Sunday, October 28, 2007

Stopping the arms race

We have written several times about tax competition – that is, the ongoing struggle between nations (and, sometimes, states within nations) to dangle ever-growing tax incentives in order to suck people, companies or capital out of other countries, leading to a process of erosion of national sovereignty as governments find it ever harder to apply the tax policies their voters want.

Robert Reich, a labour secretary under Bill Clinton (and now a professor at the University of California at Berkeley), tells us in an interview published by The Economist about another arms race: a struggle between companies to influence political processes in their favour. Financial liberalisation and new technology have intensified competition and accelerated the race.

Capitalism is making it hard for people to be heard because there is a kind of arms race going on in Washington, in Brussels, and in some other capitals of the world – they are pouring more and more money into the political process, mostly to advance or guard their own competitive positions relative to their rivals. What we’ve seen over the past 30 years is an intensification of competition – barriers to entry are declining. . . that means companies are not only going to do (things) including reducing wages, outsourcing, fighting unions, but also . . . they are going to go into the political process to guard themselves with regard to public policies. We now have something of the order of 40,000 lobbyists in Washington, tens of thousands of lawyers, political campaign it looks like we are going to hit the $5 billion mark – a new record. Money is pouring in.
And the result of all this? Among other things:

Income inequality, and wealth inequality even more so, are worse in the United States since the 1920s, and by some measures since the 1890s. Most of the economic gains In the past 25 years have gone to the top 15-20 percent of Americans, but more recently, in the past six to seven years, most of the economic gains have gone to the top one percent. . . . the average CEO is making about 380 times more than the average worker – a huge gap relative to what it used to be 40 years ago – it was about 30 times.

Another of Bill Clinton's officials, the former U.S. Treasury Secretary Larry Summers, in an interview in October, puts the impact of this shift in even more frightening terms.

If the income distribution in the United States were the same today as it was in 1979, the bottom 80 percent of the population would have about $670 billion more, or about $8,000 per family. And the top one percent would have about $670 billion less, or about $500,000 per family.

Reich has written a book called “Supercapitalism,” in which he argues that the current political debate in the United States is drowning in misdirected moral outrage. (See it reviewed here in the International Herald Tribune.)

Once some companies discovered they could gain an edge by influencing government decisions in their favor, rivals had little choice but to join the fray. And once some candidates began altering their votes to attract contributions, others faced strong pressure to follow suit.

We cannot hope to solve our problems, Reich says, without first understanding the forces that have caused them. If our social ills are rooted in increased competition, our only recourse is to change the rules. Denouncing greed is simply wasted energy. If we want less inequality, he says, we must make taxes more progressive. (If you think this is a left-wing argument, think again: this is almost exactly what Matthew Slaughter, one of president George W. Bush’s former economic advisors was arguing quite recently.)

The opportunity is taken by some demagogues on the right and the left to stir up resentment—use the anxieties that the stagnation of incomes in the middle class and the fear of job loss have already given rise to—and use them to transmit those anxieties to targets, whether they be foreigners, immigrants, or the poor or any other target that might come along - the French.

That is one of the key goals of TJN: to restore the ability of governments to set up progressive taxation systems, which safeguard the credibility of the political system, and underpin the relationships between rulers and ruled. We oppose the arms race that pits state against state in the competition to lower tax, and that pits company against company in their race to corrupt and skew government policies in their favour.


Thursday, October 18, 2007

A Code of Conduct for Taxation

We have launched a Code of Conduct for Taxation.

It is astonishing that international tax policy has for decades been formulated and promoted by tax specialists, who are usually beholden to large corporations or vested interests, and who are highly trained in the art of manipulating numbers, but not in the art of democratic politics. One result of this has been a profound sense of unease about the process of international financial liberalisation, stemming from a feeling by ordinary people that the system is rigged in favour of a small minority.

Co-operation between countries on tax and in related fields tends to be confined to narrow issues like money-laundering. Much bigger issues are quietly avoided. Footloose corporations and elites consequently use the uncoordinated international architecture to play jurisdictions off against each other, using tax havens and the services of a global tax avoidance industry (accountants, lawyers, and banks) to avoid taxes, leaving others to shoulder the tax burden. Governments tend not to support each other in this field, probably because each gains advantage from attracting tax dollars from others. As a result of this international game of beggar-thy-neighbour, millions of people go without adequate healthcare, pensions, education, housing and other necessities, and governments cannot fund proper social investment or redistribute wealth. Citizens feel less engaged in national democratic politics.

Until recently civil society organisations have been meek in the face of the tax steamroller, and a lot of protests about the effects of globalisation have focused on international trade policies, not on international tax policies. But this is now changing. TJN, and others, are helping people to notice that tax is the missing link in the debate about international development.

So, as part of our effort, The Tax Justice Network, in partnership with the Association for Accountancy and Business Affairs, and Tax Research LLP (run by TJN’s Richard Murphy,) are launching this Code of Conduct for Taxation. We hope that this code will help re-balance the equation. As Richard notes:

The Code is based on principles. This is essential. A member of the UK’s accounting profession once said: “Rules are rules, but rules are meant to be broken . . . no matter what legislation is in place, the accountants and lawyers will find a way around it”. Principles are much harder to abuse, and it is time that the professions were asked to account for the principles they promote, and required their members to commit to them.

International tax policy may seem distant and arcane, but it is not – it affects all of us, every day, and in profound ways. The Code is a short document. The supporting arguments, which are more detailed, can be found here. Or, read about it in Accountancy Age. Over time, it may be adjusted in response to experience or developments. Please take a look now, and join the debate.


Tuesday, October 16, 2007

How to change the world in one easy step

Nobel laureate Professor Joseph Stiglitz, former Chief Economist to the World Bank and former head of the Council of Economic Advisers to President Clinton, has been discussing tax havens. In an event organised jointly by TJN-USA and Professor Stiglitz' Initiative for Policy Dialogue at Columbia University, New York, he told an amusing tale:

I’ve been very concerned for a very long time about these secret bank account havens and argue that they are bad for the developing countries, they are bad for money laundering, drugs, corruption – they are bad in every dimension. I occasionally, for reasons that I don’t fully understand, get invited to give talks in these places. I was in one of these havens and gave my lecture and afterwards a couple of the bankers came up to me a little bit sheepishly and said ‘we’re not as bad as you seem to think we are. We don’t do bank secrecy for corruption, drugs - all these nefarious things you accuse us of – we only do tax evasion.

Stiglitz then outlines a measure that he argues could transform the world, and events following the September, 2001 attacks in the United States showed that in broad terms it would be relatively simple to do.

There was an initiative of the OECD to do something about bank secrecy, and that led to drawing up a convention to reduce bank secrecy, which the bush administration vetoed in August 2001. The timing could not have been worse. We all know what happened in September 2001. We discovered that secret bank accounts are not only used for drugs, money laundering, but also for terrorism. Since then, the Bush administration has shown fairly convincingly that we can stop bank secrecy. But we have chosen only to do it for terrorism and North Korea. Bank secrecy has continued. We now know – it’s not difficult to stop bank secrecy, secret bank accounts. All the United States would have to say is that no American bank can do business with any bank that operates in a jurisdiction that does not subscribe to these basic transparency codes, these basic codes of conduct . . . for appropriate bank behaviour.

We would make a few comments on this. First, it is not just bank secrecy that we should worry about. We need to tackle secrecy of company ownership; the secrecy of offshore trusts and foundations, and other issues -- these are mechanisms which are used in jurisdictions such as Jersey where it is not bank secrecy per se that is the big problem. Nevertheless, Stiglitz is right. As Richard Murphy has pointed out, "just passing the law would be enough to end banking secrecy for good. It would never need to be used. All that’s lacking is the political will to tackle this crime."

Second, Stiglitz is perhaps too kind to the U.S. administration and banks. In his classic book Capitalism's Achilles Heel, the money-laundering expert Raymond Baker, a guest scholar at the Brookings Institution and director of the Global Financial Integrity program in Washington spoke of the wake of the September 2001 attacks: "October 2001, the U.S.A Patriot Act, and the ugliest period ever in the history of anti-money laundering legislative efforts." He described a major lobbying effort by big U.S. banks to dilute or abort proposed legislation to strengthen money-laundering efforts. They sought, among other things, to reduce the strength of "due diligence" requirements, and to decouple anti-money laundering proposals from the Patriot Act, so that anti-money laundering could be fought separately and hopefully killed. Luckily, the mood in America this time was such that they failed. As Baker continued:

In the minds of some people this caps three decades, since the Bank Secrecy Act was passed in 1970, of great progress on the anti-money laundering front. I do not agree that great progress is anywhere evident. The distinction that has to be made is between efforts and results. How can a trillion dollars a year - or more of illicit funds, despite all the laws we have passed and programs we have set up, still move with ease and abandon around the globe?

Who is going to do something about this? Well, Stiglitz has an idea.

It’s clear to me that we could shut down this bank secrecy if we wanted to. Why don’t we want to? You probably know why we don’t. The real question is how do we do something about this problem that costs all of our societies so much, in so many ways, and benefits so few. This is one of the areas where civil society – some kind of activism – will be necessary.

And that is where we are only too happy to help. Who will join us?


Thursday, October 11, 2007

We have forgotten that the earth is not flat

Earlier this year, the U.S. Republican Candidate John McCain repeated a curious myth, often repeated in U.S. political debate. “Tax cuts, starting with Kennedy, as we all know, increase revenues.” As the New York Times op-ed contributor Jonathan Chait remarked, it was the political equivalent of Galileo conceding that the Sun does indeed revolve around the Earth. Chait continued:

Mr. McCain is not alone. Every major Republican contender — Rudy Giuliani, Fred Thompson, Mitt Romney — has said that the Bush tax cuts have caused government revenues to rise. No prominent Republican office-seeker dare challenge this dogma for fear of offending the economic far right. Yet there is no more debate about this question among economists than there is debate about the existence of evolution among biologists.

Most economists believe that it is theoretically possible for tax rates to be high enough that a reduction in rates could actually produce more revenues. But I do not know of any tenured economist in the United States who believes this is true of the Bush tax cuts. Granted, economic growth sometimes causes revenues to rise faster than expected after a tax cut, as has happened since the 2003 tax cut. But sometimes revenues fall faster than expected after a tax cut, as they did after the 2001 tax cut. And sometimes revenues rise faster than expected after a tax increase, as they did after the 1993 Clinton tax increase.

Even very conservative economists who have worked for the Bush administration — including Greg Mankiw, a former chairman of the Council of Economic Advisers under President Bush who is now an adviser to Mr. Romney — have publicly stated that today’s tax revenues would be even higher were it not for the Bush tax cuts.

It’s not fair only to blame the Republicans. Earlier this week, Harry Reid, the Senate majority leader and a democrat, was lambasted in the New York Times for appearing to let a proposal to increase taxes on wealthy private equity partners fizzle. Nevertheless, two Democratic presidential aspirants, Barack Obama and John Edwards, did complain.

"If there was ever a doubt that Washington lobbyists don't actually represent real Americans, it's the fact that they stopped leaders of both parties from requiring elite investment firms to pay their fair share of taxes," Obama said. As president, he said, he would "close tax loopholes for big corporations, provide 90 percent of working Americans with a tax cut, and pass the strongest lobbying reform in history."

Edwards, a former North Carolina senator, said lobbyists wield "terrible power . . . to stop real reform . . . incredibly, for an investment of about $6 million in lobbying fees -- and another $6 million in political contributions -- these elite Wall Street traders preserved a $6 billion tax break for themselves," Edward said in a statement. "America needs a leader who will stand up to these powerful interests. ... We can't just trade corporate Republicans for corporate Democrats. We have to end the rigged system in Washington," he said.

Those of us who have long experience in some of the world's less successful economies - Nigeria would be a good example -- are well aware of the appalling effects that tax and other lobbying by powerful interests can have, not just on poverty and inequality, but on democracy, and ultimately on economic growth.

The disappointment in America comes at almost exactly the time as the British government has announced measures to increase taxes on private equity (but not by a whole lot.)

What has happened is that so many of us have forgotten why taxes matter. As Polly Toynbee remarks in the Guardian about the policies of Prime Minister Gordon Brown,

It will take hard work to remind people what tax is for, why it is a public good and not a burden, how it is the agent of social justice. Those ideas have been allowed to atrophy in the last decade. Labour has redistributed more than any government to the poor, at least slowing the rate of increase in inequality - but by never framing the argument in ideological terms, a generation has never heard how inheritance tax helped shape social progress in the last 100 years.

Inheritance tax -- another political hot potato in Britain now as the Labour government seeks to head off attacks by a rejuvenated Conservative Party, is a classic case of this myopia. In a truly excellent article in the New Statesman, the political philosopher Martin O'Neill explains why we should stop worrying and learn to love inheritance tax.

Just like the Democrats in the US, the Labour Party has tended to be somewhat defensive when reacting to proposals to abolish or reduce IHT. Rather than simply emphasizing that not all that many people pay IHT, Labour should be trying the difficult task of transforming public opinion on the issue.

Teddy Roosevelt took the view that “The man of great wealth owes a peculiar obligation to the State, because he derives special advantages from the mere existence of government.” There would be no good in being wealthy if one could not enjoy stable property rights, the protection of the police, and the peace of a well-defended country, all of which need to be paid for. This sort of reciprocity argument is also made by Bill Gates, Sr., father of the Bill Gates of Microsoft, in his book Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes. This sort of argument can get broad purchase with those of every political stripe, as is demonstrated by the fact that Roosevelt and Gates are hardly “soak the rich” firebrands or loonie lefties.

When one looks clearly at inheritance tax in terms of a concern with fairness and opportunity, it’s difficult to see why it has become so unpopular. Perhaps it is significant that many of those whose families would lose out most massively from a fair system of inheritance tax are precisely those who own some of our most influential newspapers, and who have the spare resources to exert political influence through lobbying and political donations. If so, that gives one more kind of democratic argument for why IHT is a vital policy in a fair and progressive country.

In terms of its roads, schools, and many other good things, the U.S. (and some other countries) have been living off investments made in the 1950s, 1960s and 1970s, and under the current tax-cutting mania, these are now in atrophy. We need to remind ourselves of why taxes matter.


Friday, October 05, 2007

Tax Justice Focus

The latest edition of TJN's quarterly newsletter, Tax Justice Focus is now out. It was guest edited by Jean Meckaert, and reports on the offshore world from a French perspective. It contains excellent articles on Europe's leading role on tackling tax havens; on Africa's offshore oil; on the forthcoming Doha Financing for Development meeting; on dictators' embezzled loot; and on economic and financial crime. There is also news, three book reviews - and much more.

Read it in English, here, and in French here.


Ngozi's curious Renaissance

Nigeria's former Finance Minister Ngozi Okonjo-Iweala has for some time been widely praised in western policy-making circles and in serious newspapers. She pushed through difficult economic reforms in Nigeria, helping the country secure major debt relief, before being shunted rudely aside by outgoing President Olusegun Obasanjo. She is a member of the Clinton Global Initiative, and the Nelson Mandela Institute. Now, as the FT reports, she has been appointed to be the World Bank's managing director for Africa, South Asia and Europe and Central Asia and will be one of the top aides to Robert Zoellick, president of the World Bank.

But at almost the same time, something else curious has happened too. And it worries us. A couple of days before her World Bank appointment she was made chairwoman of the African and Nigerian advisory boards of the Moscow-based financial services group Renaissance Group. Renaissance says it is

an independent group of investment banking, asset management, merchant banking and consumer finance companies, specializing in high-opportunity emerging markets. Renaissance Group operates in Russia, Ukraine, Kazakhstan, the United Kingdom, the United States of America, Cyprus, Sub-Saharan Africa, the British Virgin Islands, Switzerland and Bermuda.

Most of those places are tax havens. And here is something else. Ngozi is an adviser on, and has been a key driver behind, the World Bank's recently launched Stolen Assets Recovery (StAR) initiative -- which for the first time appeared to put the issue of tax evasion and tax havens firmly on the Bank's agenda for the first time. So what is Ngozi doing stepping into the world of tax havens, hand-in-hand with Renaissance? From where we are sitting, this looks like a serious conflict of interest. Perhaps there is an innocent explanation. We look forward to this explanation from Ms. Ngozi and from the World Bank.


Thursday, October 04, 2007

Conservatism and the Offshore Aristocracy

In a welcome article in The First Post, Phillip Blond argues that capitalism in its current form is failing to deliver affluence for all. Conservatives in the UK should now be supporting wealth redistribution from the asset rich to the asset poor. (It is a theme that has been taken up on the other side of the Atlantic too -- with commentators from both the left and the right calling for change.) Referring to the situation in Britain, the world’s largest tax haven, Blond says:

Conservatives should, however, go further and lighten the heavy taxes imposed on wage-earners by ending the disgrace of British sponsored offshore tax havens and the huge losses they create for the public purse.

Citing former Federal Reserve Chairman Alan Greenspan’s recently expressed concerns that capitalism will lose its public acceptability if it fails to deliver more equitable outcomes, Blond suggests that true conservatism is incompatible with contemporary capitalism with its tendency towards winner-takes-all monopolies.

Conservative thinking, in Europe and elsewhere, remains blinkered about how tax havens and harmful tax policies, especially tax concessions aimed at the super-rich and business donors to political parties, distort markets and exacerbate wealth inequality. The same applies to Gordon Brown’s government, which Blond rightly condemns for being captive to “a tax haven culture for the offshore aristocracy.”

Conservatives also need to think more rigorously about how deeply corrupted contemporary capitalism has become in response to the growth of offshore tax havens. Offshore special purpose vehicles are not just used for tax dodging. Insider trading, market rigging, disguising risk, false accounting, trade mispricing, illicit political donations, and a host of other corrupt practices are routinely transacted through opaque structures in shady places like Jersey, Guernsey and the Isle of Man. Richard Brooks, another commentator, touches on this in another fine piece in the same edition.

Conservative politicians are not alone in turning a blind eye to the damage caused by tax havens, but true conservatism is based upon values of upholding the integrity of public institutions and democracy. It is heartening to see such values being asserted publicly.


Monday, October 01, 2007

Guernsey and Jersey abet Africa fraud

The UK's Guardian newspaper reports the apparent looting of Kenya's treasury by senior politicians, all with the gleeful assistance of an arms dealer and the British tax havens of Guernsey and Jersey. As the article says:

The Serious Fraud Office has begun a fresh investigation into British links with one of the biggest corruption inquiries in Africa. UK firms won huge contracts from the Kenyan governments of presidents Daniel Arap Moi and Mwai Kibaki, but anti-corruption investigators have discovered that many were fictitious and amounted to state-sponsored looting.

Financing for some of the suspicious weapons contracts at the heart of the investigation into the now well-known Anglo Leasing scandal was apparently administered through a company called Investec Trust, based in Guernsey. Investec handled business for a group of companies called LBA (short for Lightweight Body Armour) through accounts with the banks HSBC in Guernsey and Standard Chartered in Jersey. Two of the suspects, who once held extensive property interests in the UK, have disappeared from their Nairobi villa and are on the Kenyan police wanted list.

Investec staff claim that their suspicions were aroused as early as April 2002, but they took no action at that time. Instead they delayed until 2004, when Kenyan anti-corruption investigator John Githongo raised concerns in his report on corruption in Kenya, and then - acting on belated recommendations from their lawyers - they submitted a suspicious activity report to cover their backs. Proof, if it was needed, that the culture of the willfully blind professional is live and kicking in the Channel Islands.

Tax havens like Jersey and Guernsey routinely claim to have cleaned up their act, and their cheerleaders, including The Economist magazine, say they believe them, and claim that a race to the bottom among tax havens is a myth. We don't buy this rubbish. Nor does the Wall Street Journal. The newspaper says that Jersey is now relaxing some of its rules yet further.

It is a shift that could trigger a race to the bottom among offshore financial centers . . . Jersey's decision to introduce a new regime "was based on demand from the hedge-fund and other alternative-investment management community, which wanted an unregulated product," said Robert Kirkby, a technical director at Jersey Finance.

The behaviour of Jersey Financial Services Commission, headed by Colin Powell who also chairs the Offshore Group of Banking Supervisors, is disgraceful. And its timing isn't so clever either.