How to invest a billion

David Cay Johnston has a fascinating little piece in Tax Notes, reproduced on the TaxProf blog. He poses the question:

imagine that $1 billion, after tax, was just depos- ited in your account. What would you invest to make your $1 billion grow? And how might taxes affect your decisions?

He starts off with an observation

The first thing you will notice is a severe shortage of opportunities to increase your new wealth

The stock market is lacklustre; retail is contracting; real estate is doomed, and overall, America is awash with capital. But -

Back in 1980 the American Council for Capital Forma- tion had yet to be born, but public debate focusing on a perceived shortage of capital became part of the lexicon. . . . The success of this movement was largely in tax policy and its twin, regulatory policy. Lowered rates on capital gains and dividends, more favorable rules on avoiding recognition of income, and handcuffing tax auditors while drastically reducing their numbers all played a big role in this shift.

All this is taken, today, to raise the spectre of higher taxes on capital causing disaster. It's a nice slogan, which plays well with the tea partiers out there - but because America is awash with capital, it's just not an argument that works.

Minority Leader Mitch McConnell, R-Ky., is among those who assert that raising taxes on the highest-income Americans will do damage, but he only asserts that because he has no evidence.Reports by the Congressional Research Service and the Congressional Budget Office, among others, show that it is more demand that is needed, not continued tax savings for those at the top.

And so what is needed, Johnston goes on to explain, is a tax policy that puts capital back to work.

So how to make capital more valuable? Let us turn here to an observation made in the middle of the 19th century:

Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.

Those words come not from Karl Marx, but from the first State of the Union address given by that most famous of Republican presidents, Abraham Lincoln.

And the way to do that, he goes on:

The way to build demand right now is to work on tax policies that bring balance to our economy. That means hiring more teachers, not firing 300,000 of them. That means increasing real wages, not using government tax and regulatory policies to suppress them. It means raising taxes on those who make the most to get money circulating.

All very sensible. He wrote it with the United States in mind, but it seems equally applicable in many other countries today. And, in a final note of humility, Johnston (who is not connected to TJN) asks for suggestions as to how to act on these insights. JohnstonsTake@tax.org

More on fairness in economics: Ha-Joon Chang

Following our blog on economics and fairness yesterday, we thought we should point to another article on a similar theme by Ha-Joon Chang, the Cambridge economist whom Martin Wolf has called "probably the world's most effective critic of globalisation" (and his 2008 book Bad Samaritans is well worth reading.)

He points to some indisputable facts which somehow got overlooked in the growth of ideology over the past four decades.

"After three decades of deregulation and tax cuts for the rich, growth has slowed down, rather than accelerated, in almost all countries. The world economy, which was growing at about 3% in per capita terms in the "bad old days" of widespread regulation and punitive taxation for the rich in the 1960s and 70s, has grown at about half that rate in the last three decades. In Britain, average annual per capita income growth rate was 2.4% in the 60s and the 70s, when the country was allegedly suffering from the "British disease"; but it fell to 1.7% during 1990 to 2009, after it is supposed to have been cured of the disease thanks to Margaret Thatcher's heroic struggle in the 1980s."

Just another reminder of how badly most of the economics profession has fallen.

Can economics re-discover fairness?

Back in 1981, some researchers decided to do some experiments on "free-riding" - the process by which people take advantage of not paying for public goods, even though they benefit from it. Their conclusions were quite surprising:

Summarizing most of the results seems ridiculously easy: over and over again, in replication after replication . . . People voluntarily contribute substantial portions of their resources - usually an average of between 40 and 60 percent - to the provision of a public good. This despite the fact that the conditions of the experiment are expressly designed to maximize the probability of individualized, self-interested behavior.

That seems remarkable. First of all, it would be useful to repeat this experiment today, to get a sense of how far our culture has become corrupted by the "free-riding-is-OK" mentality that pervades current discourse, as evidenced by media praise for business folk of all kinds who get rich not by producing genuinely innovative new products, but by avoiding taxes or finding other ways to game the system.

But here is another strange result from the research.

"There was surprising unanimity of thought regarding what was considered fair. Using all subjects except the economics graduate students and [another group], more than three out of four thought that ‘about half’ or more of a person’s resources should be contributed, and more than one out of four thought people who were fair would contribute ull of their tokens."

Again, remarkable. But unpacking one detail from that paragraph:

Comparisons with the economics graduate students is very difficult. More than one-third of the economists either refused to answer the question regarding what is fair, or gave very complex, uncodable responses. It seems that the meaning of ‘fairness’ in this context was somewhat alien for this group. Those who did respond were much more likely to say that little or no contribution was ‘fair’.

This is important - as the blog that led us here (via FT Alphaville) explains, economists try to behave like scientists whereas what they are studing is a social science.

"If you push a pendulum a few times it doesn’t suddenly start avoiding you but if you prod a human hard enough they’ll start taking the long way home or bring their big friend with them next time. People are reflexive, they change what they do based on their experiences and this is the great problem of the social sciences. Economics of course, solves this by basically pretending to be something else."

The entire economics profession is currently flailing around for a Plan B following the spectacular failure of predominant Chicago-centred thinking. Perhaps if they had worked hard to incorporate words like fairness, justice and morality into their papers, instead of filling them with impenetrable mathematics, the world would be a far better place. As our name implies, this is exactly what we are trying to do.

The billionaires backing the Tea Party - amended

Update: Note the amendment on Dan Mitchell, below

First of all, a shortened snippet from the New York Times:

Another weekend, another grass-roots demonstration starring Real Americans who are mad as hell and want to take back their country from you-know-who. . . . the avatars of oppressed white Tea Party America, Glenn Beck and Sarah Palin, [want] to “reclaim the civil rights movement”

which then cuts to the chase:

There’s just one element missing from these snapshots of America’s ostensibly spontaneous and leaderless populist uprising: the sugar daddies who are bankrolling it.

And?

Three heavy hitters rule. You’ve heard of one of them, Rupert Murdoch. The other two, the brothers David and Charles Koch, are even richer, with a combined wealth exceeded only by that of Bill Gates and Warren Buffett among Americans.

The New York Times gives a flavour of the kind of interests that lie behind the anti-tax Tea Party. First, read the New York Times article - it's an important and frightening piece. And if you think that is frightening, then try this one.

Finally, we thought we'd add a gratuitous photo of Sarah Palin, just to cheer everybody up.

Update 1: Dan Mitchell of the Center for Freedom & Prosperity has sent us a friendly email saying that they are not Koch-funded. CF&P are based at the Cato Institute and use their facilities, their contact lists, and ride on the back of Cato's Washington profile. The Cato Institute is Koch-funded (see this excellent article in the New Yorker on the "Kochtopus", also looking at the Tea Party, here). We're not convinced that Dan is telling the full story.

Update 2: we had a comment pointing to a tea party riposte to the NY Times article. The comment itself was too unpleasant to publish, so we deleted it, but nevertheless the riposte it pointed to is here.

Land value taxes: new UK push

Recently we blogged a well-informed article by Martin Wolf in the Financial Times about Land Value Taxes, which contained this memorable section:

"In 1984, I bought my London house. I estimate that the land on which it sits was worth £100,000 in today’s prices. Today, the value is perhaps ten times as great. All of that vast increment is the fruit of no effort of mine. It is the reward of owning a location that the efforts of others made valuable, reinforced by a restrictive planning regime and generous tax treatment – property taxes are low and gains tax-free. So I am a land speculator – a mini-aristocrat in a land where private appropriation of the fruits of others’ efforts has long been a prime route to wealth. This appropriation of the rise in the value of land is not just unfair: what have I done to deserve this increase in my wealth? It has obviously dire consequences."

Which goes a long way towards explaining, simply, why land value taxes are such a good idea. For more details, look at our recent edition of Tax Justice Focus. Now we have Andy Burnham, a high-profile British Labour Party member of parliament who is standing as a candidate for the party leadership, making this part of a political platform.

Today I am setting out a plan for a radical reform of the tax system. At its heart is a land value tax (LVT) – an idea so old-Labour it can be traced back to Thomas Paine. But it is also a plan that draws on the best instincts of New Labour.

The article outlines a set of particular features of land value taxation that he's interested in. We won't comment on most of that, which links it to the expenditure side of budgets, which isn't really our thing, and he supports abolition of the inheritance tax, which is very strange -- but we will say that this is, overall, a most useful contribution to the debate and the principle should be widely supported. And it should be widely supported around the world, as one element in a broader tax system.

Job Announcement: Executive Director, Tax Justice Network USA

Tax Justice Network USA has circulated the following job announcement

Job title: Executive Director

Location: Washington, D.C.


Summary of Role:

This is a leadership position, with the responsibility of building the momentum of the organization. Currently, the Executive Director will be the sole staff member.

Tax Justice Network USA is the national chapter of Tax Justice Network International http://www.taxjustice.net, presenting solutions for tax policy reform at the national and global levels through research and campaigning—which may include public education, policy discussion, advocacy, media, network building and partnerships.

Founded in 2002, Tax Justice Network International now has full-time experts in more than two dozen countries, plus an internationally recognized network of senior board members and advisors. It is by far the oldest, most experienced, and most highly focused non-profit spearheading the global campaign to clean up tax havens/secrecy jurisdictions.

The Executive Director is hired and supervised by the Tax Justice Network USA Advisory Board, together with the Executive Director of the Fund for Constitutional Government, the fiscal sponsor of Tax Justice Network USA.

Core Responsibilities:

* Campaigner/Organizer: Quality policy analysis and advocacy is provided by individual and organizational members of TJN-USA. The Executive Director will take that analysis and advocacy capacity and link it with grassroots organizations to effect successful campaigns to change the actions of the US government, including regulatory agencies, and corporations.

* Leadership for the organization: As envisioned by the Advisory Board, the Board of The Fund for Constitutional Government, and Tax Justice Network International, Tax Justice Network USA is a campaigning organization that combines excellent policy analysis with broad and energetic campaigners from the grassroots through to national policy makers.

* Strategic direction and implementation: The U.S. national chapter of Tax Justice Network’s success is essential in itself, as well as for the global success of international campaigns on tax justice. TJN-USA is an active and strategic partner within the TJN international network.

* Fundraising: It is essential that the Executive Director be a successful fund-raiser, with a strong and positive partnership with the Development Committee of the Board of Advisors. The Executive Director will define the annual operating budget, subject to approval by the Advisory
Board, and raise funds to support the budget.

* Media and Communications: Translate policy language to campaign language, while developing extensive media (TV, Radio, Print and Web) contacts to disseminate the agenda of TJN-USA.

* Staffing: Define staffing needs, subject to approval by the Advisory Board, and hire, train, and supervise personnel.

* General operations and administration: Initially, as the sole staff member, handling all day to day administrative tasks and organizing technical support and practical resources.

Qualifications:

Successful experience serving as an Executive Director or senior staff of a non-profit, development, policy, philanthropic, or advocacy-focused organization. The person must have successful fundraising, campaigning, management, and supervisory experience.

The position requires a minimum of five years experience and demonstrated expertise in the following areas:

* Experience raising funds for not-for-profit organizations of similar size and scope, from individuals, foundations and members, with annual budgets of at least $250,000.

* Experience in designing and leading national campaigns that bring together a wide range of grassroots activists, media, and policy experts to achieve genuine change in the actions and outcomes of government and/or corporations.

* Some knowledge of tax issues is essential, but detailed knowledge is not. The candidate must be familiar with and understand the significance of secrecy jurisdictions (i.e., tax havens) for poverty and policy in the US and internationally.

* Strong and dynamic leadership, able to motivate “unlikely partners” to achieve a common goal.

* Exceptional verbal and written communications skills.

* Experience in fostering a highly dynamic and collaborative work environment, involving staff, volunteers, network members, and campaign activists.

* Commitment to the values and vision of the Tax Justice Network.

Compensation: Salary and benefits package are dependent on experience.

Some travel will be required.

This is an “at will” hiring.


Tax Justice Network USA is an Affirmative Action/Equal Opportunity Employer.

Qualified persons are encouraged to apply regardless of their religious affiliation, race, age, sex, sexual orientation or disability.


Application Process: Qualified applicants should send a cover letter and résumé to: info@fcgonline.org



Closing Date: Applications reviewed on a rolling basis until position filled.

Columbia's Fred Mishkin exposed for promoting Iceland's "prudential regulation"

We have previously blogged on Iceland's precipitous financial collapse, and linked through to American organisations pushing their toxic anarcho-capitalist agenda in that country. Now check out this link which explores the contribution of Columbia University's Fred Mishkin. Embarrassingly for him, just before the financial crisis washed over Iceland, Mishkin penned a rather ill-conceived report on financial liberalisation in that country claiming that "prudential regulation and supervision is generally quite strong" on the basis of absolutely no research or in-depth analysis, and failing to register that the report was funded by the Icelandic Chamber of Commerce - whoops, not the first time we find senior academics and / or business schools failing to declare potential conflicts of interest. Do watch the video link here and watch Mishkin fail to answer the questions about his professional conduct.

Many factors have contributed to financial and economic crises around the world. With a few honourable exceptions, academic economists have played their own shabby little part, imposing an intellectual straitjacket on debate and failing to understand the limitations of their petty theories which seldom have even the remotest link to human realities. It is frightening that people like Mishkin ended up directing the Federal Reserve.

UBS - Delays prevent Swiss from meeting deadlines agreed with the IRS

The Swiss government has announced that it has examined the dossiers of over four thousand UBS clients suspected of committing tax evasion offences in the United States, but they have only transmitted their findings to the US authorities for around half of the examined cases.

Under the terms of the administrative agreement agreed between Switzerland and the US in August 2009, criteria were established for proceeding with an administrative assistance request submitted by the Inland Revenue Service. This included a requirement that the Swiss Federal Tax Authority examines 4,450 UBS client dossiers and issue decisions in respect of releasing each dossier before the agreed deadline of 26th August 2010.

Procedural delays arising from a court decision in January 2010, which concluded that the agreement between the Swiss and US authorities was illegal, hampered the FTA's process, and in an attempt to head of the threat of a John Doe summons brought against UBS the Swiss government are now aiming to finalise the outstanding decisions before the year end.

Within Switzerland the controversy over the decision to cooperate with the US tax authorities, and the subsequent Parliamentary vote over-ruling the January court ruling, continues to divide opinion, with many people fearing that this case, the largest client information sharing exercise with a foreign tax authority, has caused irreparable harm to Switzerland's legendary banking secrecy. We'd like to think so, but only time will tell confirm whether banking secrecy is a thing of the past.

Finns use Estonia for tax evasion

Investigators in Finland have uncovered extensive abuse by directors and owners of companies registered in Estonia. Research has revealed around 16,000 holders of Finnish social security cards with positions of responsibility in Estonian registered companies, many of which evade taxes and other statutory payments.

According to this article, Estonian companies can be registered over the internet, with no obligation to visit Tallinn or demonstrate any physical presence in the country. Unsurprisingly, using Estonian registered companies has become popular in the construction sector, which is prone to tax fraud because Estonian firms are not liable to pay Finnish tax or social security on projects lasting less than six months.

Sixth Session of the UN Tax Committee

The Sixth Session of the UN Committee of Experts on International Cooperation on Tax Matters will be held in Geneva, Switzerland, from 18th to 22nd October, 2010. You can download the provisional agenda here.

Despite the extremely dry tone of the matters under discussion, this Committee is a crucial part of securing international cooperation to combat tax injustices, tackle environmental degradation and reduce poverty. The Committee was formed in December 2003 in the wake of the Monterrey Consensus report on financing development, which highlighted the need for poorer countries to give greater emphasis to mobilising their own domestic resources.

TJN will have a team in Geneva to observe the process and we will report on some of the key issues, not least the proposal to strengthen the capacity of the secretariat that serves the Committee which, given the importance of these issues, remains woefully under-resourced.

Dan Mitchell on why tax havens are good things

In conversation with this blogger in Washington last year, Dan Mitchell of the Center for Freedom and Prosperity confessed that he has never worked in a real job outside the Beltway. This clip shows Dan doing what he does best . . .

Why the USA beats Switzerland on financial secrecy

Global Financial Integrity's Heather Lowe discusses TJN's financial secrecy index results:

Tony Blair and the tax haven bank for the super-rich

Britain's Sunday Times newspaper is reporting this morning that former prime minister Tony Blair is involved in setting up a boutique bank for very high net-worth individuals (ultra Hen-Wees) with branches in a number of secrecy jurisdictions, including Luxembourg and Liechtenstein. You can purchase access to the article here.

Postscript: The Financial Times on Monday carried an article in which staff from Mr Blair's private office describe the Sunday Times article as "fatuous". We hope to know the truth in due course. Involvement in tax havenry would cause huge harm to Mr Blair's international reputation.

French anti-tax evasion blitz yields €700 million

A few days ago we blogged an article by a prominent French politician rejecting proposals for a tax amnesty. Now comes news that French anti-evasion tactics are making life a great deal less comfortable for tax evaders. As this interview with the OECD's Pascal Saint-Amans reveals (sorry, its only available in French), recent anti-evasion efforts have yielded over €700 million in just a few months, sending strong signals to French evaders that this national sport has become a great deal less fun.

Similar tactics are being used in Italy, where the Guardia di Finanza has launched investigations into over 2,000 wealthy Italians who are suspected over owing around €2 billion of evaded taxes between them. This summer tax inspectors have been knocking on the doors of villas up and down the coastlines in an effort to make life just a little less comfortable for wealthy people who have become adept at the art of exploiting Italy's regular tax amnesties, which serve little purpose other than to feed the average Italian's cynicism about the tax regime.

Elsewhere in the interview Pascal claims success in the OECD's programme to strengthen tax information exchange processes, but such claims must be treated with scepticism. Despite the flurry of activity last year when secrecy jurisdictions rushed to sign tax information exchange agreements to achieve the OECD's ludicrously low threshold, there is no evidence that these pieces of paper have increased judicial cooperation, and according to Jersey's Colin Powell, secrecy jurisdictions will not be revealing data about volumes of information exchange. In the absence of such data, it will be very hard for the OECD to demonstrate that substantial progress has been made.

WANTED - Platonic Guardians for a New Era of Capitalism

Capitalism v3.0 - the crisis-ridden era ushered in by Britain's Margaret Thatcher and the USA's Ronald Reagan - was declared dead and buried in the wake of Lehman Bank's collapse. Which means the search is on for a blueprint for Capitalism v4.0, and economist Anatole Kaletsky has joined the ranks of those looking for signs of what this brave new era might look like.

In the following review of Kaletsky's new book, Michael Prowse explores his ideas and, amongst other matters, suggests that Kaletsky ducks on possibly the most important issue: the role of progressive taxation in redressing the unacceptable inequalities created by monopolistic market structures.

Here is Prowse's fascinating review of Kaletsky's book:

According to Anatole Kaletsky most pundits have got the global financial crisis of 2007-09 dead wrong. They have confused cyclical and structural forces.

In Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis (PublicAffairs, 2010), he argues that the recent recession was just a typical financial bust exacerbated by gross policy errors. The main factors propelling global growth before the downturn – one billion extra Asian consumers and producers, globalisation, financial innovation and sensible macroeconomic policies – will soon reassert themselves, and the global economy will enjoy a fairly robust recovery. It is nonsense, he claims, to believe that we have entered a new era of permanently subdued growth, as suggested by commentators such as Mohamed El-Erian of Pimco.

Financial bubbles reflect excessive investor optimism, Mr Kaletsky readily concedes. But we should also remember that sometimes the underlying prospects really are pretty impressive. The South Sea Bubble did not presage British economic collapse but was rather a mere hiccup in its march to global financial dominance. The same was true of capitalism’s first bubble: following Tulipmania (when bulbs not yet germinated sold for the price of Amsterdam townhouses) 17th century Holland enjoyed a century of economic pre-eminence.

But Capitalism 4.0, as its intriguing title indicates, is much more than a contrarian analysis of the recent financial crisis and a withering critique of Henry Paulson’s policy errors. Mr Kaletsky also offers an “evolutionary” interpretation of capitalism, a powerful critique of the “new classical” economic paradigm that prevailed before the crisis, and a sketch of capitalism’s future, which he calls “Capitalism 4.0” because he regards it as the fourth major phase in capitalism’s development. (The decimal point reflects his view that each phase has various sub-divisions.)

Mr Kaletsky brings much relevant experience to this ambitious agenda. He has been an economics correspondent and columnist for more than 30 years and is currently The Times of London’s principal economic commentator. He is an active participant in financial markets through his stake in a Hong-Kong based hedge fund. And along with George Soros, he was instrumental in setting up the New-York based Institute for New Economic Thinking (INET), a nonprofit created to promote and finance new research programmes in economics – and especially those that avoid the methodological flaws of new classical economics.

Capitalism 4.0 is not without flaws. I would have liked to see his ferocious condemnation of public policy balanced by some criticism of the behaviour and values of leading figures in the banking industry. They could have acted more responsibly even if the regulatory system was poorly designed. But Mr Kaletsky doubtless believes, as does his colleague, Mr Soros, that it is pointless to criticise people for exploiting available opportunities.

His solution to financial market excesses is simply tighter regulation in the public interest. He argues that because governments must always stand behind banks, the taxpayer should be understood as a “silent shareholder”. It is thus politically legitimate to regulate bankers’ salaries to prevent the misappropriation of what are, in effect, quasi public assets. And he argues that this should apply as much to a private firm such as Goldman Sachs as to a partly nationalised bank such as Royal Bank of Scotland.

But setting aside his reluctance to criticise bankers, the virtues of the book vastly exceed its flaws. At its best, Mr Kaletsky’s polemical writing is very fine indeed: his argumentative style and love of paradox make the book an enjoyable as well as an enlightening read.

In what follows, I will briefly review four of Mr Kaletsky’s main themes: his doctrine of capitalism as an evolving adaptive system; his analysis of the causes of financial crisis of 2007-09; his critique of orthodox economic theory; and his sketch of capitalism’s future, which involves a new approach to both economic theory and public policy.

It is wrong, Mr Kaletsky argues, to regard capitalism as something static and unchanging. He identifies three main phases in capitalism’s development. Capitalism 1 ran from 1815 to 1930. The sacred text was Adam Smith’s Wealth of Nations and the dominant view was that economics and politics are distinct spheres: meddling with the iron laws of the market was generally frowned upon.

The Great Depression ushered in the next phase of capitalism – Capitalism 2 – which lasted until the stagflation of the late 1970s. The sacred text became Keynes’s General Theory and the dominant view was that government interventions are highly desirable and can nearly always improve on crude market outcomes.

Capitalism 3 – which persisted until 2007 – was the child of the Reagan-Thatcher conservative revolution of the early 1980s. The sacred text was Milton Friedman’s Capitalism and Freedom and the dominant view was that markets produce optimal outcomes and that governments should intervene as little as possible. Hence the stress on privatisation and tax-cutting, as well as the refusal to place any meaningful restraints on financial markets.

Conservative economists try to pretend there is only one valid form of capitalism – the unregulated markets of the early 19th century. Mr Kaletsky insists that capitalism is constantly evolving. His biological analogy has rhetorical rather than scientific force: there is no environment in which one version of capitalism competes against others for survival. So no form of natural selection can operate.

I would restate Mr Kaletsky’s doctrine as follows. Private property and contract are necessary conditions for any form of capitalism. But democracies can choose to add a wide variety of other rules that modify the operation of markets. They can also restrict the domain of markets to a greater or lesser degree, by funding activities through taxation. These choices – and hence the form that capitalism takes – change over time in response to a wide range of social, cultural and political forces.

Mr Kaletsky regards the severity of the recent global downturn as largely due to unforced policy errors, particularly in the US. He condemns Mr Paulson, the former US Treasury Secretary, for bailing out Fannie Mae and Freddy Mac on unexpectedly harsh terms that expropriated shareholders – and sovereign wealth funds in particular. Thereafter Lehman Brothers was at the mercy of short-selling speculators and had no prospect of finding a private saviour. Yet, blinded by his market fundamentalist ideology, Mr Paulson refused either to guarantee Lehman’s deposits and liabilities or to provide fresh capital at taxpayers’ expense.

He thereby set in motion a “doomsday machine”. Depositors’ and investors’ losses following Lehman’s inevitable bankruptcy destroyed trust in the viability of every major financial institution across the globe. It was the ensuing month of financial paralysis that sent the world economy into a quite unnecessary freefall. But had Mr Paulson recognised that governments have a responsibility to quell banking panics, akin to their responsibility for civil order, the mayhem could have been avoided – just as it was in the Latin American banking crisis of the 1980s when the major western banks were technically even more insolvent than in 2008.

What was wrong with the pre-crisis economic orthodoxy? Just about everything, in Mr Kaletsky’s view. He takes the quasi Marxist view that academia tends to produce the kind of theories that endorse the ideology of ruling elites. So it was no surprise that the conservative political revolution spawned “new classical economics” - a doctrine that held that markets are always efficient and always close to equilibrium, and that individuals and firms are always rational maximisers of utility or profit. Politicians didn’t want to intervene so economists obligingly told them it would be counter-productive to do so. In the different political climate of Capitalism 2, equally obliging economists reached opposite conclusions.

But what made the school based on rational expectations and efficient markets unique was its attempt to look sophisticated (and thereby impress policymakers and investors) by relying on complex mathematics. Real mathematicians, such as Benoit Mandelbrot, a pioneer in chaos theory and complex systems, repeatedly exposed the pretensions of the new classical school. Even before the 2007 crisis, three “statistically impossible” events had rocked Wall Street and other markets: the abrupt 1987 crash, for instance, was clearly not the product of a random walk. During the dark days of 2008 statistically impossible events were happening every other week.

With hindsight it appears that a sports field of Nobel laureates in economics had failed to understand the obvious (even though Keynes pointed it out 70 years ago): the economic future is as radically unpredictable as any other kind of future. One cannot assign probabilities to the unknowable; one cannot banish uncertainty by assuming Normal distributions. Given this basic reality, markets are inevitably fallible. “Efficiency” in the economists’ sense is a property of their models, not of reality.

So what kind of theories, and what kind of policies, are likely to characterise Capitalism 4, the new capitalism that Mr Kaletsky hopes and believes is rising from the ashes of market fundamentalism?

So far as pure theory is concerned, Mr Kaletsky is disappointingly vague – but then he can hardly be expected to create a new theoretical paradigm from scratch. This is the task that has been delegated to the Institute for New Economic Thinking that his friend George Soros is financing. INET will help young academics challenge orthodox ideas by sponsoring research in promising areas, such as imperfect knowledge economics and complex systems. As Max Planck remarked of physics, new ideas gain traction “one funeral at a time”.

In the public policy domain, the watchwords for Capitalism 4 will be pragmatism, experimentation and trial and error. As described by Mr Kaletsky, the new capitalism appears to be a Hegelian synthesis of Capitalisms 2 and 3, with a pinch of Darwin for seasoning. He reckons the knowledge that markets are not infallible will be empowering: henceforth policy makers will have the courage to intervene whenever markets appear to be generating outcomes that are unreasonable in the light of broader public goals. They will jettison the dogma of Capitalism 3, which held that no intervention is justified unless a specific market imperfection can be identified.

Mr Kaletsky anticipates an “adaptive mixed economy”, in which the public and private sectors recognise their mutual inter-dependence. There will be no return to either the “government knows best of Capitalism 2” or the “market knows best of Capitalism 3”. Instead, governments will assess markets on a pragmatic case-by-case basis, recognising that some need much heavier regulation than others. In place of Capitalism 3’s obsession with price stability, governments and central banks will recognise the need for multiple objectives in the economic domain (just as they do in foreign policy and criminal justice). They will openly promote employment and economic growth and cooperate more vigorously with their international partners to ensure that currencies are reasonably valued.

Mr Kaletsky is an unashamed optimist. Amid gloomy talk of double-dip recessions, Capitalism 4.0 makes uplifting reading. If there is a flaw in his vision of democratic capitalism’s future, it lies in his unbounded confidence in bureaucratic discretion. Like many very intelligent people, he thinks it is always possible to improve on any rule, precisely because no rule can anticipate every eventuality. But in the realm of practical politics, will a “partnership” between the public and private sectors work as well as he expects? Will civil servants exercise their discretionary powers to promote economic outcomes as wisely as he hopes? Will they be able to distinguish reasonable from unreasonable outcomes?

If Capitalism 4.0 is to succeed, many of the brightest and best of the next generation will have to devote themselves to public service (just as occurred after the Keynesian revolution of the 1930s). The world will need more Platonic Guardians and fewer Masters of the Universe. But given human nature, I fear this would require something that Mr Kaletsky does not support: far more progressive taxation. I think it would also require a revival of ethical values, a belief in public service for its own sake. Yet nowhere in this book does Mr Kaletsky even hint at how we might encourage the altruistic values on which his vision of capitalism implicitly depends.

Divided we stand - the UK government's conflicted position on tax avoidance

Two articles in the Financial Times this week point to possible divisions of opinion within Britain's coalition government on tax avoidance.

The first relates to concerns among Liberal Democrats, the junior coalition partners, over the appointment of retail magnate Philip Green as adviser on public spending efficiency. Green, whose flamboyant lifestyle stands polar opposite to the low-income households who will bear the brunt of spending cuts, caused considerable controversy in 2005 by paying his Monaco-resident wife a £1.2 billion tax-free dividend. Scarcely surprising then that Liberal Democrat members of parliament are restless about the signals that his appointment sends out at a time when the coalition government is trying to shore up its claims to be promoting "fairness" (a word rapidly becoming worn out by over-use).

The second article reports that Her Majesty's Revenue and Customs have decided to take a "less combative approach" in their dealings with corporate tax avoiders. The argument goes that this stance is "designed to cut a mounting legal logjam and unlock billions of pounds tied up in court battles over avoidance", but in conversation with this blogger one senior revenue officer claims that the change reflects the Conservative Party's proximity to big business, which came under increased pressure from the previous administration to pedal backwards on aggressive tax avoidance.

Green's appointment and the softer message on corporate tax avoidance suggest that, whatever the rhetoric, the government intends to be soft on tax avoidance and soft on the causes of tax avoidance. As the red ink spreads across British public finances in the coming years, this matter is likely to become a major faultline within the coalition.

Quote of the week - Paul Krugman

" . . . the fearmongers are unmoved: fighting deficits, they insist, must take priority over everything - everything, that is, except tax cuts for the rich, which must be extended, no matter how much red ink they create.

The point is that a large part of Congress, large enough to block any action on jobs, cares a lot about taxes on the richest 1 percent of the population, but very little about the plight of Americans who can't find work."

Paul Krugman, Nobel Prize winning economist
From 'US governing elite doesn't care about unemployment' Observer, 15th August 2010

Lies, damn lies, and FDI in the Philippines

The Asian Tax Seminar was held in Antipolo City 7-9 August, in the hills overlooking the endless foggy urban sprawl of Manila. This seminar, hosted by Action for Economic Reforms (AER), and Jubilee South Asia Pacific Movement on Debt and Development (JS-APMDD) was the first of its kind targeted specifically at civil society participants, to share tax advocacy and research experiences.

Among the heated discussions, came up the issue of Foreign Direct Investments (FDI), in which already the inward-orientated investments cost the country 1% in GDP in 2004. Cristina Morales-Alikpala from Action for Economic Reform (AER) mentioned that FDI is “the game as it is being played now”, and in this game the Philippines is disadvantaged due to rampant corruption and poor infrastructure.

The Philippines is experiencing historically low tax effort (tax per GDP) levels, mobilising only 13% in tax per GDP in tax revenues, a dramatic fall from it’s peak a decade earlier when the ratio reached 17% in 1997, just as the Asian Crisis hit the country. Surely there is capacity to collect more taxes in a country that is categorised both as mineral wealthy, and middle-income.

But why should the Philippines “sweeten” the deal by giving a whole host of tax incentives? For most investors, it seems that tax incentives are not the central issue when deciding on the location of investments. A recent study by Chai and Goval at the IMF mentions that the cost of tax incentives outweight the benefits in the Caribbean states. Similarly, in Central America, Cabnera from ICEFI have published similar findings, on how incentives outnumber social spending in Guatemala and Nicaragua.

Incentives are also readily abused, and here the official literature is mostly blind on the issue. The Board of Investment (BoI) and the Philippines Export Processing Authority (PEZA) have large discretion on handing out incentives, and they also end up giving them to companies who sell to domestic markets, thus undercutting local producers. In Ghana, it was found that 72% of forestry turnover at the Kumasi tax office was under Free Zone status, while forestry doesn’t qualify for incentives. The TJN Ghana Report mentions that

“Yet, the more glaring reason for low tax payments is that six of the fifteen firms, accounting for 72% of turnover, were registered as Free Zone companies, and are thus not liable for any tax at all.”

Why does the Philipino Government play the FDI Game if provides little in benefits and is open to abuse?

The Philippines received US$1.9 Billion in FDI, which is dwarfed by the US$ 17 billion it received in remittances from the estimated 10 million Overseas Filipino Workers (OFW), representing 22% of the total work force. Rex Varona, from the Asian Migration Centre, argued that better policies for the overseas workers would make these remettances more productive, investing in co-operatives and by-passing expensive middl-men like the Western Union and MoneyGram.

And what about the US$ 1.9 Billion figure, how much of this is “round-tripping” where a Filipino pretends to be an overseas investor, by establishing a company in Singapore or the British Virgin Islands. A pity the National Statistical Coordination Board (NSCB) doesn’t provide FDI statistics on-line, so we had to dig elsewhere.

A paper by Balboa and Medalla we can deduce that a staggering 15.1% of Philipino FDI between 1998 and 2003 comes countries known uniquely as Secrecy Jurisdictions (British Virgin Islands 2.8%, Hong Kong 5.9%, Singapore 6.4%), while a total of 38.5% of FDI came from countries that offer secrecy services (adding on the Netherlands 6.4%, USA 11.7%, UK 5.3%). The largest FDI source was Japan with 25%.

UNCTAD in its blindness to secrecy jurisdictions, is facing increasing criticism for not telling anything behind the FDI statistics, which are often taken at “face-value” whereas when you put FDI to the “secrecy jurisdiction” test, you get a wholly different picture.

So what are the most enduring effects of Foreign Investment in the Philippines? Well – it must be the Jeepneys! Originally brought by the US Military in the Second World War and abandoned and sold off after the war, and adopted as popular mini-busses that are a pride of the Philippines. There are currently several domestic producers from small workshops of recycled vehicles, to industrial facilities now rolling out electric Jeepneys and adapting the Jeep to new designs from Toyota people carriers to Humvees.

If technology transfer were the point of FDI, then best support local manufacturers and stop subsidising foreign firms.

No to a French tax amnesty

Today's edition of Les Echos (a French financial newspaper) carries a comment by Michel Hunault (Deputy in the National Assembly) hitting back at suggestions made earlier this month that France should follow the Italian example of offering a tax amnesty to encourage repatriation of offshore capital.

M Hunault, a lawyer and rapporteur on money-laundering and corruption, argues that at a time of almost unprecedented financial crisis, which in part is due to the complexity and lack of transparency of financial markets, offering such an amnesty will undermine progress towards tackling the black holes in the financial markets:

" . . . a tax amnesty would have a disastrous effect, at the very moment when the next G20, under the French presidency, should be reinforcing and amplifying measures to tackle these black holes."

We couldn't agree more. Past experience of tax amnesties has shown that they have limited impact in terms of encouraging capital repatriation and - as the Italians have demonstrated - achieves little in the war against tax evaders. Far more can be achieved by targeting a number of high profile tax evaders in an organised and determined way, and (as M Hunault comments) by strengthening measures to tackle opacity in the financial markets:

"So France doesn't need a tax amnesty, on the contrary she should give priority, along with her European partners, to creating a proper framework for judicial cooperation and better coordination of instruments to control the global markets."

A proper framework for judicial cooperation includes a multilateral treaty process for tax information exchange along the lines of the existing European Union savings tax directive, which provides for automatic information exchange. The existing directive, which came into force in 2005, is under review and will hopefully be extended to include a wider range of income types and to cover legal persons (companies, trusts, etc) in addition to natural persons.

By agreeing a tax amnesty at this stage, less than half a year before he assumes the G20 presidency, Nicolas Sarkozy will send out a devastating message about his commitment to tackling the black holes of international finance. It is also likely to cause immense political damage in France. As Michel Hunault concludes: "Proceeding with the folly of a tax amnesty could well lead to a social fracture from which our country might never recover." Strong words, but French people are acutely aware of the centrality of tax to the social contract, and they have the courage and commitment to defend these abstract ideals. Vive la France!

Newsweek ranks Finland number one country

Finland, Finland, Finland
The country where I quite want to be
Your mountains so lofty
Your treetops so tall
Finland, Finland, Finland
Finland has it all, Finland has it all
(Monty Python)

Newsweek magazine has confirmed that there's more to Finland than lofty mountains and forests. In its newly published country ranking Finland topped the list with an overall score of 89.3 (Switzerland - another country with lofty mountains and forests - came second with a score of 89).

Rather than relying on the crude measurement of gross national product (with all the perversities that arise from including activities that very frequently reduce rather than increase human well-being), Newsweek has undertaken a massive research exercise, with an advisory board including globally renowned specialists, comparing performance across such matters as healthy life expectancy, access to education, unemployment rates, family income inequality, homicide rates, economic diversification and innovation. You can see the full list of indicators here.

Success is never based on a single factor, but it is clear that those countries which invest most heavily in developing their social capital -- that is their people -- perform far better than those that invest less. Social inequality also matters. And it is no coincidence that Nordic countries perform so much better than some of their European and American counterparts. The former use their high tax revenues to invest heavily in education, infrastructure and social security.

Monty Python's memorable lampoon of Finland missed out on the crucial ingredient: despite the grumbles of some tax-payers (and the tax avoidance industry), tax is a vital ingredient of national success.

Enhancing domestic resource mobilisation in Sub-Saharan Africa

A recent conference at Wilton Park addressed the largely neglected issue of domestic resource mobilisation in Sub-Saharan Africa. Tax Justice Network argues that domestic resource mobilisation should be the core of development strategies for most countries, but common sense has been in scarce supply in recent decades, largely pushed to one side to make way for the tax-cutting and privatising agenda of big companies and the western governments who serve their interests. So this conference was a welcome event, and we are pleased to report that the outcome document is now available online here.

Domestic resource mobilisation refers to giving priority to making efficient use of the savings and investments of households, domestic companies and local and national governments. It stands in contrast to the excessive focus on trying to attract external investment (known in the development jargon as Foreign Direct Investment) which must be lured into the country by a combination of tax breaks, subsidies and lax regulation. Needless to say domestic resource mobilisation carries a number of significant advantages, not least since it is more likely to serve the needs of local populations and less likely to engage in aggressive tax avoidance. Also, unlike foreign aid (another source of external investment) it doesn't involve undemocratic interference in decision-making processes.

Domestic resource mobilisation was given a boost by the 2002 Conference on Financing for Development, held at Monterrey in Mexico, which placed this issue as the first of the six "leading actions" of the famous Monterrey Consensus. This Declaration was one of several factors that motivated the creation of TJN, which recognises that attempts by poorer countries to mobilise domestic resources are frequently thwarted by illicit outflows of capital and related tax evasion. Greece and Pakistan serve as stark warnings of the consequences of allowing wealthy elites to shift their assets offshore and tax evade, with inevitable impacts on the economy and society more generally.

In the case of Sub-Saharan Africa, despite some limited progress in the past decade, the majority of countries are largely unsuccessful at mobilising domestic resources. Although they raise approximately eleven times more revenue from taxation than they receive in overseas aid, a significant proportion of these revenues originate from oil or other natural resources. Overseas aid exceeds taxation in a quarter of African countries, and for half of the countries in the region it constitutes over a third of government revenue. Obviously there are many reasons for this failure, but illicit financial flows and tax evasion are particular problems for countries that rely heavily on extractive industries and commodity exports.

TJN and several of its members participated at the Wilton Park conference, which was jointly organised with the North-South Institute, and included fascinating case study material from Burundi, Cameroon, Ethiopia, Tanzania and Uganda. You can download the conference programme and the papers given at the conference here.

The outcome report is available here.

Report on FIFA's dark side is a winner

Congratulations to our friend and colleague Khadija Sharife, a South Africa-based investigative journalist, for the following citation from the Sidney Hillman Association:

Winner: Khadija Sharifeend_of_the_skype_highlighting, for a penetrating look at the dark side of the Federation Internationale de Football Association (FIFA) — the “non-profit” governing body of international soccer which earned $3.3 billion from this year’s World Cup.

More about FIFA's tax-free World Cup bubble here.

Pakistan: Tax system needs beefing up

The scale of the catastrophe in Pakistan has revealed massive shortcomings in that country's capacity to respond to emergencies. A significant part of the problem lies with Pakistan's woefully inadequate national tax system. But contrary to comments by UK Development Minister Andrew Mitchell on BBC's Today programme this morning, introducing VAT is not the answer: priority needs to be given to tackling endemic tax evasion, unnecessary tax exemptions, and the complete absence of a tax on land values.

Responding to the interviewer's question about concerns that Pakistan's rich elite pay little or no tax at all, undermining the country's public finances and exacerbating the appalling inequality between Islamabad's elites and the vast majority of the population, Mr Mitchell agreed that "in the medium term Pakistan needs to address this fact, there is no VAT for example, the taxation system needs to be beefed up."

The case for beefing up the tax system is unarguable: the administrative weaknesses of the current system are a national disgrace (and as you can read here, we are not the only people to have noted this). But to impose a Value Added Tax on an already highly impoverished society is not the answer, especially since this is more likely to worsen an already untenable situation as legions of micro-businesses react to the new tax by shifting to the informal sector. The correct response is to strengthen direct taxation, especially on the wealthy land-owning elites who dominate Pakistan's quasi-feudal society. Introducing land value taxation and strengthening tax compliance among rich people and companies should be the medium term priorities.

China's Rich Have $1.1 Trillion in Hidden Income

From Bloomberg:

China’s households hide as much as 9.3 trillion yuan ($1.4 trillion) of income that is not reported in official figures, with 80 percent accrued by the wealthiest people, a study showed. The money, much of it likely “illegal or quasi-illegal,” equates to about 30 percent of China’s gross domestic product, the study, conducted for Credit Suisse AG and published last week by the China Reform Foundation, found.

Global Financial Integrity found a very high share of its illicit flows figure coming out of China:

"Asia accounts for approximately 50 percent of overall illicit financial flows (Charts 6 and 7) from developing countries and normalization of the estimates does not significantly alter this picture. The large volume of illicit outflows from China (mainland) is behind Asia’s dominance in overall illicit financial flows from developing countries."

Capital gains taxes - more effective than people thought

There has been much huffing and puffing about capital gains taxes, with opponents of taxes on the wealthy arguing that raising capital gains taxes doesn't work - because wealthy folk will find ways around them. So, the argument goes, the best thing to do is cut them. There is a hoary story about the so-called Laffer Curve, which is a rather more academic way of saying the same thing. We have laughed at Laffer several times in the past (see here, for instance, or see Martin Wolf's opinions on this, or Paul Krugman's even more wonkish case against the Laffer arguments.)

New evidence is now emerging from the Congressional Research Service of the U.S., which shows that even the U.S. government forecasters have been bamboozled. And they were wrong to do so:

The revenue gain from allowing the capital gains tax to rise could be up to twice as much as that projected by the JCT for FY2019 if the smaller responses estimated in more recent studies were applied. It is reasonable to expect revenue gains of $28 billion, rather than the $13 billion likely to be projected by JCT if they maintain their current realizations response assumptions, and the gain is unlikely to be less than $18 billion.

(The rest, unfortunately, is even more jargon-filled.)

Malaysia asked to drop Labuan from tax treaty

Back in the 1970s U.S. corporations used to avoid taxes wholesale by setting up financing units in the Netherlands Antilles, which were covered by a U.S. tax treaty with the Netherlands. It was a shambolic affair of questionable legality, but a lot of tax was avoided as a result. Now we see something interesting happening on the other side of the world:

"The Korean government is moving to exclude Labuan from a tax treaty with Malaysia as part of efforts to prevent any attempts to evade taxes through the island, which is well known as a tax haven for global investors. Seoul and Kuala Lumpur are currently having talks in Seoul to modify their bilateral tax treaty, which was established in 1983."

A good idea. The Korea Times continues:

"According to the Financial Supervisory Service (FSS), Malaysians invested a total of 964.8 billion won in the local stock market in 2009. They also spent 2 trillion won buying local bonds in the same period. The FSS said 95 percent of those investments were based on Labuan, and a significant portion of those investments came from paper companies, which aim to evade taxes."

A much better idea -- which would help ordinary Malaysians, Koreans and the citizens of a range of other countries - would be for Malaysia to abandon this entire, crooked, abusive set-up.

Tax from the front lines in Greece

In March of this year Greek Prime Minister George Papandreou said:

"To give you just one measure of the scope of that problem: Fewer than 5,000 Greeks declare incomes of EUR100,000 or more," he said. "And that pattern must end, and it will end."

Now, courtesy of Reuters, here is a very fine story looking at the new Greek fight against tax evasion, from an insiders' perspective.

According to Eurostat, when you exclude social security contributions Greece has the lowest tax revenue-to-GDP ratio in the euro zone, at 20.4 percent. The black market makes up close to a third of the country's 240 billion euro economy, compared with 27 percent in Italy and 15 percent in Germany, according to the most recent estimates by the World Bank.

Now, as part of its 110 billion euro rescue deal with the European Union and the International Monetary Fund (IMF), Greece has vowed to go after tax dodgers and end what the IMF has called "wide tax evasion and corruption.

The success of this effort will go a long way to determining Greece's financial future. The country's top commercial bank, National, believes better collection could boost revenues by up to 9 billion euros a year, equivalent to 3.8 percent of its GDP, or more than a third of the sum Athens has pledged to lop off its budget deficit over the next four years.

But it's not just about finance. The Socialist government hopes toughening up on taxes will not only stave off the threat of sovereign default, but also transform the political and economic relationship between the state and Greece's 11 million citizens. "We are called today to stage a revolution," Prime Minister George Papandreou told a conference on the island of Crete on July 30. "To turn the crisis into an opportunity for changes that have been needed for decades."

Read on. And apologies for the thin posts of late. It is the holiday season.

Telling Swiss secrets: A banker's betrayal

An excellent and atomspheric update on the UBS case in the United States.

“Birkenfeld must be considered among the biggest whistle-blowers of all time,” wrote the editors of Tax Notes, the arcane but influential industry journal, in a column naming Birkenfeld its “Person of the Year” for 2009. “He single-handedly made 2009 the year in which the world finally got serious about cracking down on tax evasion.”

Well, the "world" is not remotely getting serious enough on tax evasion yet, and the outlook is decidedly less rosy than many have suggested, but Bradley Birkenfeld, the star is a hugely significant figure.

Big Four Accountants: Where 4 Art Thou?

From Tax Research:

This paper considers the role of the Big 4 firms of accountants - PricewaterhouseCoopers (PWC), Deloitte, Ernst & Young (E&Y) and KPMG – in the creation of the offshore secrecy space.

Part 1 shows that secrecy jurisdictions deliberately create opacity in financial data, and multinationals exploit this to create opacity in their financial reporting.

Part 2 develops the concept of the ‘secrecy space’ which combines the opacity of secrecy jurisdictions with the opacity found inside group consolidated accounts of multinational corporations.

In Part 3 the role of the Big 4 firms of accountants in this process is questioned.

It concludes that over many years a tangled and connected web has developed linking the opacity of secrecy jurisdictions, transfer mispricing and other commercial tax abuse by multinationals, the existence of the Big 4 as auditors of those corporations.

A useful addition to the literature.

The road to serfdom is lawlessness

For anyone with a few minutes on their hands, they might read this article - whose headline nods to the famous anti-government book by Friedrich Hayek - which contains nothing very new but is a very well written first-hand account of how deregulation corrupts governments - in great contrast to those who argue that government is bad, so you should deregulate and let people get on with it.

Tightening up on the intermediaries - an update

In 2008 we blogged a determination by the New York State Bar Association, which said that lawyers should not counsel or assist clients in conduct they know to be illegal or fraudulent "in New York or any other jurisdiction." (We did a re-run of this yesterday on the Financial Task Force blog.)

That last part in parenthesis is crucial - for it addresses a common offshore loophole - helping someone else commit an illegal act in a foreign jurisdiction may not be illegal in the home jurisdiction. This loophole has allowed tax haven intermediaries to assist foreign criminality, fraud and other illegality, with impunity. The New York State Bar Association, to its credit, disagreed.

David Spencer, who originally brought this to our attention, now provides an update. Since that determination was issued by the New York State Bar Association, New York has adopted the relevant provision of the American Bar Association Model Rules of Professional Conduct, which reads, in the relevant part, as follows:

"A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law."

In other words, the "in any other jurisdiction" clause remains valid, which is a good thing, but the but the professional ethics rules in New York State are now narrower because they now refer to "conduct that is criminal or fraudulent." (To be clear -- "illegal" included civil law and criminal law.)

What we now need to see, far more widely around the world, is professional associations - be it lawyers, accountants or whatever - being directly asked specific questions like this: notably whether a local practitioner, in assisting offshore illegality, is engaging in local illegality.

In fact this ought to be one of the great questions of our globalised age. And yet who ever asks it?

Another day, another British bank scandal

Yesterday it was the Royal Bank of Scotland. Today it's HSBC, through its U.S. arm. As ABC News reports:

"These examinations and inquiries pertain to, among other matters, our global banknotes business [TJN: which sends notes around the world on behalf of clients] and our foreign correspondent banking business [which settles cross-border banking business], and our compliance with the Bank Secrecy Act, Anti-Money Laundering and Office of Foreign Assets Control requirements," the filing said."

Well this sure does look like offshore business. And, depending on the outcome, dirty business. British banking does it again.

Information exchange: outlook bad but a glimpse of sunshine

A while ago we pointed to a study by Misereor that had concluded, on the subject of double tax treaties (DTTs) and tax information exchange agreements (TIEAs), that

Only 6 percent of DTTs show a signature of a Low Income Country (with an even smaller participation of 3 percent for Least Developed Countries). The situation with TIEAs is even worse: There is no single LIC (leaving aside LDC) as signing party of any TIEA documented on the OECD website. . . . While G20 and OECD are promoting DTTs and TIEAs as centrepieces of a global standard on transparency and cooperation in tax matters statistics show that poor developing countries are simply left out in this picture. How these countries should get access to “the benefits of a new cooperative tax environment” (G20 London Summit) according to the recipes of the G20 and the OECD remains an open question.

Well, the pattern remains broadly the same - but occasionally better things do happen. This story from South Africa's Sunday Times reports that:

"Guernsey, Jersey, San Marino, the Cayman Islands, the Bahamas and Bermuda aren't going to be much help keeping your earnings - legitimate or otherwise - hidden from the tax collectors of the SA Revenue Service. MPs heard that tax information exchange agreements (TIEAs) are to be signed with all five, and that once signed the main benefit to those who keep their money there - secrecy - will be gone."

This is a great exaggeration - the agreements will be under the OECD's flawed "on request" standard of information exchange - which means you have to know what you are looking for, before you ask for it. On a case by case basis, each agreement is better than nothing, but taken from a global systemic point of view, it is probably worse than useless because it allows governments to claim that something is being done, while allowing business to carry on more or less as usual. Read more about all this here.

Still, the latest agreements contain some things that are to be welcomed, beyond the fact that we are talking about a major developing country here. The Sunday Times continues:

"The agreements extends exchanges to taxes of every kind and description: "Not only income but also consumption taxes such as VAT," Van der Merwe said. The information shall be exchanged whether or not the requested party has a domestic tax interest in it or even whether conduct being investigated would or would not be a crime under its laws.

The laws of the former tax havens should allow for the exchange of information held by banks, other financial institutions and any person including nominees and trustees acting in an agency or fiduciary capacity. It should also include information regarding the legal and beneficial ownership of companies, partnerships, foundations and other persons - including in the case of collective investment schemes, information of shares, units and other interests, and in the case of trusts, information on settlers, trustees and beneficiaries. "It is really wide," said Van der Merwe.

The agreements will also allow representatives of the requesting country - i.e. the SARS investigators - to be present at interviews being conducted in the requested country. They won't conduct the interviews, but they will be there.

This all looks useful. This is also curious - Guernsey asking to learn from South Africa:

"Guernsey made a special request for a clause to be included in their agreement for the parties to agree to exchange technical know-how, develop new audit techniques, identify new areas of non-compliance and jointly study non-compliance areas. "They were anxious to benefit from our expertise in these areas," Van der Merwe said."

According to South Africa's Business Report:

According to Sars official Ron van der Merwe, there are a few other similar agreements in the pipeline.

Interesting developments.

Offshore lobbying gathers pace

From Reuters

"The Channel islands of Jersey and Guernsey are setting up a diplomatic mission in Brussels for fear their representation to the European Union will be marginalised by a cash-strapped British government."

This is a seriously dangerous move. These islands have been protected and promoted by the City of London, via the British government that it influences, since even before the Suez crisis of 1956 which marked the inflection point at the end of Britain's formal empire.

"The diplomatic mission, which opens in September, marks the islands' first overseas representation and is a step towards taking control of international relations from Britain. It is also a rare example of the two statelets working together.

"It's an indication of a step towards greater autonomy and that's probably a recognition of the fact that the Channel Islands are becoming increasingly mature and capable of looking after themselves and running their own operations," Le Sueur said.

The City of London Corporation already has a well-financed permanent lobbying effort in Brussels. This is going to worsen the problem of democratic nation states trying to protect their sovereignty from offshore abuse. And it gets worse

"If the Brussels mission proves successful, the islands may set up offices in Washington and elsewhere, said Le Sueur, whose post of chief minister is equivalent to prime minister."

Jorg Haider, Libyan loot, and Liechtenstein

This time it's the late Austrian leader Jorg Haider. As Der Spiegel reports:

Investigators have found shell companies in Liechtenstein which apparently belonged to the late right-wing populist politician Jörg Haider. The accounts reportedly have 5 million euros in them, a fraction of the 45 million they originally contained. There are suggestions the cash could have come from Libyan leader Moammar Gadhafi.

And, as noted on the Financial Task Force blog:

"The revelation has sparked interest in Austria to reform party donations laws, which require parties to “report donations higher than 7,260 Euros to the Federal Audit Office (RH) – but do not face consequences if they fail to do so.” But I’m not sure Austrians are asking the right question.

Strengthening consequences of this legislation would not address the root problem—the financial secrecy enabled by Liechtenstein. Such a law would not prevent the next Haider from setting up shell accounts and accepting political contributions from the next Qaddafi. Or rather, at the rate Qaddafi is going, he could be the corrupt contributor all over again."

North Korean dirty money and tax evasion: two rails in the same system

From the Washington Post:

A top U.S. nonprofileration official outlined a plan Monday to penalize North Korea by choking off the international network of companies and banks that largely fund its nuclear weapons program and the lifestyles of its elite."

This follows our recent blog about North Korea and the complicity in these crimes of secrecy jurisidctions such as Luxembourg.

Now, we turn to Raymond Baker's 2005 book Capitalism's Achilles Heel:

“Laundered proceeds of drug trafficking, racketeering, corruption, and terrorism tag along with other forms of dirty money to which the United States and Europe lend a welcoming hand. These are two rails on the same tracks through the international financial system."

U.S.Treasury officials told Baker that in a good year they caught 0.1 percent of the illicit inflows
into the country—a 99.9 percent failure rate. A Swiss central banker told him his country’s record was probably worse: 99.99 percent. To try to tackle terrorists’ financing or the looting of African treasuries without tackling tax evasion by western companies and individuals, is to set yourself up to fail.

As we said in a recent Ukranian blog on a different but related matter. . . go figure.

Property prices: right diagnosis, wrong medicine

A commentator from the Policy Exchange in the UK is writing in the Financial Times about property prices, an emotive issue if ever there was one. Prices are too high, he says - and he is right:

"For a cash-strapped government the costs (of high property prices) should be obvious. Expensive houses mean bigger wage demands from public sector workers. They have also pushed up the housing benefit bill by £8bn since 1997, while blocking people from leaving social housing, doubling the waiting list and locking many families in dependency. Rising prices have also choked off a right-to-buy programme that used to generate billions in revenues.

For individuals the cost is less obvious, but no less real. Property prices are embodied in everything you consume. The sandwich you buy at lunchtime costs more if the person who made it has to pay higher rent. Furthermore, rising house prices transfer wealth from poor to rich, and from the young to the baby boomers."

Indeed. But then he veers off in completely the wrong direction. The answer, he says, is to liberalise housing laws so that people can build anything, anywhere, any time. (Well, he's a bit more circumspect than that, but not much.)

No, the biggest part of the answer lies here. And just think of all that lovely tax revenue that would come with it.

NYT: the art of tax war

This New York Times piece comments on efforts to repeal part of the Bush tax cuts, and begins with:

As Sun Tzu observed about 2,500 years ago, “All warfare is based on deception."

Indeed. The article is well worth reading, but we shall point out merely to this, about our good friends CTJ:

"In my view, Citizens for Tax Justice, which describes itself as an advocacy group that strives “to give ordinary people a greater voice” against the “armies of special interest lobbyists for corporations and the wealthy,” offers the most specific and well-documented analysis of the two competing approaches to the Bush tax cuts, those of President Obama and the Congressional Republicans. Unfortunately, it doesn’t seem to have gotten much attention from the news media.

I’m not sure whose fault that is, and if Sun Tzu were alive today, I’m not sure whom he would be working for. But it’s pretty clear that the Republicans would offer him a higher salary."

And, as a reminder, it points to what we blogged recently:

"In a counterattack, a group called Business and Investors Against Tax Haven Abuse has released a report arguing that corporate tax havens provide an unfair advantage to large chain retailers and financial companies over locally owned retailers and community banks."

Good to see this stuff getting noticed. And we'll end with this little tidbit:

"Apparently Goldman Sachs, taking brilliant advantage of offshore tax havens in 2008, paid federal taxes at an effective tax rate of 1 percent, proffering a sum less than one-third what it paid its chief executive, Lloyd Blankfein."