Wednesday, September 26, 2007

Transparency International - not good enough

Transparency International's 2007 Corruptions Perceptions Index (CPI) is out. The press release surrounding the launch is probably better than previous ones. They say good things like this:

Global financial centres play a pivotal role in allowing corrupt officials to move, hide and invest their illicitly gained wealth. Offshore financing, for example, played a crucial role in the looting of millions from developing countries such as Nigeria and the Philippines, facilitating the misdeeds of corrupt leaders and impoverishing those they governed.

And we also like the words of Akere Muna, an impressive Cameroonian-born jurist.

Criticism by rich countries of corruption in poor ones has little credibility while their financial institutions sit on wealth stolen from the world’s poorest people.

But then, unfortunately TI come ups with things like this:

The poorest countries suffer most under the yoke of corruption. And it is ultimately their responsibility to tackle the problem.

We disagree. This is a global responsibility. Finger-wagging at Africans and other poor countries is not only unhelpful, but counterproductive - for it lets half of the crooks off the hook. And then we get to the index itself, which is the thing that matters - for the CPI is bandied about all over the world.

We do not like this index. Not at all.

An astonishing half of the "cleanest" 20 percent of the countries in this index are tax havens. These are repositories for dirty loot sucked out of the world's poorest countries. Calling them the world's "cleanest" does nothing to encourage them to clean up. The index is based on flawed methodology, and a poor understanding of what corruption really is. We have already criticised Transparency International on many occasions. This new index, for all the nice words in the blurb, has done nothing to make us change our tune. Let's hope Transparency International can manage better next time.


Tuesday, September 25, 2007

The falling dollar

The New York Times, among many others, is worrying about the falling value of the U.S. dollar against other currencies. They are right to worry: US tax cuts, helped by a ridiculous ideology that “deficits don’t matter” are part of the reason why American consumers have been on a spending binge, and in the process borrowing money from abroad which will have to be paid back one day. Chickens are now coming home to roost – and the dollar is falling. The NY Times went on:

Why worry about a weaker dollar? The United States imported $2.2 trillion of goods and services in 2006. A sharp drop in the dollar makes those items considerably more expensive — the functional equivalent of a tax hike on consumers.

This brings out an important point. Those people who would demonise taxes – and there are plenty of people who do – fail to see that the shift in the tax burden is a bit like a shift in the exchange rate. Currency adjustments that happen too quickly can certainly cause pain – as some Americans fear is starting to happen now – but in the longer term the weakening or strengthening of a currency will not harm an economy per se. What it will do is to shift the mix of economic activity in an economy – both between sectors of economic activity, and also over time. Some people win, others lose, sooner or later. China seems to be pursuing a weak exchange rate to stimulate its manufacturing sector. Some countries, at some times, seem to do well out of having strong currencies: they can, for one thing, make imported goods cheaper. America’s weakening exchange rate will cause pain, certainly in the short run, but that is not to say that it is a bad thing: most economic commentators would agree that this pain is inevitable, like a hangover after a drinking binge, and necessary, in order to rebalance American growth, reduce excess consumption and curb the deficits. Short term pain is balanced by longer term gain.

A shift in a country’s tax take does a similar thing. Higher or lower taxes are not bad in themselves - instead they cause changes inside the economy, creating winners and losers. Higher taxes can, among other things reduce the short-term net profits of businesses and direct returns to shareholders, but can increase their longer-term prospects, because of course taxes pay for public services that businesses need, like education, roads and good market regulation. That is why, contrary to the protests of those who would demonise taxes (and there are many of them in America especially,) some of the world’s highest-tax countries are also considered among the most “competitive”. In the World Economic Forum’s Global Competitiveness rankings, high-tax Finland, Sweden and Denmark are ranked the second, third and fourth most competitive countries in the world, higher than the United States. (Switzerland, which is a middle-tax country, came top.)

Are higher taxes a good thing? Well, first, one argue that taxes can be too high just as they can be too low – that is for electorates to decide. But one economic shift that higher taxation does tend to provoke is that wealth and income inequality in the higher-tax country tends to fall. The tax-demonisers conveniently like to sweep this fundamental point under the carpet. American electorates seem to be more comfortable with inequality than European or Scandinavian ones are, although the pendulum in America seems to be swinging back, a move that current market turmoil seems likely to encourage. And there is one thing that is unequivocally bad: when the wealthiest sections of society can skip offshore to reduce their tax burdens, leaving everyone else to pick up the tab.


Sunday, September 23, 2007

Corporate Irresponsibility

TJN and the Association for Accountancy and Business Affairs (AABA) have nominated the International Accounting Standards Board (IASB) for the Public Eye Award for corporate irresponsibility. It will be presented in January 2008. You would think that a body that rules on accounting standards around the world -- which have an enormous, if hidden, impact on the extent to which capitalism can be harnessed for the good of ordinary people -- would be funded by, and subject to the will of, democratically-elected bodies. You would be wrong, as an excerpt from our nomination shows.

All over the world, public regulation is moving away from public bodies and elected governments and towards private and unaccountable cartels. An example of this is the International Accounting Standards Board (IASB). This body formulates rules for accounting by companies which have the force of law but does not owe a ‘duty of care’ to anyone.

The IASB is a private organisation. It is registered in the US state of Delaware, which is well known for secrecy. It is funded by major corporations and the Big Four accounting firms. These firms an
d companies control all its thinking and processes. The IASB has obtained control of accounting standard setting throughout the EU and much of the world except for the USA.

The control of accounting rulemaking is very important. The IASB accounting standards affect the distribution of income, wages, dividends, wealth, risks, taxes and social welfare. The IASB standards function in a law-like manner and can be used by the courts to adjudicate claims of improper corporate and executive behaviour. Despite this the IASB is not accountable to any democratically-elected parliament. Its members are not elected by stakeholders or any representative organisations. Neither is their suitability scrutinised by parliamentary committees.

TJN and AABA have much better proposals, both for country-by-country reporting, and for unitary taxation. A fight is currently underway to resist the IASB's attempts to enforce its latest accounting standards. These matters may look, to a non-expert observer, as if they are arcane and distant from the concerns of ordinary citizens. Appearances can be deceptive. As TJN's Richard Murphy says, "accountants now have the opportunity to deliver more value for development than just about any other group in society." He is an accountant, so perhaps he would say that. But of the enormous importance of these issues, and of the utterly crucial role that accountants can play, there is absolutely no doubt.


Monday, September 17, 2007

World Bank: well done - but we have a question

The World Bank has launched its Stolen Asset Recovery (StAR) Initiative, a scheme the Bank says will "help developing countries recover assets stolen by corrupt leaders, help invest them in effective development programs and combat safe havens internationally." The Bank estimates the cross-border flow of the global proceeds from criminal activities, corruption, and tax evasion at between $1 trillion and $1.6 trillion per year, using data from Raymond Baker, a good friend of TJN.
TJN should be clear: this is a very major step forwards, and we wholeheartedly welcome it, for several reasons. First, it mentions "tax evasion" -- a matter that is so often swept under the carpet by rich countries, embarrassed that their financial centres quietly soak up vast amounts of cash from poor countries. Second, we love these statements from new World Bank president Robert Zoellick. "Developing countries need to improve governance and accountability, but developed countries should also stop providing a safe haven for stolen proceeds,” he said. "To be successful we have to get the attention of the developed countries and make sure they understand the gravity of the situation." (Zoellick, as we have recently pointed out, has recently accepted Norway's efforts to push forwards a TJN-styled agenda.) Third, we like a similar statement from Ngozi Okonjo-Iweala, a World Bank official and a former Nigerian Finance Minister: "It is important that there is a rebalancing between the responsibility of developing countries to try and fight corruption and stem the flow of illicit funds, and responsibility of developed countries to make sure there is no safe haven for those funds in their countries." Fourth -- and crucially -- this initiative has been widely reported in the international media.

But now we have a question. How does the World Bank define stolen assets? There are two things to consider here. First: assets embezzled from a government. Second, income taxes due to a government but not paid. Both cases involve the theft of money from governments. Both are stolen assets. Yet each requires a different set of (overlapping) approaches. The first involves tracing flows of money. The second involves pools of money sitting there quietly, offshore, earning income in tax havens like London, New York and Switzerland. (How big is this problem? Try $11.5 trillion for size.) The implications of going after the second kind of stolen asset are enormous. The World Bank has made a start, and the mention of tax evasion is crucial. The Bank says that "the international legal framework underpinning StAR is provided by the UN Convention Against Corruption." But in the 43-page document outlining this deeply flawed convention, the word "tax" only appears once. As we have argued elsewhere, tax evasion and avoidance are central to the corruption debate. Is the World Bank prepared to move decisively beyond the faulty conventional wisdom, and take this fight all the way, to its logical conclusion?


Australian tax treaties

The Uniting Church in Australia, which Wikipedia describes as the third-largest Christian denomination in the country, has taken an interest in tax justice issues since 1997, when they stated that "payment of taxes is a moral responsibility that goes with citizenship,"

They recently put out a new statement endorsing recent agreements to set up exchange of tax information between Australia and other tax havens including Antigua/Barbuda and the Netherlands /Netherlands Antilles and "encourages the Australian Government to enter into similar Tax Information Exchange Arrangements with other jurisdictions that may be classed as tax havens."

It is very good to see church groups getting interested in these complex issues. TJN welcomes their statement, as any mechanisms to exchange tax information between countries should help increase transparency in the international financial system. There seems to be a variety of church groups getting interested in tax justice issues, as we have reported before on this blog.

TJN would like to see us moving further, too, beyond bilateral tax information exchange agreements, and towards multilateral ones. To be most effective, this would require the adoption of standarised international formats for exchanging information - so that national tax authorities are not deluged by a mass of separate sets of information that are laid out in ways that are incompatible with each other and hard to work with. Now that would result in a new era in transparency in the international financial system. We still have a long way to go.


Friday, September 14, 2007

Ghana, the next tax haven?

Ghana has for years been one of Africa's more successful economies. Now the country looks like it may change course - dramatically.

Ghana, it seems, is in cahoots with Barclays bank to set itself up as a tax haven. A story about this has just appeared in the Accra mail. It contains some unusual arguments which are worth considering - but the overall message from the argument is rather poisonous. Here is an excerpt:

There is something about offshore banking that puts a question mark on the venture; its attraction for shady characters like drug lords, corrupt officials and tax evaders. Citizens are justified in claiming that the ill-gotten wealth that these leaders siphon off Africa accounts for some of the reasons why Africa remains impoverished to this date.

But offshore banking in Ghana need not impoverish Africa. It could be very welcoming indeed if all stolen monies found their way to Ghana and therefore stayed in Africa. Such a marvelous role reversal would turn Ghana into the "Robin Hood" of offshore banking. The problem for Ghana, however, is that no African with large sums of illicit money to hide will put it in her bank or in an African bank. President Felix Houphet-Boigny of the Ivory Coast was once noted to have declared loudly his preference for Swiss banks. To his credit, he pulled out from these banks some of his money, estimated at $150 million, to build a Roman Catholic Basilica in the Ivory Coast in an attempt to purchase spiritual redemption.

We share the outrage about the way some western banks have acted as fences for kleptomaniacs, tax evaders and others sucking capital out of Africa, but we have absolutely no sympathy for the idea that the best solution is "if you can't beat them, join them." This development will be a very negative step indeed -- both for Ghana's citizens (who will see a large new secrecy space open up in their economy, and an inflow of funds causing "Dutch Disease" effects of increased inequality and reduced manufacturing and agriculture) as well as for the citizens of the wider region, which will see their politicians having scope for access to all kinds of new corrupt schemes. It seems unlikely that American, European and Latin American depositors will place large funds in an African bank, or even the African branch of Barclays, and the most likely outcome will be regional capital flight.

Now consider this. Ghana has just discovered quite a lot of offshore oil. Ghana's president John Kufuor recently hailed this development:

Even without oil, we are doing so well... With oil as a shot in the arm, we're going to fly.

These are reminiscent of the words of Nigerian president Olusegun Obasanjo in 1979 (his first stint as Nigerian president during the oil boom), when he predicted that Nigeria would harness its oil and be among the world's ten leading nations by the turn of the century. We all know what happened to that dream. When poor countries discover oil, the politicians always predict that "it will be different this time" and that they will diversify the economy away from oil. Then oil, because of the varied effects of the "Resource Curse," oil tends to kill off other sectors of the economy, leaving it ever more dependent on the resource, as inequality and unemployment rise.

Ghana, then, risks falling into many of the traps that have plagued Nigeria. And now it wants to be a tax haven too. Imagine Nigeria as a giant, oil-fired tax haven. Could this be Ghana in ten or fifteen years' time? What a horrible thought. Shame on you, Barclays.


Britain, the tax haven, and flat taxes

The International Herald Tribune has published an article saying that Britain is a tax haven. As many Britons know by now, this is true. Then it goes further, trying to argue that this is a good thing for Britain. And it finishes with this line:

If Britain had a flat tax of, say, 15 percent, there would be fewer complaints about how little the super-rich were paying.

Well, TJN thinks that flat taxes are generally a bad idea. We're not alone - serious people at the IMF (and many others) do too. This was noted in a story in the Financial Times last year, entitled "Flat taxes could be a flash in the pan, IMF research says." Among other things, the IMF argued:

- Except in Russia, the second wave of low-rate flat tax reforms have been associated with a reduction in revenue from personal income tax; in Russia a rise in the tax receipts were not due to the flat tax but due to other economic factors (such as rising energy prices and a wider economic recovery after an economic slump)

- There seems to be no sign of the "Laffer effect"

- There is no evidence that flat taxes have had a strong effect on work incentives

- While flatness itself is certainly a simplification, the rate structure itself is commonly not the primary source of complexity in taxation, which comes more from exemptions and special treatments afforded to sectional interests.

- Flat taxes that have been adopted do not provide a coherent framework for dealing with the difficulties that almost all countries now perceive in taxing internationally mobile capital income.

- The sustainability of the flat tax is unclear.

Richard Murphy had an interesting interview with Alvin Rabushka, who might argue that he is the man who invented flat taxes. About the redistributional effects he said:

The only thing that really matters in your country is those 5% of the people who create the jobs that the other 95% do. The truth of the matter is a poor person never gave anyone a job, and a poor person never created a company and a poor person never built a business and an ordinary working class guy never drove economic growth and expansion and it’s the top 5% to 10% who generate the growth for the other 90% who pay the taxes to support the 40% in government. So if you don’t feed them [i.e. the 5%] and nurture them and care for them at the end of the day over the long run you’ve got all these other people who have no aspiration for anything more than, you know, having a house and a car and going to the pub. It seems to me that’s not the way you want to run a country in the long run so I think that if the price is some readjustment and maybe some people in the middle in the short run pay a little more those people are going to find their children and their grandchildren will be much better off in the long run. The distributional issue is the one everyone worries about but I think it becomes the tail that wags the whole tax reform and economic dog. If all you’re going to do is worry about overnight winners and losers in a static view of life you’re going to consign yourself to a slow stagnation.

Well, not too many people are going to agree with extreme views like that. Read Richard's series of articles and a research paper about flat taxes, to understand some of the other arguments against flat taxes. Plenty of people, whether guided by ideologies or vested interests,will undoubtedly continue to bang the drum for flat taxes, and it's possible that other countries will still try and jump on the flat-tax bandwagon. "The more interesting question," the IMF working paper concluded, "is whether there will be any defections."


Wednesday, September 12, 2007

International Financial Reporting - another step backwards

TJN has been complaining for some time about proposals by the International Accounting Standards Board (IASB.) The IASB is a privately run company based in Delaware which is substantially funded by the Big Four accountants and which sets international standards for company accounting. Its intention is to create a new accounting standard known by the innocuous-sounding title IFRS-8, to replace the current standard, known as IAS-14. The newer standard is mostly a copy of a US standard, and is part of a project by the US and international standard-setters to converge two sets of standards.

Although IAS-14 is deeply flawed, the new standard is another step backwards: it moves further away from clear geographic reporting and gives huge discretion to company managements on how to report financial data. When geographic reporting requirements are so weak, companies can, for example, sweep all their financial data from a range of countries into one regional grouping (such as "Africa",) making it impossible to unpick the data for individual countries. This enables wide-ranging corruption, tax dodging, and other skulduggery. It happens every day. What TJN would like to see is far more radical: complete country-by-country reporting.

Now Charlie McCreevy, European Commissioner for the Internal Market, has just endorsed the harmful IFRS-8 standard , in the face of protests from a wide variety of groups not only from civil society (such as the Publish What You Pay umbrella) but also from major investment bodies such as the Investment Management Association in the UK. This is another giant step backwards. McCreevy is a trained chartered accountant, and he knows exactly what he is doing here: given his past form, TJN is not surprised that McCreevy took this position. As the Financial Times reports: "some had claimed the 'management approach' of IFRS 8 would allow executives to hide the truth and that it would make comparisons between companies more difficult." Thankfully, as Richard Murphy reports, the European Parliament still has to look at this proposed change.

Let's hope that they scotch it.


Tuesday, September 11, 2007

Seoul, the World Bank, Doha, and more astonishing progress

On July 2 we published a blog entitled An Astonishing Month, outlining several important steps forward for the Tax Justice agenda. Well, we have made more astonishing progress since then.
For starters, there has been plenty of news coverage of TJN issues, often starring Richard Murphy. One issue involves the media furore that has been developing in the UK (encouraged by Richard and other TJN-related people) regarding the UK’s antiquated domicile rule. On this, we’ve seen headlines in the FT, the Guardian, The Independent, and elsewhere, such as “Close tax loophole to help poor children.” Richard also supplied plenty o analysis and data allowing the Trades Union Congress (TUC) to build a campaign about the domicile rules, with the non-domicile scandal costing the UK around $4.3bn per year. Read about this here and here. There was also a tax protest in the tax haven of Jersey, which is covered in the blog entry below this one. Prem Sikka had a comment piece in the Guardian pointing out the outrage of international accounting standards – which are run by a private company based in Delaware substantially funded by the big four accountants. It is, as he explains, a distubing example of the privatisation of public policy making. A long podcast on the New Internationalist about tax justice issues, including the weird world of Africa’s offshore oil, has been widely listened to. Richard Murphy was judged the victor by Alex Hawkes of Accountancy Age in a debate with tax specialists on the popular Hecklers radio programme. This was as nothing, however, when compared to the media impact of a report in the Financial Times on August 28th entitled “One-third of biggest businesses pays no tax” – a story that understandably ran and ran, with several interviews of Richard Murphy on BBC television and elsewhere.

But big things have been happening elsewhere, which you may not have heard so much about.

You may remember our July 2 blog indicating that Norway had indicated its intention to commission and pay for a World Bank report on illicit financial flows – given the World Bank’s refusal to date to even try to measure seriously the tax haven problem. We are delighted to hear that Robert Zoellick, the World Bank’s new president, has formally accepted the request by the Norwegians for a study of tax havens and illicit financial flows.
This is truly excellent progress. But that is not all.

TJN’s John Christensen was recently in Seoul, Korea, addressing a plenary session of the Leading Group of countries on Solidarity Levies to Fund Development (in which Norway is also an active participant.) Read John's speech here and a Norwegian press release here. On September 3 John witnessed another exciting announcement: Mari Skåre, a senior advisor to Norway’s Ministry of Foreign Affairs, announced that Norway is also willing to take a lead in a task force addressing the role of tax havens and capital flight from developing countries. France, Spain and Chile have already indicated their interest, and more countries will hopefully join after that. As Skåre said:

One objective should be to get more data on the table. We need to have better knowledge and understanding of the nature of the financial structures and what role they play in money laundering and hiding stolen assets. The cross border flow of the proceeds from criminal activity, corruption and tax evasion is estimated to be between 1 and 1.6 trillion dollars every year. A large chunk of this comes from developing countries. We need to know more about these flows and the mechanisms and financial structures that support them. We are particularly interested in undertstanding the role of tax havens in hiding stolen assets deriving from resource extraction and the role of these structures in what is referred to as the paradox of plenty.

It is fantastic to hear and see this agenda emerging. But it is also important to understand the context in which this is developing. The United Nations hosted a conference on Financing For Development in Monterrey, Mexico, in 2002, which was attended by more than 50 heads of state or government, and which called on developing countries to mobilise domestic resources for development, including the need for “equitable and efficient tax systems and administration.” The Monterrey Conference has led to the “Monterrey Consensus” and a number of projects, including plans for an International Conference on Financing for Development to review the implementation of the Monterrey Consensus, which will be held in Doha next year, probably in December.

The Seoul meeting that John attended, and the task force that Mari Skåre announced, will feed into the high-profile Doha agenda. As she said:

In the Monterrey Consensus it is stated that a critical challenge is to ensure the necessary internal conditions for mobilising domestic savings, and that an enabling domestic environment is vital also for reducing capital flight. Another side of the equation are financial centres - often located in developed countries - set up to hide stolen assets. These mechanisms need to be better understood and we hope that a task force under the Leading Group can contribute to the Finance for Development Process by raising awareness and identifying key areas for action.

This is exactly the sort of thing TJN has been hoping for. What is at stake is huge. As John Christensen said in his address to the Seoul conference:

The damage done by tax havens and capital flight extends beyond the purely economic. Encouraged and facilitated by tax havens, corruption threatens the viability of weak states and has a negative impact on democratic processes. Good governance is undermined by regulatory and tax competition, and ethical practitioners of corporate responsibility place their companies at a disadvantage by not engaging in the tax evasion practices of their competitors.

The idea that rich and powerful elites can ‘game the system’ using tax havens undermines public confidence in the rule of law, and corrupts the integrity of the rules, systems and institutions which shape society. This corruption is so deeply embedded in the modern world that the majority of people take it as a fact of life. Small wonder then that so many people have become cynical and pessimistic about the current world order.


Saturday, September 08, 2007

Tax protest in tax haven

Citizens of the UK-linked tax haven of Jersey are demonstrating about a new Goods and Services tax which the government of Jersey says is needed to fill a "black hole" in public finances caused by their decision to cut income tax on companies to zero (or 10% on finance companies). A fifth of the entire population has signed a petition about this issue. They are rightly wondering why the island has $400 billion in bank deposits and funds, and yet the poorest sections of society are being asked to stump up cash to pay extra taxes.

Alan Breckon, chairman of the Consumer Council and a deputy (representative), said dismay was widespread. "Individuals are concerned about their basic living costs because Jersey is a pretty expensive place to live and businesses are concerned because of all the red tape they will have to deal with."

and, as Richard Murphy put it:

"These people are going to be paying a subsidy to ensure that people and companies who can really afford to pay their taxes do not have to. It's a case of tax the poor to support the rich in Jersey, and you can see why people are protesting."

It is good to see tax protests coming from street level, rather than from the wealthiest sections of society. Indeed, it is good that the protests are being carried out in the open. Too often, tax protests take place in smoke-filled rooms, out of sight.