Magnitudes, misunderstandings and myopia
The tax writer Andrew Goodall has written a useful blog highlighting the extraordinary lack of hard data about cross-border illicit flows, and expressing concern about this. As he says:
"Is the World Bank content to allow a handful of committed individuals and a few NGOs to provide the only meaningful research into the impact of tax evasion on developing countries? It appears so."
This is the right question to ask. Why have the World Bank, and others, utterly ignored this? Given that the amounts of money involved are so terrifically huge, according to the best independent analyses available (Goodall highlights Raymond Baker's work, of which more below) - is it not startling - astonishing - that there is such an information gap? Does the World Bank not want to know the answer?
First, here are Raymond Baker's estimates of cross-border illlicit financial flows, based on a top-down approach, using data from others (including the IMF, Celent Communications, Boston Consulting Group, and others) which come in at the same order of magnitude as his own research, taking a bottom-up approach, which adds up the separate components of cross-border illicit flows. The relevant sections of Baker's book says, on various pages of the 2005 hardback, citing a $1.06-1.60 trillion / $539 - 778 - billion range, which he stresses uses conservative methodologies.
"One trillion dollars total; $500 billion out of developing and transitional economies. These are my estimates. I look forward to additional figures from others in the future" (p173)
Baker stresses that this has been one of his key objectives in producing these figures: prompting others into action to build up independent research. He has said, on several occasions, words along the lines of: "If you think I am wrong, then show me why this is so, by coming up with your own figures."
Attending a conference in Washington that Baker called last year, it seemed that the World Bank representatives who were invited were, perhaps, reluctant to address this. One senior World Bank official, speaking on a video link after being called away at the last minute (then disappearing before anyone had a chance to ask him any questions) muttered something about this being "not a priority." It was only when the Norwegian government forced their hand, by offering to finance such a study, that the World Bank agreed to look at this. Early signs, described by Richard Murphy who recently attended a meeting of that conference, are not promising. A review of the current literature on the subject, requested by the World Bank process, identified four sources: a report in 2000 for Oxfam, Baker's Work, TJN's The Price of Offshore, and Christian Aid's recent report. And there ain't any other estimates out there, this World Bank review found.
So that's one thing about magnitudes: the world's myopia on the subject. Could it be that there is a deliberate attempt to look the other way, because hard data on this would have enormous policy implications - such as shutting down tax havens? Could there be lobbying interests at play here? There are several reasons, in fact: one of the most important one being that so much attention has been paid to terrorist financing and money-laundering, both relatively small parts of the overall picture, that it has allowed most people to assume that the problem is being dealt with. Baker said:
"Dozens of bodies, thousands of people, millions of documents, and billions of dollars concentrated on staffing anti-money laundering programs becausme a feature of our globalised world by the start of this century.. .. we seem to be failing across the board. Are there any bright spots at all? Yes, the pursuit of terrorists' financing is a bright spot. Which indicates what can be accomplished given politial will to tackle at least an element of the dirty-money problem in a determined manner."
These initiatives missed the big picture. They are perfectly legitimate initiatives, but they do have a smokescreen effect, which may be most convenient for some of TJN's wealthy opponents.
There is another thing to understand about magnitudes. We've a web section here, highlighting the different aspects of the problem. Each aspects is huge, but because they overlap, we can't just add them up to make one gigantic figure. Baker's figures, for example, focus only on illicit (law-breaking) flows, and are big enough. He says his calculations are conservative, and adds:
"No one I have ever talked to thinks dirty money is declining or that anti-money laundering efforts are stemming the global tide of illicit proceeds. Indicators point in the opposite direction (page 182.)"
Some of the problems he identifies stems from tax havens offering a secrecy shelter for illicit flows; some of it stems from illicit mispricing by multinational corporations. But Baker's figure excludes plenty of legal flows that TJN cares about, which may be just as harmful: legal (or quasi-legal) tax avoidance by corporations through tax havens, for example - which is quite colossal too. Then there is the 255bn annual lost tax revenues just from tax-dodging offshore assets held by wealthy private individuals. Some of this lost revenue is illegal, and some is not.
Why not measure all this? Why on earth not? Don't take our word for it. Measure it, and publish! With one proviso: make sure your methodology and your data sources are transparent - for you can be sure there will be malign interests out there very happy to see a new set of fiddled numbers out there to support their cases. They will try this, and if they can lobby to get a big institution like the World Bank to back their case, so much the better. We hope this doesn't happen.
On the subject of magnitudes, there's more. We could add the damage that tax havens cause by punching holes in other jurisdictions' tax systems, by undercutting them and offering the owners of great wealth an alternative to threaten their tax authorities with, forcing them to cut taxes, leaving ordinary people to pay their taxes for them instead. Tax competition. What is the cost of that? It is surely incalculable. And that's not even getting onto the subject of regulation. Tax havens have eviscerated nation states' abilities to regulate their financial institutions effectively. There is a huge cost to this, and this carries a very significant share of blame for the current economic crisis, as we and many others have pointed out. It doesn't make any sense sense to measure the size of this effect, but the Bank of England's recent estimate, highly speculatively, that the crisis could cost $2.8 trillion, gives an idea of the scale of the kind of impact we are talking about.
Add on the costs of encouraging the growth of huge globalised crime networks using the secrecy jurisdictions to move their money; the costs of impunity for dictators and political crooks stashing their huge fortunes in tax havens around the world; the distortions to world markets from insider trading and many other games that secrecy jurisdictions encourage; the damage to undermined democracies, and the harm caused to ordinary people's faith in markets . . . . and you could go on.
This must one of the great issues of our age. We welcome Goodall's query about this issue. A last word from Richard Murphy.
"Suppose Baker et al. are wrong. Suppose the total figure is not as high as $400 billion of loss a year, as we think it might be in tax terms, and much more in terms of capital flight? Suppose it’s only half that. Suppose (and I think this unlikely) that we have grossly overestimated this sum even though statistically the opposite error is much more likely - because we’re trying to measure what is not declared, with the likelihood that we’re always bound to underestimate. Even if we were 50% out and had doubled the right figure the result would still be revenues lost that exceeds the global aid budget and the cost of the Millennium Development Goals.
In that case isn’t it time to stop worrying about greater precision, which will always to some degree be spuriously accurate, and instead we need to focus on solutions, now. Isn’t this where the research money needs to go now?"
"Is the World Bank content to allow a handful of committed individuals and a few NGOs to provide the only meaningful research into the impact of tax evasion on developing countries? It appears so."
This is the right question to ask. Why have the World Bank, and others, utterly ignored this? Given that the amounts of money involved are so terrifically huge, according to the best independent analyses available (Goodall highlights Raymond Baker's work, of which more below) - is it not startling - astonishing - that there is such an information gap? Does the World Bank not want to know the answer?
First, here are Raymond Baker's estimates of cross-border illlicit financial flows, based on a top-down approach, using data from others (including the IMF, Celent Communications, Boston Consulting Group, and others) which come in at the same order of magnitude as his own research, taking a bottom-up approach, which adds up the separate components of cross-border illicit flows. The relevant sections of Baker's book says, on various pages of the 2005 hardback, citing a $1.06-1.60 trillion / $539 - 778 - billion range, which he stresses uses conservative methodologies.
"One trillion dollars total; $500 billion out of developing and transitional economies. These are my estimates. I look forward to additional figures from others in the future" (p173)
Baker stresses that this has been one of his key objectives in producing these figures: prompting others into action to build up independent research. He has said, on several occasions, words along the lines of: "If you think I am wrong, then show me why this is so, by coming up with your own figures."
Attending a conference in Washington that Baker called last year, it seemed that the World Bank representatives who were invited were, perhaps, reluctant to address this. One senior World Bank official, speaking on a video link after being called away at the last minute (then disappearing before anyone had a chance to ask him any questions) muttered something about this being "not a priority." It was only when the Norwegian government forced their hand, by offering to finance such a study, that the World Bank agreed to look at this. Early signs, described by Richard Murphy who recently attended a meeting of that conference, are not promising. A review of the current literature on the subject, requested by the World Bank process, identified four sources: a report in 2000 for Oxfam, Baker's Work, TJN's The Price of Offshore, and Christian Aid's recent report. And there ain't any other estimates out there, this World Bank review found.
So that's one thing about magnitudes: the world's myopia on the subject. Could it be that there is a deliberate attempt to look the other way, because hard data on this would have enormous policy implications - such as shutting down tax havens? Could there be lobbying interests at play here? There are several reasons, in fact: one of the most important one being that so much attention has been paid to terrorist financing and money-laundering, both relatively small parts of the overall picture, that it has allowed most people to assume that the problem is being dealt with. Baker said:
"Dozens of bodies, thousands of people, millions of documents, and billions of dollars concentrated on staffing anti-money laundering programs becausme a feature of our globalised world by the start of this century.. .. we seem to be failing across the board. Are there any bright spots at all? Yes, the pursuit of terrorists' financing is a bright spot. Which indicates what can be accomplished given politial will to tackle at least an element of the dirty-money problem in a determined manner."
These initiatives missed the big picture. They are perfectly legitimate initiatives, but they do have a smokescreen effect, which may be most convenient for some of TJN's wealthy opponents.
There is another thing to understand about magnitudes. We've a web section here, highlighting the different aspects of the problem. Each aspects is huge, but because they overlap, we can't just add them up to make one gigantic figure. Baker's figures, for example, focus only on illicit (law-breaking) flows, and are big enough. He says his calculations are conservative, and adds:
"No one I have ever talked to thinks dirty money is declining or that anti-money laundering efforts are stemming the global tide of illicit proceeds. Indicators point in the opposite direction (page 182.)"
Some of the problems he identifies stems from tax havens offering a secrecy shelter for illicit flows; some of it stems from illicit mispricing by multinational corporations. But Baker's figure excludes plenty of legal flows that TJN cares about, which may be just as harmful: legal (or quasi-legal) tax avoidance by corporations through tax havens, for example - which is quite colossal too. Then there is the 255bn annual lost tax revenues just from tax-dodging offshore assets held by wealthy private individuals. Some of this lost revenue is illegal, and some is not.
Why not measure all this? Why on earth not? Don't take our word for it. Measure it, and publish! With one proviso: make sure your methodology and your data sources are transparent - for you can be sure there will be malign interests out there very happy to see a new set of fiddled numbers out there to support their cases. They will try this, and if they can lobby to get a big institution like the World Bank to back their case, so much the better. We hope this doesn't happen.
On the subject of magnitudes, there's more. We could add the damage that tax havens cause by punching holes in other jurisdictions' tax systems, by undercutting them and offering the owners of great wealth an alternative to threaten their tax authorities with, forcing them to cut taxes, leaving ordinary people to pay their taxes for them instead. Tax competition. What is the cost of that? It is surely incalculable. And that's not even getting onto the subject of regulation. Tax havens have eviscerated nation states' abilities to regulate their financial institutions effectively. There is a huge cost to this, and this carries a very significant share of blame for the current economic crisis, as we and many others have pointed out. It doesn't make any sense sense to measure the size of this effect, but the Bank of England's recent estimate, highly speculatively, that the crisis could cost $2.8 trillion, gives an idea of the scale of the kind of impact we are talking about.
Add on the costs of encouraging the growth of huge globalised crime networks using the secrecy jurisdictions to move their money; the costs of impunity for dictators and political crooks stashing their huge fortunes in tax havens around the world; the distortions to world markets from insider trading and many other games that secrecy jurisdictions encourage; the damage to undermined democracies, and the harm caused to ordinary people's faith in markets . . . . and you could go on.
This must one of the great issues of our age. We welcome Goodall's query about this issue. A last word from Richard Murphy.
"Suppose Baker et al. are wrong. Suppose the total figure is not as high as $400 billion of loss a year, as we think it might be in tax terms, and much more in terms of capital flight? Suppose it’s only half that. Suppose (and I think this unlikely) that we have grossly overestimated this sum even though statistically the opposite error is much more likely - because we’re trying to measure what is not declared, with the likelihood that we’re always bound to underestimate. Even if we were 50% out and had doubled the right figure the result would still be revenues lost that exceeds the global aid budget and the cost of the Millennium Development Goals.
In that case isn’t it time to stop worrying about greater precision, which will always to some degree be spuriously accurate, and instead we need to focus on solutions, now. Isn’t this where the research money needs to go now?"
posted by TJN at 1:12 am
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