Britain's regulator calls much of City "socially useless"

Lord Turner, head of Britain's Financial Services Authority (FSA) has long been regarded as something of a lame duck: Private Eye calls it the "Fundamentally Supine Authority". For too long it has been seen as supporting the City of London - that state within a state - in its race to be lower than everyone else in terms of lax regulation and tolerance of criminality.

Now, in an interview in Prospect Magazine (not yet on the web) he has said the FSA should

"be very, very wary of seeing the competitiveness of London as a major aim."

And, The Guardian reported,

"Lord Turner described much of the City's activities as "socially useless" and questioned whether it has grown too large."

We have been saying this for years -- indeed this was one of our main themes since we launched, but the idea, it seems, is now becoming mainstream, and not only in Britain. Even a year ago, Ken Rogoff, former IMF chief economist, said the world was suffering from

"an excess supply of financial services"

and this was followed last May by an excellent column by Martin Wolf of the Financial Times, containing phrases such as

The UK has a strategic nightmare: it has a strong comparative advantage in the world’s most irresponsible industry
. . .
In the years leading up to the crisis, that influence was surely malign: the “light touch” approach led the way in a regulatory race to the bottom.
. . .
A recent report on the future of UK international financial services, produced by a group co-chaired by Sir Win Bischoff, former chairman of Citigroup, and Alistair Darling, chancellor of the exchequer, fails to provide such self-examination. This is partly because the committee consisted of the industry’s “great and good”. It is far more because Mr Darling had already decided that “financial services are critical to the UK’s future."

Could the tide be turning? We are sure that it will be, up to a point, but we should never underestimate the enormous stranglehold of power that the City of London and its secret guardian in the corridors of power - the Bank of England - have always held on the British state. This is absolutely no time for complacency, and Britain will need help from its foreign friends - with the judicious application of pressure - to help ordinary British people break this stranglehold.

What is to be done? Martin Wolf has one answer:

So how should one manage a sector that produces such “bads”? The answer is: in the same way as any polluting activity. One taxes it”.

And this, as it happens, is also what Lord Turner is now proposing - if a little timidly:

"If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit. Higher capital requirements against trading activities will be our most powerful tool to eliminate excessive activity and profits.

And if increased capital requirements are insufficient I am happy to consider taxes on financial transactions – Tobin taxes."

Now there is an idea. TJN is generally favourable towards Tobin taxes, although we haven't made it a central theme of ours, partly because others are already ably doing so. James Tobin's original and famous "sand in the wheels" article from 1978 is here, and it contains a number of things that could have been written by TJN, had it existed then. Such as:

"the mobility of financial capital limits viable differences among national interest rates and thus severely restricts the ability of central banks and governments to pursue monetary and fiscal policies appropriate to their internal economies. Likewise speculation on exchange rates, whether its consequences are vast shifts of official assets and debts or large movements of exchange rates themselves, have serious and frequently painful real internal economic consequences. Domestic policies are relatively powerless to escape them or offset them.
. . .
There are two ways to go. One is toward a common currency, common monetary and fiscal policy, and economic integration. The other is toward greater financial segmentation between nations or currency areas, permitting their central banks and governments greater autonomy in policies tailored to their specific economic institutions and objectives. The first direction, however appealing, is clearly not a viable option in the foreseeable future, i.e., the twentieth century. I therefore regretfully recommend the second, and my proposal is to throw some sand in the wheels of our excessively efficient international money markets.
. . .
The proposal is an internationally uniform tax on all spot conversions of one currency into another, proportional to the size of the transaction."

The Tobin tax is a currency tax, though the economist Dani Rodrik recently, commenting on Tobin's 1978 speech, added this:

"How about generalizing this idea to all securities transactions, domestic as well as international? If leverage--short-term debt--is a big part of the problem, isn't taxing it an important part of the solution?"

Now that makes sense. Hold on a second, however, for there are already nay-sayers about. The FT has this:

“This isn’t on the table,” said one government official. “If Adair Turner has views on tax policy, perhaps he should go and work in the Treasury.”

and The Guardian adds:

"Finance industry figures agreed that a Tobin tax would be complicated to implement and unlikely to be agreed by countries keen to protect rival financial centres."

Why can't these people see the obvious flaw in their own argument? The flaw is this: that they have a starting point that says that what is good for the financial services industry is good for Britain. As most people have come to realise, it isn't good for Britain. The result has been vast taxpayer losses, Dutch Disease effects, a drain of some of Britain's best minds into "socially useless" (though we'd prefer to say "socially desctructive") jobs, and almost the highest levels of inequality in the OECD.

Clearly the financial services industry - or at least one this size - isn't at all good for Britain. So a unilateral tax, without international agreement, is clearly a good idea. A properly implemented tax policy would flush all the dirty, dangerous and destabilising elements of financial services -- including much of the "casino part" - away from Britain, leaving it with the socially useful, mostly "utility" bits that everyone needs and benefits from.

International co-ordination on this would certainly be welcome, but we don't need to wait for it. Get cracking right away with regulating and taxing this sector appropriately, and Britain, on the whole, will be so much the better for it.

* * * And finally - some comments under the Guardian article -- which we love:

1. "If you will permit me to speak frankly, the answer to the question "why does a financial exec pay himself so much?" is the same answer to the question "why does a dog lick its private parts?" Because it can."

2. Responding to a comment that "The big winners from this will be Swiss, German and Dutch bankers." Which is very different, of course, from claiming that the big winners from this tax will be the Swiss, the Dutch and the Germans.

Quite so.

The Robin Hood Tax: an all-round winner

Today sees the launch of a new campaign calling for a Robin Hood Tax on financial transactions. TJN strongly supports the principle of this tax, especially when applied to currency transactions.



The idea of taxing financial transactions is not new. American economist James Tobin (pictured) mooted the proposal back in 1971, largely in the context of seeking ways to protect currencies - not least Sterling - from speculative attack by traders. Famously, Tobin described the proposal as a means of putting "grains of sand in the wheels" of international finance.

Sadly, at the time his ideas were supplanted by the defeatist ideology of those who argued that governments "can't buck the markets", paving the way for the largely de-regulated, free-for-all situation that has prevailed since that time. The disastrous consequences of this failure to shape markets to serve the public are now clear to even the most myopic.

But the idea of a Tobin Tax was revived and refined in the late 1990s in response to the frightening social and economic impacts of the financial crisis in south-east Asia, which rapidly spread to Russia and on to Latin America. Sadly, complacency amongst OECD countries meant that little was done at that time, but civil society has stayed with the idea, making transaction taxes a core demand of the coalitions that have formed around the World Social Forum, including Tax Justice Network.

The time has come for governments to adopt Tobin's idea, preferably in the form suggested by Paul Bernd Spahn, who has proposed a two-tier system which applies a normal rate at a very low level, backed by a surcharge rate which could be deployed during periods of speculative attack. This proposal has the merit of not impairing international market liquidity, but puts in place a mechanism that deploys automatically to stabilise market volatility. It might also raise significant additional revenue in a wholly equitable fashion, and without the need for a complex collection machinery.

In other words, an all-round winner.

Financial Transactions Taxes: new task forces (+ Stiglitz)

Our colleagues in Paris have informed us of some important developments coming up. But first, from Britain's Daily Telegraph:

"Although economist James Tobin said his idea of a small tax on every foreign exchange transaction, in order to reduce financial sector volatility, was unfeasible in practice, Professor Stiglitz said modern technology meant that was no longer the case.

Prof Stiglitz, in Istanbul for talks on the fringes of the International Monetary Fund and World Bank meetings, said the tax is “much more feasible today” than a few decades ago, when Tobin recanted.

Last week IMF managing director Dominique Strauss-Kahn said the Fund was now working on plans to create a tax or “insurance fund” into which financial services groups should pay to mitigate the effects of this and future crises. However, he said a simplistic Tobin tax was impossible for technical reasons."

and he added:

"He said that any new tax should be levied on all asset classes – not merely foreign exchange – and would be based on the gross value of the assets, thereby helping to discourage the creation of asset bubbles."

In this light, we now understand that a conference on Financial Transaction Taxes (FTTs) is now planned for October 22 in Paris, as the set-up point for a new task force on FTTs. The task force is expected to meet three or four times between now and June 2010, at ministerial or official level France's Foreign and Finance Ministers agree on the principle of a tax too (as do the Germans), and many others.

The discussions in Paris are currently envisaged on two main kinds of taxes: first, regulatory taxes (Tobin taxes, as advocated by Lord Turner), aimed at curbing "socially useless" (or, more accurately, harmful) speculative activity, of the order of 1%; and second, financial taxes, at much lower rates (e.g. 0.005%) aimed at financing development.

The task force is expected to take input from civil society, banks, and so on.

Credit to the French for pushing forwards on this. Watch this space.

Linking Climate Justice to Tax Justice

The Center for the Advancement of the Steady State Economy is carrying an article on its website by James Henry (TJN-USA) and Brent Blackwelder (Friends of the Earth) advocating two forms of Tobin Tax to combat the 'financial pollution' caused by (a) speculative activities on the wholesale foreign exchange markets, and (b) personal wealth held offshore and almost entirely untaxed (think of the possible headlines: "Kim Jong-Il to pay for climate change costs!")

The authors propose that these taxes would be levied as a 'climate change surcharge', linking climate justice to tax justice. Read on, and let us have your reactions.

14th March 2010

Two "Robin Hood" Taxes for the Price of One

Linking Climate Justice to Tax Justice

Co-authored by James S. Henry, economist, lawyer, and author of The Blood Bankers (Basic Books, 2005) and Dr. Brent Blackwelder, president emeritus of Friends of the Earth

The subject of taxes certainly isn’t the most riveting topic for cocktail party conversations. Most people don’t like thinking about the labyrinthine tax code or filling out convoluted forms. They certainly don’t enjoy paying taxes. But we believe that the time has come to reframe the debate on taxes and build up some popular passion and energy for a few basic adjustments to the tax code. With these simple, easy-to-implement changes, it turns out that we could move the economy in a direction that works much better for people and the planet, including a more stable climate.

We badly need to recapture the public discussion and debate on tax codes from the technical specialists and special interests, as well as the diehard anti-government reactionaries. The tax system is so critical to the functioning of any nation that as concerned citizens, it is essential for us to insist on making values like justice, fairness, and shared responsibility central to any political debate on this issue.

By framing all discussions of taxation with the jaundiced view that “politicians just want to raise your taxes,” critics have actually ended up promoting a tax system that rewards pollution and disproportionately exempts the wealthy from paying their fair share. Since more careful discussions of tax policy have become taboo, governments have ended up being deprived of revenues that are essential to provide services. Thus, the anti-government forces have created a vicious, self-perpetuating cycle: their programs to curtail revenues have often crippled government programs, helping, in turn, to reinforce the notion that government can’t get anything done.

The issue of government revenues has come to the fore as developing nations have tried to grapple with climate destabilization. Quite reasonably, they’ve been asking for assistance from the wealthy nations that, over the long haul, have undeniably been the biggest contributors to the problem, to help them pay the costs of adaptation.

The huge Copenhagen climate summit in December failed to achieve breakthrough results to reduce greenhouse gas emissions, but it did result in a pledge by the U.S. Secretary of State, Hillary Clinton, for $100 billion per year in climate adjustment assistance to poor countries by 2020. The actual amount required may turn out to be even larger, but if we start early and build up a reserve fund, we can be prepared – much like insurance. And the good news is, there is a way to obtain such large sums even in today’s difficult economic climate, while simultaneously helping to clean up and stabilize the global financial system.

The tragic earthquake in Haiti, although not caused by climate destabilization, graphically illustrates the sheer magnitude of physical and monetary magnitude of relief and adaptation measures that scientists predict may well be needed by poor nations as the earth’s climate is disrupted.

Our revenue plan involves two very modest, complementary transnational “climate change surcharges” on groups that not only could readily pay them, but also richly deserve to pay them: major banks and their superrich, often tax-dodging global corporate and individual clients.

The first component is a variation on the well-known “Tobin tax” on foreign currency transactions, originally suggested by Keynes in the 1930s. The version of the Tobin tax that we are proposing would be even less intrusive. It would only apply to wholesale foreign exchange transactions, not to retail customers. Nor would it really be an international tax, imposed on countries by some faceless OECD bureaucracy. Each country signatory would agree to introduce legislation to adopt its own national version of a “model” tax. Each country’s own tax authorities would be responsible for collection and enforcement. Given the astonishing $4 trillion per day of such transactions, a tax of less than a dime per $1,000 of transactions would yield at least $50 billion per year. A similar low marginal tax rate on all international financial transactions, including stocks, bonds, options, and derivatives, could readily collect at least twice that amount.

The second new revenue stream that we propose is an “anonymous wealth” tax. This involves levying a modest 0.5% annual “climate aid” withholding tax on the estimated $15 to $22 trillion of liquid private financial assets — bank deposits, money-market funds, mutual funds, public securities, and precious metals — that we and other analysts have estimated now sit offshore, almost entirely untaxed, in anonymous accounts, trusts, and foundations. This tax could raise at least $25 billion to $50 billion per year.

Furthermore, the administration of all these “private banking” assets is heavily concentrated in the hands of a comparative handful of leading First World banks, including all of the key players in the wholesale currency market, as well as the leading players in the recent financial crisis, and the largest recipients of “too big to fail” assistance.

This means that the anonymous wealth tax and the transactions tax complement each other neatly. The first one addresses the huge stock of undisclosed offshore wealth and income that has fallen through the cracks, while the other addresses the ongoing speculative activity that has been fueled by the accumulation of all this restless, internationally mobile private capital. From an administrative standpoint, major international banks, the “systems operators” for this highly problematic global financial industry, are perfectly positioned to help clean up its “bads.” In that sense, we can view these two modest taxes as “financial pollution” taxes, which will help to compensate the rest of us for bearing the costs and the risks of easy tax avoidance and excessive speculation.

In sum, we believe that these two modest tax proposals constitute a bold new potential solution to the problem of paying for climate adaptation, and a way of linking “climate justice” to “tax justice.” They not only are administratively and politically feasible, but most important, they also happen to be the right things to do on ethical grounds.

Administrative feasibility. This year the G20 and the IMF have already had very serious discussions of several variations on the Tobin tax, and just this week the European Parliament passed a resolution supporting it. Nevertheless, for reasons that are unclear, the U.S. Treasury Department and White House economists have been resisting. Apparently the economists are concerned about “market efficiency,” while the Treasury is still concerned about Wall Street.

These concerns are overblown. Of course all taxes interfere with perfect markets to some extent, but no one except radical anarchists are proposing that we all return to the mythological Eden of a tax-free world. This is especially true in a world with highly imperfect markets, where facts of life like imperfect information, excess financial speculation, financial crimes, ineffective law enforcement, and pollution often justify tax policies that offset these market imperfections.

The question in any real world situation is always whether the revenue generated is worth the price of any extra inefficiencies. We believe that in the case of our two specific proposals, the revenue gains dwarfs the inefficiency, if any. For example, in the case of the .005% levy on all wholesale and interbank foreign currency transactions among major currencies and cross-currency derivatives, such a tax could be implemented at very low cost, with limited opportunities for evasion. The wholesale foreign exchange market is already completely electronic, and highly concentrated. Indeed, in 2009, for example, more than 60 percent of all trading was handled by just five global banks — Deutsche Bank, UBS, Citigroup, RBS, and Barclays. This growing market generated over $4 trillion of transactions per day, more than twice the volume in 2004.

Similarly, in the case of the withholding tax on anonymous offshore wealth, the top 50 private banks in the world have more than $8 trillion in private financial assets under management, and another $4 to $5 trillion in assets under custody. Indeed, the top 10 alone account for nearly half of this amount. So long as the taxes were implemented uniformly across anonymous customers, it would be simple for these institutions to levy .5% annual withholding taxes on these assets.

Political feasibility. In principle, the revenue plan proposed here should be by far the most politically pain-free way of fulfilling Secretary Clinton’s Copenhagen climate aid pledge. It concentrates the costs on a very tiny, privileged group that is supremely able to afford them — the world’s wealthiest 10 million people on a planet with 6.8 billion humans.

From this angle, this proposal should attract widespread support from religious congregations and other nongovernmental organizations that are concerned about equity and global development. It should also attract support from national tax authorities, law enforcement agencies, and homeland security agencies that continue to see a large share of proceeds from international tax evasion and the underground economy slip through the cracks, despite their best efforts. Of course it should also attract support from environmental groups, and from public officials who are concerned about finding ways to pay for essential government activities without going deeper into debt.

Finally, this proposal could gain traction from the public outrage over the lingering effects of the financial crisis and the taxpayer bailouts that have been received by wealthy financial institutions that were “too big to fail.”

Moral justification. The moral foundation of this proposal is the idea of combining “global climate justice” with “global tax justice.” Global climate justice reflects the polluter pays principle — the judgment that it is fundamentally fair for rich countries to pay for most of the costs of adapting to climate change, since they have been overwhelmingly responsible for greenhouse gas emissions in the first place.

The concept of “global tax justice” reflects the judgment that it is fundamentally fair for the financially wealthiest citizens and corporations in both poor and rich countries alike to pay at least some taxes on their worldwide incomes and/or wealth to support their home countries.

One key source of the trillions in private funds that we propose to tax is underreported capital flight — money that is secreted offshore and invested abroad beyond the reach of domestic tax authorities. A second major source is under-taxed corporate profits and royalties that have been parked offshore in tax havens by way of rigged transfer pricing schemes. A recent report by the charity Christian Aid estimated the annual cost of these transfer pricing schemes to developing countries, in terms of lost tax revenues, at $160 billion per year. A third source is the myriad illicit activities that constitute the global underground economy — corruption, fraud, insider trading, drug trafficking, “blood diamonds,” and innumerable other big-ticket, for-profit crimes.

The ownership of the trillions in untaxed financial wealth is incredibly concentrated. At least 30 percent of all private financial wealth, and nearly half of all offshore wealth, is owned by world’s richest 91,000 people — just 0.001% of the world’s population. The next 51 percent is owned by at most 10 million people, comprising only 0.15% of the world’s population. About a third of all this offshore wealth has been accumulated from developing countries, including many of the largest “debtors.” And almost all of it has managed to avoid any income or estate taxes, both in the countries where it has been invested and the countries where it originated.

Tax policies are at their best when they provide the right incentives, secure funding for needed public goods and services, place the burden of payment on the right parties, and make progress toward a more equitable society. The proposed “Robin Hood” taxes on anonymous wealth and foreign exchange transactions meet all these criteria, and they are easy to administer. They are precisely the kind of progressive tax changes that we should all be happy to discuss, even at a cocktail party.

Links - Nov 17

A few stories noticed today. Plenty more are available from Offshore Watch and TJN's historical news page.

What has the Tax Justice Network done?
Richard Murphy takes an overview of some of TJN's recent achievements.

Swiss Bank Executive Charged with Aiding U.S. Taxpayers Evade Income Tax
Nov 12. From the US DOJ web site.

Please sign up
We the undersigned petition the Prime Minister to Abolish Tax Havens, Enact Tobin Tax & Reform CAP for an end to poverty world-wide. (Not instigated by TJN.)

Mauritius, tax haven
Uncovering truth behind the fine words about Mauritius' business climate.

Libyan televised debate signals change
Muammer Gaddafi, their ruler, was debating with disapproving senior government officials his grand plan to distribute the proceeds of oil wealth directly to the people and abolish government ministries. See also here.

Blast from the Past: A Proposal for Monetary Reform
This paper is Prof. Tobin's presidential address at the 1978 conference of the Eastern Economic Association, Washington DC. It was originally published in the Eastern Economic Journal, Volume IV, No. 3-4, July/October 1978, pp. 153-159.

US hedge fund bosses threaten to move to Britain
Several times Soros broke ranks with his colleagues to adopt a more accommodating line. He said he would have no objection to paying a standard rate of tax on all his income: "I agree to it. I've no problem with it." Also see Soros warns of hedge fund horror to come

Bernard Kouchner Calls for Currency Transaction Tax

The French foreign minister surprised his audience, and not least the British, in the annual meeting of the Leading Group on Innovative Finance for Development, by proposing to implement the Currency Transaction Tax (CTT).

"I promise you, and our country, France, is ready to assist a pioneer group of States in applying this type of tax which was already adopted in our parliament in 2001. So it is possible to implement such a measure, which could perhaps be applied to the European market initially." - (English communiqué is found here)

The comment went around like wildfire in the French press, where the finance minister Christine Lagarde, politely replied in Le Monde that the tax "isn't currently being investigated", while the minister for development Alain Joyandet supportive of the tax said on the RFI radio that the tax would bring in an extra $30 to $60bn in additional annual resources to meet development targets.

The proposed tax would apply to all currency transactions in participating currencies at a rate of 0.005% of the value of the transaction, or half a basis point. It is a market that has a daily estimated volume of $4tr (yes - trillions), while the last BIS estimate from 2007 places the volume at $3.2tr. This by all standards is an enormous tax base.

Banks of course will argue that they are already taxed on their overall profits, and therefore taxing currency (or for that matter any financial transactions) is taxing twice. This is besides the point, as taxation needs to apply where taxable rents are found, and taxation applies companies already at different stages.

Certainly a tax of $50bn would not just eat to the margins of the banks, it would be passed on to their clients who once again are not retail customers (making up only 2%), but hedge funds and other institutional investors. Taxing hedge funds especially should be seen as a good effort as some 70% of them are placed in offshore secrecy jurisdictions, and thus offer avenues for tax evasion.

There are at least three good reasons to support the CTT:

- Taxing currencies increases the transparency of the single biggest financial market in the world, forcing regulated settlement houses to be established and ending the opaque Over the Counter (OTC) trading. If information will be shared with tax authorities, it can be used as a proxy for spotting suspicious transactions ranging from criminal activities to tax evasion.

- If the tax raises an extra $50bn while mainly appying to the speculative markets it should be seen as an equitable one, in line with the redistributive function of taxation. Furthermore, if money is then given for developing countries as is promised, it would help ongoing Millennium Development Goals programmes as expendture "earmarking" is for a just cause.

- The CTT would open the road for further taxes in the financial sector, where we wholeheartedly support much wider financial transaction taxes, which could be used in every country to monitor the financial markets and raise domestic revenues. A bank transaction tax called the CPMF raised $20bn in Brazil alone, at a rate of 0.38% excluding the stock exchange, movements between two accounts of the same person, and social security benefits. Unfortunately the tax was voted down in December 2007, due to opposition's stance against it. To cover the shortfall the government raised other taxes in the financial sector, and reduced spending.

The CTT is often still seen as a Tobin Tax, which relates to another originally Keynesian idea of sanctioning "herding" behaviour in markets where traders follow a "rally", which led James Tobin to originally propose the tax on currency transactions at a rate of 1%. It is this idea that Mme. Lagarde is suspicious of, and rightly so as when herding occurs better measures (such as capital controls, or obligatory deposit requirements) can tackle the issue.

The CTT has the double function of raising revenues and improving regulation of financial markets through transparency. It is this lack of transparency that largely led us to the current financial crisis, and has contributed to previous currency crisis as bubbles build-up in secretive off balance sheet vehicles, and structured finance thrived in secrecy rather than its capacity to manage risk. Therefore, efforts towards taxing currency transactions should be supported.

Open letter to Senator Stuart Syvret

Dear Stuart

Your political capital must have hit a low ebb for you to feel the need to publicly state: “I have never been a member or supporter of organisations such as the Tax Justice Network and Attac and so on. I don’t agree with them. If we didn’t have the finance industry, we wouldn’t have an economy.”

Virtually everything about that statement is misleading, with the exception of your never having been a member of either organisation. You most certainly do support what both organisations represent. You do agree with the policy measures they propose at national and international levels. And to state that Jersey would not have a finance industry if international efforts to crack down on abusive tax practices were to succeed, or if a Tobin Tax were introduced, is to openly concede that the Jersey economy is based on supporting illicit activities which governments and multilateral agencies around the world recognise as harmful. Why, in the context of an exchange with a member of the public over issues of political integrity, did you see the need to distance yourself from your strongly held principles?

You and I go back a long way. You regularly consulted me when I was an economic adviser to the States. We sat together on the Arts Trust and I supported you when the crisis blew up over the Chairman’s foolish megalomania. I also supported you when you challenged the manner in which the Limited Liability Partnership law was introduced to the States; in fact I provided the evidence that proved Reg Jeune’s knowledge of his conflict of interest in that affair. You were a backbencher at the time, and you made it very clear to me – in your typically trenchant style – that you regarded the island’s tax haven activities as globally harmful. And as you know, you are the politician I refer to in my chapter of A Game As Old As Empire when I spoke about meeting with Andrew Edwards during his 1998 review of the regulation of the Crown Dependencies.

We have kept in regular touch throughout the past 9 years since I quit my job in Jersey and settled in the UK. You have frequently sought advice from me and my colleagues, some of whom rank amongst the top financial experts in their fields, and we have gone out of our way to provide analysis and advice. Neither fees nor publicity have been asked for or offered. Time and again we have provided the ammunition you have used so effectively in the States. Don’t delude yourself that other States members don’t know this. They do. But the public doesn’t, and it’s the public you seek to deceive. Why?

Over the years you have talked ceaselessly about the realpolitik of Jersey politics, which boils down to not rocking the boat on issues of real substance. History is littered with radical politicians who, having succumbed to the trappings of power, abandon principles and friends and go it alone in the deluded belief that they change the system from within. Charles Fox, for example, destroyed his reputation for political integrity when he was seduced into taking office alongside Lord North. Fox became the subject of ridicule and scorn. Your attempts to publicly distance yourself from your inner convictions risk turning you into a latter-day local version of Fox. It is time for you to come out and state publicly what you stand for on the important issues of the day.

I hope that you will respect the spirit in which this letter is written and look forward to your reply.

John Christensen

International News - Oct 17

** Also see here for a permanent list of past story summaries; and Offshore Watch for more stories. **

Highlight: TJN in the news - The Threat Lying Offshore
Oct 10 (TJN) - Today TJN's director, John Christensen and senior adviser Richard Murphy have co-authored an article on the comment pages of The Guardian newspaper, entitled: The threat lying offshore.

The threat lying offshore
Oct 10 (Guardian) - Tax havens will sabotage attempts to re-regulate global finance. Democracy demands we tackle them.

Capital flows: another threat from the secrecy world
Oct 10 (TJN) - As noted in our previous blog, we have just published an article on the comment pages of The Guardian newspaper, noting the threat that tax havens, or secrecy jurisdictions as we often like to call them, pose to the world.

KPMG Tax Shelter Case Heads to Trial, on a Smaller Scale
Oct 14 (NY Times) - Jury selection began on Tuesday in a closely watched tax shelter case once billed as the largest ever, but government prosecutors face a difficult road after a string of defeats in a proceeding that has been scaled back.

I.R.S. to Tighten Tax Oversight of Foreign Banks
Oct 15 (TJN) - The Internal Revenue Service is tightening up its oversight of foreign banks that sell offshore services to wealthy American clients, a move intended to stem what officials have called rampant tax evasion.

Tax Havens, Economic Aggression and the Race to the Bottom
Oct 17 (TJN) – TJN’s Bruno Gurtner - a paper on tax competition.

Executive Excess: how taxpayers subsidise executive pay
Oct 15 (TJN) - Average U.S. taxpayers subsidize excessive executive compensation — by more than $20 billion per year — via a variety of tax and accounting loopholes. A new report.

Ireland's tax rates: guest blogger
Oct 15 (TJN) - Ireland decides to keep its abusively low tax rates intact.

Britain’s toxic fiddling
Oct 15 (TJN) - The British government undermines efforts to achieve global governance in favour of the poor.

French Prime Minister attacks tax havens
Oct 15 (TJN) - French Prime Minister François Fillon that he wants tax havens or "black holes" as he calls them, to "disappear" as a first step towards reforming the international financial architecture.

The anomaly of nationalised banks
Oct 14 (TJN) - UK opposition spokesman points out that banks receiving investment from the government to close their operations in offshore tax havens. "It seems totally inappropriate for banks funded by the taxpayer to be systematically avoiding British tax or helping customers to do so.”

TJN in the news - again
Oct 7 (TJN) - There has been quite a flurry of tax justice commentary, and mentions of our network, in the newspapers and on TV recently.

Dirty money goes Dutch
Oct 7 (TJN) - We have been alerted to an interesting article in de Volkskrant, the major left-of-the-centre newspaper in the Netherlands. It is in Dutch, but you can find a (slightly comical but more or less comprehensible) automatic translation of it here; the original article in Dutch is here.

Tax is where the environment was 10 years ago
Oct 8 (TJN) - The headline to this blog is a direct quote from Jeffrey Owens, quoted in an FT story in November 2004. It is a long and detailed story, quoting TJN on several occasions, dating from November 2004.

Switching to the barbarians
Oct 8 (TJN) - Just added to our quotations page: a comment from the 5th Century. Rather interesting in light of current market turmoil, what has preceded it, and what might come after (which we worried about in our last blog).

On extending public ownership
Oct 8 (TJN) - A few weeks ago you would not have seen sentences in the Financial Times even hinting at public ownership. How times change.

Gazprom and bean-counters without a conscience
Oct 9 (TJN) - Edward Lucas has an interesting piece in the FT about Russia's geo-political ambitions.

A Facebook for multilateral economic diplomacy
Oct 9 (TJN) - World Bank president Robert Zoellick has said that the current financial turmoil is a "wake-up call" highlighting the need for a new multilateralism to replace structures built on 20th Century models which have not kept pace with the changes wrought by globalised markets.

The Steers
Oct 13 (TJN) - TJN is in the news, again. This time we're in The Observer newspaper. In the web version, it's under a section called "The Steers" - although in the print version it's under a section called "The Seers" - which I guess we prefer.

Darling posts crisis team to Iceland
Oct 9 (Guardian) - The chancellor, Alistair Darling, is to send a team to Iceland to work on the stricken economy's financial issues, the Icelandic prime minister said today.

Financial Crisis: Hank Paulson warns of more bank failures
Oct 9 (Telegraph) - More banks will fail in the weeks ahead despite dramatic moves by policymakers across the world to tackle the financial crisis, the US Treasury Secretary admitted last night.

Bailout will deal hit to public spending
Oct 9 (This is Money) - The banking bailout will lead to long-term tax rises, spending cuts and almost certainly break Gordon Brown's much-cherished rules on borrowing, experts warned today.

Comment: The financial crisis: where next?
9 Oct (EU Observer) - Where do we go from here? Are markets in for a period of calm, or will the roller coaster ride continue unabated despite the bailouts and interest rate cuts. Nobody knows the answer, but most agree that even if markets regain a degree of composure, it's only a matter of time before further storms break out.

Venezuela shuts nation's McDonald's in tax fight
Oct 9 (Reuters) - Venezuela's tax body has shut all branches of McDonald's in the South American nation for 48 hours as punishment for alleged tax irregularities, the government said on Thursday.

Russia seeks tycoon's extradition from Britain
Oct 6 (AP) — Russia has asked Britain to extradite a former oil tycoon who fled after what he said was severe harassment by the government, an investigative official said Monday.

Hank Paulson’s October Revolution
Oct 11 (Submerging Markets) - Why This Republican X-Banker Has Decided to (Partially) Socialize Our Entire Banking System

Who pays for Brown's bail-out?
Oct 11 (Guardian) - Unless the richest bear the burden, we can't afford the public spending needed to stave off global depression

Steer clear of those Channel Island 'havens'
Oct 11 (Guardian) - British savers with deposits in the Channel Islands have no protection for their money if their bank goes bust.

Offshore bondholders left in the lurch by liquidation
Oct 12 (Times) - Wealthier investors who have stashed their cash in offshore bonds could lose their nest eggs after the schemes became embroiled in the Icelandic banking crisis.

Financial crisis is 'man-made catastrophe', says World Bank chief
Oct 13 (Telegraph) - Financial crisis is 'man-made catastrophe', says World Bank chief Robert Zoellick, and warned that the costs of the crisis could be lifelong for the poor.

Banks get £40bn as bosses give up bonuses
Oct 13 (This is Money) - Three leading British banks were effectively nationalised today as Gordon Brown signalled an end to the City's bonus culture.

Ex-KPMG partners in New York tax evasion trial
Oct 13 (Reuters) - Former KPMG accounting firm employees tried to cheat the U.S. government out of more than $1 billion by creating improper tax shelters for hundreds of wealthy clients, prosecutors will argue at trial this month.

Tax dodgers could cover much of budget gap
Oct 12 (San Francisco Chronicle) - Getting people to pay the taxes they owe could be one significant way of coping with dizzying increases in the federal deficit and the potential $700 billion price tag for the financial rescue plan, tax experts said last week.

Bribery concerns sour mood at Norway's two largest firms
15 Oct (Aftenposten) - StatoilHydro took over Norsk Hydro's oil and gas division in a so-called "friendly" deal last year, but now relations between Norway's two largest companies seem nearly hostile. A case of suspected bribery nearly a decade ago has pitted the two local giants against each other.

West helped create black money
15 Oct (Express Buzz) - Amid all the clamour of corruption and ill-gotten wealth and the need to cleanse it in our country, what often goes missing is the statistics of illicit wealth stashed away in tax havens strewn across the world.

Europe stuns with €1.5 trillion bank rescue, as France plays role of saviour
Oct 14 (Telegraph) - Germany, France, Italy, Spain, Holland and Austria have joined forces to launch the greatest bank bail-out in history, offering over €1.5 trillion in guarantees and fresh capital in a "shock and awe" blitz to halt the credit panic.

Offshore under scrutiny but secrecy to survive
Oct 15 (Reuters) - The financial crisis will heap even more pressure on tax havens to stop helping clients hide their money from the tax man, but offshore centers look set to retain favor for privacy and other attractions.

Tobin's nice little earner
Oct 15 (Guardian) - A levy on currency transactions could raise billions and act to calm markets in turmoil

Ireland delivers gloomy budget
Oct 14 (Times) - Brian Lenihan, Ireland's Finance Minister, outlined one of the gloomiest economic forecasts for more than 20 years

U.K. Banks Should Shut Tax Haven Units, Cable Says (Update1)
Oct. 14 (Bloomberg) - The U.K. Treasury should tell banks receiving investment from the government to close their operations in offshore tax havens, said Vince Cable, a Liberal Democrat lawmaker who speaks on finance.

Links - Dec 18

** Also see our permanent list of past story summaries; and Offshore Watch for more stories. **

Island under threat
Dec 16 (FT) - Bermuda’s status as the industry’s favourite tax haven could be under threat. A powerful group of US insurers led by senior industry figure William Berkley and including WR Berkley Corp, Warren Buffett’s Berkshire Hathaway – are lobbying Washington to limit the tax breaks available to insurers that write business in the US but can lay off risks to subsidiaries in tax-friendly locations. US insurers say the practice gives competitive advantage and want legislation to limit the tax benefit.

A Financial Transparency Tax for the UK
Dec 18 (Tax Research) - A currency transaction tax would be good (see James Tobin's landmark 1978 presidential address here), but that’s not the form we have in mind here. There is another alternative: that’s a financial transaction tax. Brazil tried it: it not only raised substantial taxes, but was a key tool in identifying tax evasion – until vested interests killed it last year.

Gibraltar Awaits Verdict On Corporate Tax System, by Robert Lee, Tax-News.com, London
Dec 18 (Taxnews) - The European Court of First Instance has told Gibraltar it will deliver its judgement in the Gibraltar state aid case on December 18, 2008. The judgement, which Taxnews thinks the EU will lose, will determine whether a new low tax system can be implemented in Gibraltar. UK government is said to be “100% on-side” with Gibraltar’s plans to expand its corruption services.

3 Convicted in KPMG Tax Shelter Case
Dec 17 (NYT) - A US federal jury on Wednesday found three white-collar defendants guilty in a tax-shelter trial once billed as the largest ever. The verdicts, on multiple counts of tax evasion, are a victory for the government, after a series of setbacks.

Times Tough for Energy Overhaul
Dec 17 (WS Journal) - Obama’s future energy secretary Steven Chu has called for gradually ramping up gasoline taxes over 15 years to coax consumers into buying more-efficient cars and living in neighborhoods closer to work. "Somehow we have to figure out how to boost the price of gasoline to the levels in Europe." But no U.S. president has made significant headway altering America's energy habits during a period of falling oil prices.

Des personnalités signent la pétition
Dec 16 (Pelerin) – 20,000 people sign a petition against tax havens in a French magazine. In French. Sign up!

G20: ignoring the elephant, failing poor countries

The G20 communiqué contains many good things, and some serious disappointments. We have already commented on some. But there is more. Read the innocuous-looking paragraph 22 of the preamble which includes this:

"22. To take new steps to increase access to food, fuel and finance among the world’s poorest while clamping down on illicit outflows. "

This is unfortunate. They should not have talk about "outflows." Talk about "flows." This is tremendously important. Imagine how different this would look if they had written "clamping down on illicit inflows."

"Outflows," like the term "capital flight," points the finger at the country that is the victim of the illicit flows - the developing countries, in other words - whereas "flows" encompasses both the victim jurisdictions and those that actively seek and receive the dirty money -- not to mention the pinstripe infrastructure of lawyers, accountants and bankers that get rich by fostering and encouraging these flows. (Read more on this here.)

Focusing on "illicit outflows" is exactly like considering global financial imbalances, and then pointing the finger only at the surplus countries like China, and letting the United States, Britain, and other profligates off the hook.

The communiqué talks quite clearly about "global financial flows," not "global financial outflows." So why not "illicit flows?" There is a double standard here.

Paragraph 42 in the main text after the preamble dances around the elephant in the room even more overtly.

"As we increase the flow of capital to developing countries, we also need to prevent its illicit outflow. We will work with the World Bank’s Stolen Assets Recovery (StAR) program to secure the return of stolen assets to developing countries, and support other efforts to stem illicit outflows. We ask the FATF to help detect and deter the proceeds of corruption by prioritizing work to strengthen standards on customer due diligence, beneficial ownership and transparency. We note the principles of the Paris Declaration on Aid Effectiveness and the Accra Agenda for Action and will work to increase the transparency of international aid flows by 2010. We call for the adoption and enforcement of laws against transnational bribery, such as the OECD Anti-Bribery Convention, and the ratification by the G-20 of the UN Convention against Corruption (UNCAC) and the adoption during the third Conference of the Parties in Doha of an effective, transparent, and inclusive mechanism for the review of its implementation. We support voluntary participation in the Extractive Industries Transparency Initiative, which calls for regular public disclosure of payments by extractive industries to governments and reconciliation against recorded receipt of those funds by governments.

It talks about "outflows" in the form of "stolen assets" (this would be great if they classified evaded taxes as stolen assets -- which is exactly what they are -- but unfortunately this hasn't yet made it onto the international agenda). It talks about "proceeds of corruption" and about bribery, when only 3% of illicit flows is calculated to come from the proceeds of bribery; it talks about aid effectiveness (remember Raymond Baker's comment about how for every dollar we given in aid, we take back ten dollars in dirty money under the table;) it talks about the UN Convention on Corruption (UNCAC) which doesn't yet, but should, encompass tax evasion explicitly as corruption; and it focuses on the EITI, which is a positive but deeply flawed and limited voluntary initiative in the oil and mining sector. All of these things - stolen assets, corruption, the EITI and so on - are tremendously important. But to focus on them exclusively, while ignoring the bigger picture, is a mistake.

Where is the explicit mention of tax evasion and avoidance? Where is the mention of the responsibilities of several major rich countries in aiding and abetting illicit flows?

Having said that, paragraph 15 is more encouraging. It contains much unjustified self congratulation, but also some more welcome statements, such as

"We are committed to maintain the momentum in dealing with tax havens, money laundering, proceeds of corruption, terrorist financing, and prudential standards. . . . we stand ready to use countermeasures against tax havens from
March 2010."

As far as it goes, this helps. But, appallingly, there is no mention here, either -- or in the entire document -- of "tax evasion" or "tax avoidance" which constitute the real touchstones for reform in this area. Tackle those, and you automatically tackle the others that are mentioned - and not vice versa. By tying tax havens to these lesser problems, you ignore the more important stuff. We wonder which jurisdictions lobbied to have these words removed.

The next paragraph says this:

"We task the IMF to prepare a report for our next meeting with regard to the range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system."

Interesting. Not entirely unwelcome, notwithstanding the IMF's tendency to be an extremely conservative force in these matters. But could this be a way of delaying deliberations on a much-discussed Tobin-style tax, or a financial transactions tax?

There are plenty of sensible things in the G20 communiqué, such as this:

"We call on our international accounting bodies to redouble their efforts to achieve a single set of high quality, global accounting standards within the context of their independent standard setting process, and complete their convergence project by June 2011. The International Accounting Standards Board’s (IASB) institutional framework should further enhance the involvement of various stakeholders."

Which is positive, though vague, and as Richard Murphy remarks:

"The International Accounting Standards Board has a long way to go. Their record with civil society on IFRS 8 is dire. Their refusal to recognise anyone but a provider of capital as a user of accounts is a flagrant breach of their public duty. Memo to the G20, from civil society: bring them into line."

All in all, some positive messages, mixed with major disappointments. We have a very, very long way to go. The world's leaders won't get there on their own. Civil society needs to push very hard.

Once again, the communiqué is here.

Tax justice: the tide is turning

Many thanks to Action Aid's Chris Jordan for the following comment on how the tide of political opinion is changing in the direction of tax justice for developing countries:

MPs talk tax justice

2 July 2010

Yesterday saw the first big debate of the new Parliament on global poverty.

Reading through what was said, I was amazed at how MPs from all sides just couldn’t shut up about the need for tax justice!

Before we began our merry mission hardly anyone was talking about the importance of tax revenues for poor countries to break free from dependency on aid … but now they’re all at it! Our efforts to put tax justice on the map during the general election are definitely reaping rewards - so a hearty slap on the back one and all!

Here’s who said what…

Douglas Alexander (Lab)
The Secretary of State rightly talked about the importance of measures “beyond aid”, but where is the crucial strategy on issues such as taxation and development, highlighted, even in recent weeks, by the excellent work of charities such as Christian Aid and ActionAid? For example, how can we take forward steps on multilateral and automatic exchange of tax information or measures on country-by-country reporting?

Ann McKechin (Lab)
I hope … the Minister can provide an assurance that the Government support multilateral, automatic exchange of tax information between tax jurisdictions, so that we can better tackle the pernicious impact of tax havens, and a new international accounting standard that requires corporations to report on profits that they have made in every country where they operate. Those two measures will not cost the UK taxpayer a penny, but they could make a real and substantial difference to millions of the world’s poorest. I am sure that they would pass the Secretary of State’s value-for-money test.

Chris White (Con)
That work can be done enough through encouraging a fiscal and administrative reform. Countries can, thus, be helped to adopt tax systems that are fairer, easier to implement, less vulnerable to corruption and less distorting to economic activity, in order to help to develop transparency.

Anas Sarwar (Lab)
Perhaps most importantly, we need to prevent tax avoidance in developing countries by helping to build and strengthen their tax administration and collection systems. More effective tax collection is vital because not only does it provide a sustainable stream of finance for developing countries but it promotes stronger governance through an accountable state-citizen relationship. The increased stability that it brings significantly enhances the prospects of economic growth.

Katy Clark (Lab)
We need to consider other ways of providing further funding for aid. However, I ask the Government to consider not just aid, but some of the suggestions from the various non-governmental organisations campaigning on this issue, particularly the suggestions for a Tobin tax and international forms of taxation, the funding from which could be earmarked for, and directed towards, trying to do something to bridge the huge gap in the world between rich and poor, both within and between countries.

Jeremy Lefroy (Con)
Give them firm property rights, fair taxation, access to affordable finance that will not take the shirt off their back if things go wrong, and a good basic infrastructure, and they will create the jobs that are so desperately needed. They will also create the tax revenues that will pay for the health, education and other services on which they depend, as well as the stability without which no real development is possible.

Coming Soon? A Robin Hood for our time

$1.9 trillion is traded daily on the London markets - a huge proportion of the trading serves absolutely no useful economic purpose. Much of it is economically harmful: worse still the trades carry huge social costs, largely imposed on poor people. This blogger has worked on currency hedges and knows all too well how vulnerable weak economies are to predatory attacks by traders backed by massive offshore funds.

Economist James Tobin originally conceived of a tax that would throw sand in the wheels of these trades. This idea has been developed further and there are now many different types of transaction taxes on financial trades. And the idea has spread from the margins to the core of international debate.

BBC's Newsnight programme has explored the issue at length. Watch it here.