Thursday, December 20, 2007

Does being a tax haven make you rich?

We spend a lot of time reminding people how tax havens make other countries poor - by using secrecy and other unpleasant tricks to suck capital out of them. Ah, the defenders of tax havens reply, but they make the tax havens rich!

Do they really? Take a look at this nice story from the tax haven of Bermuda, in the UK's Telegraph newspaper: not exactly a fount of radicalism.

Tony Black lives on the richest island on Earth. Today is a typical day: after driving a taxi for eight hours, he will head to a warehouse, where he has an evening job operating machinery. Late tonight, he will move on to his third job, as a nightclub bouncer. At weekends, Tony, 28, drives a truck.

Tony's story is not unusual. Bermuda has the highest GDP per capita in the world - 50 per cent higher than America's - and it has zero unemployment. Mega-wealthy Britons, among them actress Catherine Zeta Jones and insurance magnate John Charman, rub shoulders with even wealthier American tycoons such as Ross Perot and Michael Bloomberg. Meanwhile, the average black Bermudian takes two or three jobs just to make ends meet. And the problems are worsening. A severe housing shortage has pushed the price of even a modest home way out of the average Bermudian's reach. Now the issue of inequality has spawned a power struggle that some say risks destroying the tax haven's economy.

Ireland is another tax haven. Look at its position on the graph we pointed to yesterday: extremely high rates of child poverty. Now the tax haven of Jersey has just put out a performance record for itself for the year 2007. Like Bermuda, it is one of the world's richest jurisdictions - on paper. Dig beneath the headline numbers, and something different emerges.

As you can see, mainstays of the economy - like agriculture, manufacturing and tourism not only aren't growing - they are shrinking. Agriculture, according to the separate table accompanying this graph, has declined by more than 20% since 1998. And this is no co-incidence.

There is an effect here that is familiar to citizens of oil-producing countries: the Dutch Disease. It is part of a wider phenomenon known as the Paradox of Plenty: more money can sometimes actually make you poorer. It goes something like this: large inflows of money (in the case of, say, Angola, it's oil money; in Jersey's case it's money owned by rich Angolan politicians and others from around the world who love Jersey's tax haven status) cause prices to rise - either through a shift in the exchange rate, or through inflation, or both. The effect is to make everything produced locally more expensive, and so these sectors -- like agriculture or tourism -- can't compete. They wither. The tourists stop coming because it's too expensive. And so on.

As a result, these economies become ever more dominated by the financial services (or oil) industries. Even if they want to diversify away from these dominant industries, they can't: because these sectors are killing the other areas of activity. And, when a sector gets too dominant like this, you also get political "capture" - the lobbyists and cheerleaders for tax havenism get ever more politically intertwined with the politicians. It just gets worse.

Jersey's latest scorecard does not break down the distribution of income on the islands or provide other politically sensitive measures. Why not? In Angola's case, the contrast between the headlines (among the world's fastest growth rates for the last three or four years) and the reality for ordinary people (the world's second worst child mortality) is shocking.

Jersey's problems will not be nearly this bad. But, as many Jersey residents tell us, there are serious tensions on the Selfish Isles. In the absence of Jersey's scorecard on income distribution, let's look at its unemployment data. The data claim it's fairly low. But then the report says this:

It should be noted, however, that due to the absence of unemployment benefit in Jersey the number of people registered as unemployed should be regarded as an indicator rather than the actual level of unemployment.

Oh, and that's not all. Richard Murphy has unpicked another set of numbers from this Jersey report. Take a look.

To end with, let's get back to the Bermuda story:

One Brit - who, like most executives, does not want to be named for fear of making matters worse - said: "My son got home and said: 'Dad, am I a racist?' My wife also feels like a lot of this talk is aimed at her.

The political effects of this tax haven inequality, political capture, poverty, Dutch Disease etcetera can be very serious. When presented with breathless texts from the well-funded libertarian institutes shouting how tax havens make you rich, we would offer a couple of bits of advice. First, look behind the headlines. Second, and much more importantly, consider the harm that tax havens cause to other countries.


Wednesday, December 19, 2007

Tax and child poverty

We would like to share this graph with you. It speaks for itself.

For those skeptics wondering about how child poverty is measured in this graph: follow the link we've provided. It's defined in this report as "Share of children 17 years and under living in households with equivalized disposable income less than 50% of median income; Society at a Glance: OECD Social Indicators, 2005, p.57." This is how the United Nations defines poverty.

For those doubting the US poverty rate identified in this graph, take a look here. And if you doubt that, follow the links to the source materials. And even if you really want to doubt those (why would you?) - well, the precise definition of poverty that you use doesn't really matter in this graph - for it's the trend: the relationship between the component parts, that is the important (and striking) thing here. It tells a simple story: the lower your taxes as a share of GDP, the more child poverty.

See more here. Note that this graph refers to relative poverty within countries (not between them.) Does inequality matter? Yes it does: around the world, it is one of the great political issues of all time.

And one last thing: read the full report. It contains much else that might surprise you.


Wednesday, December 12, 2007

Scrutinising Switzerland

TaxAnaysts have done it again - a well-researched probe into the filthy affairs of Switzerland, one of the great epicentres of global tax evasion. (The Swiss don't like to call this behaviour corruption - but that is exactly what it is.) TaxAnalysts' conclusion?

At the end of 2006, $606.8 billion of assets in Switzerland’s financial sector were beneficially owned by nonresident individuals who can easily avoid tax on those assets.

This follows their analyses of three other crime-creating jurisdictions: Jersey and Guernsey and the Isle of Man - leading to a total of tax evasion asssets of $1.5 trillion of tax evasion assets in these four jurisdictions. Switzerland is particularly shameless in this respect: brazenly thumbing their nose at other countries who want to crack down on tax evasion.

The report showcases some of the weasel words that lie at the heart of the offshore world. To the $606.8 billion figure should be added a further $356.1 billion in fiduciary deposits. What are these? Like "tax planning," or "tax efficiency" -- words beloved of the tax avoidance and evasion industry -- to the uninitiated, the words "fiduciary deposits" might suggest propriety, and skilled high finance. They are not. The system of Swiss fiduciary deposits promotes criminal tax evasion. As TaxAnalysts explains:

Swiss fiduciary deposits are deposits made by Swiss banks on behalf of their customers in banks in other jurisdictions that have little or no withholding tax on bank interest. And because the deposits pay interest that is not Swiss-source, there is no Swiss withholding tax. Those deposits are highly conducive to tax evasion by individuals. As noted in a 1999 OECD working paper: ‘‘This scheme allows a nonresident desiring to evade taxes to be reasonably certain that a failure to declare the invested capital and/or the interest thereon to his country of residence will go undetected."

In other words, Swiss banks in this case are serving as a kind of turntable, flipping money in and out of the country in order to stop taxes and to trip up the forces of law and order.

Let's be clear about something else. This data is only part of a much bigger picture.

First, TaxAnalysts have made several assumptions which have reduced their potential total to "just" $606.8 billion. For example, for certain types of accounts, the study disregards deposits by Swiss residents - but TaxAnalysts admit that they are assuming that residency here designates beneficial ownership and not, for example, the residence of Swiss lawyers making deposits on behalf of foreign investors. Which is a big, and almost certainly false, assumption in many cases). The study also cuts out hundreds of billions of dollars because this report is part of a bigger global study that TaxAnalysts are doing, and since they are including Swiss fiduciary deposits (for example) in the totals of the jurisdictions where deposits ultimately reside, such as Guernsey and Jersey -- and they don't want to count these deposits twice. This is right for such a global study - but if your interest is in Switzerland, then you will want to include these numbers.

We sent this report to someone knowledgeable about Swiss banking, and he replied that the total sum could well be higher: there are, he said, "a lot of black boxes."

And that is by no means all. The figures here refer only to potential tax evasion by individuals. Tax evasion, which is (by definition) illegal, is just one component in the much larger universe of tax dodging. An entire industry has grown up to promote the other part of the problem: tax avoidance (which is, by definition, legal: as a former UK Finance Minister put it, "the difference between tax avoidance and tax evasion is the thickness of a prison wall.") And remember that this is about individuals: we haven't even got onto the subject of corporations avoiding or evading taxes through transfer mispricing and all kinds of other tricks - which is yet another story.

This is an excellent study, and it's nice to see serious researchers digging deep into the murky world of offshore: the scandal has been allowed to fester in secrecy for far too long. But it's important to remember: these huge numbers are only a part of a much, much bigger picture.


Wednesday, December 05, 2007

The UK – leading the fight against anti-corruption

The latest edition of the Distressed Debt Report (DDR), has been prying into the failure of two Bear Stearns hedge funds domiciled in the Caymans – where more than 80% of the world’s 8,000 hedge funds are registered. Regulators in the U.S. state of Massachusets say that Bear Sterns has been using Cayman to shield the directors of the two funds from their duties to investors. The directors refused to respond to subpoenas, claiming that the U.S. regulators have no jurisdiction in Cayman. Cayman insists, of course, that all is above board.
Whatever the truth, the DDR’s reporter Reg Crowder describes something else. He discovered, after rooting through internal UK Home Office and Foreign & Commonwealth Office documents, that when the British government ratified the UN Convention against Corruption (UNCAC) in February 2006 (why so late?), it exempted Cayman and all the other overseas territories and crown dependencies like it! “In effect,” he writes, “the British government exempted most of the world’s offshore money centers.”

The UK claims to be in the forefront of the international fight against corruption. But in light of this, and other ghastly scandals such as the BAE affair, It might be more accurate to say this: Britain is at the forefront of the fight against the fight against corruption.