Stiglitz calls for tax havens to be closed down

Germany's Suddeutsche Zeitung has carried an interview with Joseph Stiglitz, a former chief economist for the World Bank and controversial best-selling author.

In an article entitled "Wall St. has lost the war of words", Stiglitz calls for coordinated worldwide action against tax havens because single actions against jurisdictions such as Liechtenstein or Monaco may simply make money move to other havens.

He also places much of the blame for the current credit crisis on tax havens, in a statement that is exactly what was being described in our lead article and editorial in the latest edition of our newsletter, Tax Justice Focus. Stiglitz said:

"The banks have mercilessly exploited that there are big differences in regulation. They have taken their business to where supervision is the least and taxes are the lowest. There is, in addition to the actual banking system, a second shadow banking system. The banks have shifted their debts and transactions into special purpose entities in tax havens."

Stiglitz isn't everyone's cup of tea. As one respected economist recently put it: "Joe is fine on taxation, as on most other specific issues. The trouble is that he insists on mixing that up with a load of general philosophical points that lose all sense of proportion."

Which may be fair comment (you decide). But Stiglitz is spot on in this case. In the interview, he also warns that Wall Street might have lost the battle of words, but not of reality: they might rhetorically welcome tighter international financial regulation now, but then either avoid this regulation or water it down during the legislative process. "Lamentably," Stiglitz said, "the devil is in the details." We are all too aware of the power of Wall St. in influencing policy in Washington (and in many other countries) as our previous blog notes. Interestingly, Stiglitz also mentions an idea by Robert Shiller on integrating into the tax system an automatic adaptation tool which adjusts annually for changes in inequality.

"Robert Shiller has a very good idea developed and suggested that our tax system should adapt to inequality each year. We change tax rates so irregularly. Why sdhould we not build it into the tax system so that it happens automatically?"

Interesting point, and here is the Shiller paper (from 2006, co-authored by Leonard Burman and Jeffrey Rohaly.)

Here are some excerpts from the interview. (We've used a translation programme, and some German knowledge, to turn this into usable text. Apologies for any awkward phrasing.)

Suddeutsche Zeitung (SZ): Should the supervisors destroy the shadows?
Stiglitz: Quite clearly, yes. Our banking system is regulated because it is so important for the functioning of our economy. For this reason we buy banks out when they collapse. The state provides the banks with security - it is like fire insurance conditions, for example, require that every house has a sprinkler.
SZ: The banks want fire insurance but do not want to pay for it.
Stiglitz: This is the problem. The banks are calling instead for the state to build more hospitals to provide for burns victims. They also want that their nice little fires to keep burning in tax havens like the Cayman Islands or Bermuda. These tax havens should be closed down.
SZ: The U.S. actually just put the Swiss under pressure, but not the Caymans, where most hedge funds on Wall Street are registered.
Stiglitz: There is no result, if you close down Monaco or Liechtenstein and then all the money flows into another tax haven. That is why we must proceed around the world, without exception.

As we've said, for more information about how tax havens have contributed to the emerging financial and economic crisis, read our newsletter.