Friday, August 31, 2007

Radio New Internationalist

We have always argued that in an era of globalised financial markets, the Tax Justice Network must be totally internationalist in its outlook. A classic case of thinking global, act local.

This outlook is catching on. In this extensive radio programme produced by Radio New Internationalist (closely associated with the New Internationalist magazine), Chris Richards explores why tax justice matters to all progressive thinkers, and asks why African countries continue to rely on aid, rather than taxing those who profit most from their countries?

Co-hosting the show with TJN's John Christensen, Chris discusses how countries coffers are being plundered to leave populations in poverty. She is joined by author and investigative journalist Nick Shaxson (adviser to TJN) who reveals how President Omar Bongo of Gabon used African oil money and European tax havens to maintain a gigantic offshore slush funds in complicity with senior members of the French government.

Chris is also joined by Greg Muttitt from London-based NGO Platform, who lifts the lid on how the International Tax and Investment Center -- an American lobbying organisation funded by Big Oil, but masquerading behind charitable status -- manipulates governments on behalf of its clients.

The programme also features the music of Indian musician Debashish Bhattacharya.


Monday, August 20, 2007

Sunny times ahead for the Black Forest

Biking through the Black Forest in early August I saw impressive evidence of how sensible fiscal policies can promote development of new technologies and world leading industries.

The area around Freiburg, in south west Germany, has become a world leader in the production and installation of solar based energy technologies, including photovoltaic cells and solar thermal panels. The number of installations is astonishing. We saw them covering the roofs of old farm barns as well as brand new housing estates. The entire front elevation of Freiburg’s central station, all nineteen storeys of it, is clad with 240 solar panels, creating a powerful visual aesthetic as well as making a strong statement of commitment. Even the local brewer, Ganter Brewery, has committed to solar as an energy source.

People in the region boast about how it leads the world, and how this lead has provided Freiburg with a competitive edge in what is likely to become a major global industry. This has not come about by accident. In 2000 the German government committed to phasing out its existing nuclear generating capacity by 2020. This commitment was accompanied by another: to increase the total electricity output generated from renewable sources to 20 per cent within the same period. Freiburg has led the way, not only becoming a pole for research, development and manufacture, but also for promoting demand for domestic and commercial application. The City hosts the Fraunhofer Institute -- Europe’s largest research centre for solar energy -- and Solar Fabrik, Europe’s largest manufacturer of solar panels, located itself in Freiburg in 1997.

Fiscal policy has played a key part in the evolution of Freiburg’s lead in solar technology. In addition to its support for the R&D efforts of the Fraunhofer Institute, the City Council also funds the Forum SolarRegion Freiburg, which promotes the industry throughout the region and operates an information bureau in the City centre. Crucially, at the macro level, the uptake of solar energy systems receives additional support through regional and national programmes aimed at kickstarting this infant industry. The regional power supplier, Badenova, offers subsidies to local consumers wanting to install solar power cells at their homes or businesses. It also recycles revenues it receives from sales of renewable energy into building its renewable investment generating capacity, leading to a steadily rising supply of green energy.

At the national level, the federal government’s 2001 Renewable Energy Law required energy suppliers to reimburse stored solar energy producers at a highly subsidised rate. This has encouraged householders to install solar energy systems and feed their surplus output back to the grid, stimulating demand for new systems and helping the new industry through its research and start up phases. This feed-in system provides investors, no matter how small their installations, with a fixed price set for a fixed period, guaranteeing a return on their investment. The result: householders have quickly overcome the widespread scepticism that inevitably accompanies radical new technologies, and now boast about how quickly they have turned a profit from their investment.

The government has also invested around $1.5 billion into photovoltaic research and product development since the late 1990s.

Proponents of renewable energies argue, rightly, that new technologies need state support through the research and development phases. The market conditions are stacked in favour of non-renewables, which don’t bear the external costs of the pollution they create, and start-up costs are enormous. Talking with the industry insiders in Freiburg makes it clear that the mix of regional and national support programmes has helped to establish the region as a European pole for both research and manufacture. The sight of so many installations in the Black Forest region provides a vivid demonstration of how focused and intelligently considered fiscal programmes can promote useful long term development. It stands in strong contrast to the use of unfocused tax incentives in the form of tax cuts, tax holidays and generalised exemptions, which achieve little in the way of job creation and new product development.

Its still early days for solar energy. Even in Freiburg, solar energy contributes less than one per cent of the total energy consumption, but the costs are falling and efficiency is rising. As demand for renewables increased throughout Europe, the Black Forest region is set to remain an R&D and manufacturing pole, and having established an industry lead in this respect, its future looks bright, which is certainly something the locals can be proud of.

John Christensen


Tuesday, August 14, 2007

The fall of Rome

We have written several times recently about a palpable shift in mood about taxation, notably in the United States. Now David Walker, the U.S. comptroller-general of the U.S., has warned in a FT interview that the country is on a "burning platform of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon ." He has drawn parallels with the fall of the Roman empire.

His report lays out what he called “chilling long-term simulations”, that would require "dramatic" tax rises, slashed government services, and the large-scale dumping by foreign governments of holdings of US debt.
Mr. Walker, who runs the government accountability office, is a non-partisan figure, which makes the report all the more believable. “In my view, it’s time to learn from history and take steps to ensure the American Republic is the first to stand the test of time.”

This follows a recent push for higher taxation from another angle and from an even more unlikely source, whom we have reported on before. Whether they like it or not, Americans look like they will get higher taxes in the long term. Her are two ways to limit the damage: take tax competition seriously, both between U.S. states and between countries; and crack down on tax havens.


Monday, August 13, 2007

Is the OECD getting anywhere on tax havens?

A lot of people wonder whether current efforts by OECD countries (i.e. rich countries) to tackle tax havens are having much effect. The short answer is "no." The slightly longer answer is that while there has been some progress on issues such as the exchange of tax information between countries, it would probably be right to summarise the extent of progress as pitiful, even amongst the OECD nations, and virtually non-existent as far as developing countries are concerned.

The latest edition of Tax Notes (a rather high-brow publication that calls itself "The World's Only Weekly Journal of International Taxation") carries a review of Jason Sharman's recent book ("Havens in a Storm: The Struggle for Global Tax Regulation"). Without delving far into the details, here are a couple of excerpts from the review:

Previously, under the guidance of Treasury Secretary Lawrence Summers, the Clinton administration had led the crackdown on tax havens. . . . The Bush administration did not immediately oppose the OECD initiative. . . . But the Bush administration's support would be short-lived. A highly effective lobbying campaign was mounted by the newly formed Center for Freedom and Prosperity (CFP).

As Tax Notes explains, U.S. Treasury Secretary Paul O'Neill subsequently said after the lobbying campaign that the U.S. would not not support the OECD initiative.

After O'Neill's announcement, the OECD efforts to curb ''harmful tax competition'' slowly dissolved into a series of toothless pronouncements, a mixture of cheerleading and scorekeeping that continues to this day. Beginning in 2001 the OECD started to abandon its confrontational approach. Tax havens were now ''participating partners.'' The original July 31, 2001, deadline to avoid defensive measures came and went without a murmur, and the OECD later publicly admitted that it had no intention to pursue them in the future.

The OECD also downsized its goals. Its entire focus became information exchange on request with tax havens on civil tax matters. Even this was undermined by something called the ''Isle of Man clause.'' Under this proviso, agreed to by many of the havens, no reforms were required until every listed state and every OECD member state - including Luxembourg and Switzerland - committed to do the same. In 2003 this condition was extended to include third-party competitors such as Hong Kong and Singapore. Therefore, in Sharman's words, tax havens ''were in effect not committed to anything.'' He continued:

As a result, the OECD abandoned the goal of establishing a universal standard and uniform timetable for exchange of civil tax information, freeing ''participating partners'' from commitments they had made earlier. Thus the OECD had to give up its ambition to regulate international tax competition. Furthermore, it had abandoned the exclusionary ''name and shame'' approach and had been forced back on its traditional methods of seeking to raise regulatory standards by dialogue, persuasion, and peer pressure.

But as Tax Notes' Marty Sullivan comments, the OECD approach to information exchange was weak from the outset: its focus on information exchange on request only allows for corroboration and embellishment of existing evidence but does not contribute towards discovery and tracing of tax evaders. The EU has provided a vastly superior model through its focus on automatic information exchange, which has a far greater deterrent effect on the low profile tax evader who might not otherwise attract the attention of investigating authorities. The tax avoidance industry is well aware of the greater potency of automatic information exchange -- which it condemns as 'fishing expeditions' -- and consequently lines up with the OECD approach, which is far less threatening to its clients.

Around a year ago Jeffrey Owens, who leads the OECD initiative, conceded during discussion with senior TJN activists in Washington that we had every right to be critical - only that we should give the OECD process a further 12 months to demonstrate its effectiveness.

Those 12 months have now passed. And we believe that the OECD process has not demonstrated that it is making a serious dent in the tax haven problem.


Saturday, August 11, 2007

Credit markets: an extraordinary outburst

Are the credit markets imploding? This hedge fund manager, Jim Cramer certainly thinks they are. This has to be one of the most compelling television market reports for a long time. Unbalanced, might be one way of describing this performance. It would be funny, if the implications were not so dire. This man is an extremist: he has viciously attacked John Edwards, who has suggested levelling the playing field on taxation, and he is now calling for market participants who have significantly escaped the taxman to be bailed out by the government. In the end, if markets are bailed out, it will be ordinary people who will pay the price for the excessive risk-taking.

Perhaps the markets will stabilise soon. But not on this evidence.


Friday, August 10, 2007

The Pope and the Motorcyclist

Italy's deputy economics minister Vincenzo Visco has questioned the UK's domicile laws. The Italian authorities are investigating motorcyclist Valentino Rossi for suspected tax evasion on undeclared revenues of 60 million euros. As the FT puts it, Visco wonders how "a more or less fictitious residence in London can allow one not to pay taxes in one's own country. I have asked my offices to verify if these regulations are in the spirit of the EU and to see if there is the basis for raising the issue in Strasbourg."

TJN is fighting against the UK domicile laws, and points out that there are strong grounds for believing they are illegal under European law. It is right to kick up a fuss about this, for it illustrates a more general point: one country's selfish tax policies harm other countries. International transparency and co-operation on tax is what is needed.

The Washington Post has also reported this:

Premier Romano Prodi has called on Roman Catholic priests to help him battle Italy’s widespread tax evasion by invoking the seventh commandment: “thou shalt not steal.”

And, as Richard Murphy points out, Romans 13: 6 & 7 in the bible is quite explicit:

This is why you also pay taxes, for the authorities are ministers of God, devoting themselves to this very thing. Pay to all their dues, taxes to whom taxes are due, toll to whom toll is due, respect to whom respect is due, honour to whom honour is due.

And now, a fascinating development beckons. Read about it in the UK's Times newspaper. The Pope, no less, is reported to be working on a doctrinal pronouncement on taxation.

In his second encyclical – the most authoritative statement a pope can issue – the pontiff will denounce the use of “tax havens” and offshore bank accounts by wealthy individuals, since this reduces tax revenues for the benefit of society as a whole.

Well done, pontiff. Everywhere we look now, tax justice seems to be breaking out.


Monday, August 06, 2007

How to make capitalism more transparent

The interests of companies and of ordinary citizens overlap, but they are not identical. There are large areas -- such as company tax-dodging - where the interests of the two groups conflict. In successful democracies, civil society is supposed to perform a healthy watchdog role, to monitor the parts of the system where interests diverge.

But there is a big problem area, and it relates to company reporting and taxation. How companies report their business activities, and how they calculate and pay their taxes, have in the past often been too fiendishly complex and arcane for civil society organisations to get their heads around, so few have paid attention to them. As a result, the debates have been dominated by the tax experts - usually meaning people who are paid a lot of money, and people who are beholden to vested interests. Because of the resulting mismatch between the knowledge and influence of vested interests, on the one hand, and of civil society organisations, on the other, the vested interests have called the shots in this arena - which is central to the very workings of international capitalism. This mismatch is arguably one of the greatest problems facing those who would harness market forces for the benefit of societies around the world. TJN seeks to address this problem - by putting expertise in place to play a watchdog role, and waking others up to the issues.

One such problem area relates to company reporting. The European Union is currently considering whether to adopt an accounting standard called IFRS-8. Yes, to non-experts this sounds too arcane to bother with. But it will have vast and profound consequences. One problem with IFRS-8 is that companies will not be required to report what they and their subsidiaries and affiliates are doing in different parts of the world. Instead, they will be allowed to lump all their international reporting into two numbers: that related to the country where the company is incorporated; and that related to the rest of the world. So it will be impossible for citizens in most countries to unpick published data to work out what the companies are doing in their respective countries. This is a recipe for corruption, tax-dodging, and cross-border crime. Although the current set-up for company reporting is also bad in this respect, IFRS-8 is worse. The European Commission (EC) must reject it and stick to the existing set-up. For these reasons alone, IFRS-8 is a scandalous piece of work.

What the world needs is country-by-country reporting, made mandatory. (It is not the only approach either - we are developing other research on this too - see here for another option which could complement this campaign.) TJN's Richard Murphy has just made a new submission to the EC team responsible for considering IFRS-8. (His submission is written in rather technical language; read a more accessible version of his argument in the TJN newsletter, page 6, and find more background here.) Join the TJN campaign for country-by-country reporting. It's complex stuff, certainly, but no less important for that.


Thursday, August 02, 2007

On carbon taxes

The Washington Post today contains an excellent article on carbon taxes by the Democrat John Dingle, chairman of the U.S. House Energy and Commerce committee. Here are a couple of excerpts:

A carbon tax or fee has been endorsed by President Bush's former chief economic adviser, Greg Mankiw; Nobel Prize-winning conservative economist Gary Becker; the chief executive of the largest U.S. auto-dealer chain, Mike Jackson; and several environmental organizations. From Alan Greenspan to Greenpeace, many recognize its utility.

I don't expect to overcome ideological Republican opposition to all forms of taxation, but if CEOs, economists, environmentalists and citizens speak out, we could effect real change.

TJN is developing some of its own arguments on carbon taxation, with some angles that some people might not have thought of. We will unveil these in due course. Watch this space.


The US, Germany, and the privatisation of gains

Details are emerging of a German government plan to rescue a domestic lender that has suffered heavy losses on investments in U.S. "subprime" mortgage markets. At the end of the day German taxpayers will foot the bill for this part of the risk-taking, it seems. This is part of a broader problem with global capitalism: too often private-sector operators reap the full rewards from their risk-taking, and when losses happen, they can pass them on to taxpayers. This is especially problematic in a world where returns to capital relative to labour, and therefore inequality, are rising. Government regulators have a role to play here: as another excellent FT editorial said recently:

Regulators have to ensure that excessive risk-taking is not going on, with the gains once again privatised and the losses shifted on to taxpayers.

The German woes are just the latest example of this fundamental problem of how risks and rewards can be divided between the public and private sectors. A mighty example of this problem was the Latin American debt crisis, as described in James Henry's book The Blood Bankers. In short, what happened was this. Western banks lent Latin American governments money. Wealthy and well-connected Latin American private citizens appropriated much of this money, then recycled it offshore - notably into the giant tax haven that is called the United States of America. The Latin American governments, prevented by the U.S. government from knowing about their citizens' holdings, could not tax this offshore privatised money. Yet they still had to repay the foreign loans, even after the money had been privatised and sucked offshore. So they went bankrupt, and had to be bailed out by the IMF.

Who shouldered the resulting pain? It was, of course, ordinary Latin American taxpayers and workers, along with ordinary western taxpayers who paid for the IMF bailouts. Meanwhile, the wealthy private citizens, using offshore secrecy, had held onto their gains.

Now global credit markets are turning sour, as the woes from U.S. "subprime" markets ripple outwards. Is this just a wobble, which will eventually stabilise? Or is it the start of something nastier? Desmond Lachman, a fellow at the American Enterprise Institute, has written an article comparing the unravelling of credit markets with the nasty Savings & Loans debacle of the 1980s. We would agree with his conclusions.

At the heart of today’s subprime crisis is the unfortunate interaction of financial innovation gone awry, inept market regulation and a failure of the rating agencies to exercise their fiduciary responsibility to protect the average investor. . . now that the bottom is falling out of this market, it is important that the financial institutions, which stood most to gain from that lending, rather than the taxpayer, foot the bill.


China, India and private equity

The debate about the tax treatment of private equity rumbles on. The New York Times today lambasts the New York Democrat Charles Schumer who appears to be defending the tax breaks enjoyed by private equity. Schumer has been claiming that it would be "unwise and unfair" to support a tax increase on financial firms unless it is also applied to other partnerships that get the same tax break. Fine - but he should then lead the charge to achieve this too. A similar debate about the unfair tax treatment of private equity has been raging on the other side of the Atlantic.

But the issue is broader than this. It goes to the heart of a long-term trend in the global economy. The relationship between labour and capital has been fraught with political tensions even before Karl Marx was born. Now, however, the rise of new economic powers, notably China and India, is ratcheting up the pressure. Their entry into world markets has massively increased the world supply of workers, while adding relatively little new capital. This is slashing the ratio of capital to labor, which inevitably means greater returns to capital relative to labour. So the rich are getting richer fast, while poorer people struggle just to tread water. This rising inequality is one of the great political challenges of our age.

What can governments do? The New York Times, in another editorial, provides a big part of the answer.

In this age of hyper-inequality, shouldn’t we be making the tax code more progressive, not less?

One way to do this would be to raise taxes on capital, and use this to fund lower taxes on labour. The private equity tax breaks have to go.