishing that they have not done so to date. At the conference, a representative from the Norwegian government announced two crucial initiatives. First, Norway has indicated its intention to commission and pay for a World Bank report on illicit financial flows – notably the all-important tax-evading money that always gets missed out of traditional measures. This is, at last, what is needed. Second, Norway has said it would like to create a global task force to investigate tax havens and approaches to tackling the problem. GFI and the Tax Justice Network, among others, would be official advisors to this second initiative, which Norway is promoting under the auspices of the countries involved in the Leading Group on Solidarity Levies to Fund Development.

This alone would have been good enough. But at the conference, many influential people lent powerful support to the agenda that TJN and GFI are setting.

“We have to build real global institutions,” said Herman Wijffels, a World Bank executive director. “We don’t have global institutions. We have multilateral institutions dominated by nation states and by the interests of nation states. I have come to the conclusion that we need to turn the World Bank into a real global institution. The calling of these institutions – the World Bank and the IMF – is to protect the global financial system. We are not there today – that is where we have to go. We are in a global, interdependent system. We are in it together. This is the basic step in consciousness we have to take in the 21st Century. (Incoming World Bank head Robert) Zoellick has to take the World Bank to the next level, explicitly including the element of illicit financial flows in this equation.”

Eva Joly went further. “The idea that we can fight corruption without closing down tax havens is illusory,” she said, then pointed out one possible theoretical approach. “If the US decided that tax havens no longer havce access to financial markets – they are dead.” She was followed by Moises Naim, who pointed out that many of the world’s biggest tax havens are islands: one, he said, is called Manhattan, and another is called Great Britain.

The high-profile lawyer Jack Blum, who is also a senior advisor to TJN, highlighted one of the key problems. “There is no global agreement that allows the compulsion of testimony across borders,” he said. “We have the fragmentation of law enforcement . . . we have specialists who find ways to create new entities and mix-and-match jurisdictions, who make it all more fragmented. We have no way of finding – or doing – anything. . . . The United States encourages money to move in by not enquiring who you are.”

Perhaps the most arresting talk was given by Raymond Baker. “'For the first time in 200 years we have an integrated global structure in the Square Mile and Manhattan whose basic purpose is to shift money from the poor to the rich,” he said. Among other things, Baker has noticed the peculiar failure of economics to pay attention to some of the most important issues. “We just don’t see what we don’t model,” he said, referring to the work of the economist Paul Krugman, who famously remarked on "the remarkable extent to which the methodology of economics creates blind spots." Baker estimates that $1.0-1.6 trillion in annual dirty money flows, around half of which flows out of developing and transitional economies. For every dollar of foreign aid flowing to poor countries on top of the table, ten dollars flows back out again under the table. This is, as the UK’s Observer newspaper put it in a report on the event, the elephant in the room. “Cracking down on tax havens and the evasion of taxes by some of the world's biggest companies is seen as the 'missing link' in the poverty alleviation agenda.”

Baker has been fighting hard to get the World Bank to measure these numbers. “Better analysis might narrow this picture,” he said. “Or it might widen the picture. But no analysis will make this a pretty picture.”

Read the conference report here, an analysis in French in Le Monde here, and Baker's introductory talk here.

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