Monday, June 30, 2008

TAX HAVENS CREATING TURMOIL: The Tax Justice Network submission to the UK Treasury Select Committee

The Tax Justice Network warmly welcomes the UK Treasury Select Committee hearings on Offshore Financial Centres (OFCs) that start on 1 July 2008. In anticipation of those hearings TJN-UK has submitted evidence to the Committee and with its agreement is publishing that submission today.

Entitled ‘Tax Havens: Creating Turmoil’ the submission examines the harm that tax havens and OFCs cause to the global economy. As well as dealing with each of the Committee’s 12 questions the submission provides more than 100 pages of background evidence on the nature of the offshore world, and the harm it causes.

In a press release issued today John Christensen, International Director of the Tax Justice Network said:

“We know that a large number of tax havens are submitting evidence to this Committee claiming that their actions are beneficial. We also know that major accounting, legal and banking businesses, who make extensive and very profitable use of tax havens, will back these claims. The evidence though is clear: tax havens function for the sole purpose of allowing people and companies to avoid and evade tax law and other regulations in the countries where they live or work. Tax havens are used to attack the sovereignty of nation states and they harm the efficiency of globalised markets.”

Richard Murphy, a chartered accountant and director of Tax Research LLP, who wrote the report for the Tax Justice Network added:

“This report shows that tax havens and offshore financial centres are not the same thing. Tax havens are the countries that create the laws designed to undermine other states. Offshore financial centres are made up of the lawyers, accountants and bankers who sell the resulting products to people from other countries who want to abuse the law of the place in which they live.”

He added:

“Tax havens and OFCs need each other to undertake their immensely damaging and sometimes illegal trade. It is vital though that we see them as different things. To date all effort is being put into regulating tax havens, and they are then expected to regulate the OFCs that they host. However, as this report shows, all the power in this relationship rests with the OFCs because they are managed by migrant professionals whose only interest is in pursuing money without consideration for society. As we have seen in the UK this year, if they do not get their way they threaten to leave. In a small economy this could destroy a country.”

As John Christensen explained:

“Recent attempts by international organisations to regulate tax havens have failed because they were far too timid and have targeted entirely the wrong players. To stop tax havens from causing further harm we must put the accountants, lawyers and bankers who operate there out of business. This will require tackling the secretive arrangements they use to hide their own and their client’s activities. This is entirely practicable and our report includes 18 recommendations on how to proceed.”

Richard Murphy said:

“I am ashamed that my own profession, far from tackling tax haven abuse, has become a core part of the problem. The Treasury Select Committee should not be asking the Big Four firms who come before it ‘how can we solve this problem?’ but should instead be asking ‘Why is it that you are abusing in the UK through your tax haven operations because you are present in every one of the tax havens that seeks to undermine the law and taxation systems of this country?

The above is the text of a press statement sent by TJN. Richard Murphy has added details to this, on his blog. One blog notes that the Executive Summary of Tax Havens: Creating Turmoil beings with a quotation:

"We feel that this (lack of provision of an effective regulatory system) might be a grave omission, since it is notorious that this particular territory, in common with Bermuda, attracts all sorts of financial wizards, some of whose activities we can well believe should be controlled in the public interest."
- This is an extract from a memorandum concerning the Bahamas dated 3rd November 1961 submitted by Mr W.G.Hulland of the Colonial Office to Mr B.E.Bennett at the Bank of England.
It was seen in 1997 by John Christensen in the Bank of England archive.

As Murphy says, nothing has changed. He adds more detail, here.


PRESS RELEASE: Country By Country Reporting will make global markets more transparent

Tax Justice Network
London, June 30th, 2008
As France takes over the rotating presidency European Union on July 1 it must take the lead in demanding radical improvement in the transparency of global financial markets. One of the most powerful and cost-effective ways to boost transparency would be to introduce Country by Country Reporting into international accounting standards.

Multinational companies use subsidiaries to shift profits and risks between different jurisdictions – often tax havens – yet current international accounting standards do not require them to publish relevant country-specific information on corporate income, profits, taxes, investments, assets, liabilities (or carbon emissions.) Instead, global standards set by the International Accounting Standards Board (IASB) permit companies to combine results from different countries into a single global (or regional) figure, and it is impossible to use company accounts to unpick these numbers for each country.

All the trade between group companies disappears from view in the consolidated accounts that current IASB standards endorse. The OECD estimates that 60% of all global trade is undertaken on this basis. And we know almost nothing about it.

Enron had many hundreds of subsidiaries, often located in the Cayman Islands and other tax havens: County-by-Country Reporting would have exposed its crimes at an early stage.

Country by country reporting would have given early warning of the global credit crunch, and would have limited its impact. Under the current system, regulators and markets cannot meaningfully assess the quality of earnings or risks, which are often specific to a country. Country by country data would make this possible. Transparency is essential for clean and efficient markets, and it underpins democracy and a respect for the rule of law.

At present the governments of developing countries cannot use company accounts to work out what taxes they are properly owed by multinationals, and citizens of corrupt countries cannot work out what deals their rulers are making with multinationals. Country by Country Reporting would provide this information, it would expose which companies are using tax havens in abusive ways, and it could benefit poor countries as much as all foreign aid does now.

Small businesses and ordinary individuals worldwide pay more tax, and public services lack funding, because multinationals can use the opacity in company accounting to shift profits and minimise taxes, leaving others to pay instead. Important economic analysis essential for basic policy-making is made harder, and often impossible, by the lack of information on company activities.

Non-governmental groups associated with the Publish What You Pay coalition have achieved some success by asking for Country by Country Reporting in the extractive industries, and the European Parliament has now asked the IASB to move forwards with a Country-by-Country accounting standard for the extractive industries. New legislation has been introduced in the United States.

The Tax Justice Network strongly supports these initiatives, but we want to go further. We now call for Country by Country reporting for all multinational companies using International Accounting Standards.

Country by Country reporting would be easy and relatively cost-free to achieve: multinationals already hold this information internally. It is high time they were made to publish this data. Europe must take a forceful lead on this without delay. The British government must strongly support this push.
John Christensen, international director of the Tax Justice Network, said:

“Current accounting standards throw a veil of secrecy over company accounts. Global markets will only work in the public interest when there is transparency. A lack of transparency encourages crime and other abusive activities and hides important risk information. Country by Country Reporting would make markets safer, cleaner, and more responsive to voters’ democratic choices. It would expose abusive tax haven activity by multinational companies. Tax is the most sustainable and beneficial form of finance for development; Country by Country Reporting would help release untold billions in tax revenues for poor countries, reducing their reliance on foreign aid.”

Richard Murphy of the Tax Justice Network-UK created the concept of country by country reporting. He said:

Country by Country reporting is possible. We have to shatter the myth that accounts are only for shareholders. They are not. They are for everyone, in developed and developing countries, whether they are shareholders or not, suppliers or employees of these companies or not, or just concerned citizens. Corporate responsibility is based in communities and it is in our national communities that we must hold companies to account. That is why country by country reporting is essential.



- Tax Justice Network briefing paper on Country-by-Country reporting:

- French version and German version

- Publish What You Pay on International Accounting Standards.

- European resolution on accounting standards for the extractive industries

- New U.S. draft legislation on country-by-country reporting for the extractive industries


Wednesday, June 25, 2008

Catholic organisations on tax and financing for development

We warmly welcome a new report by CIDSE, an alliance of 16 European and North American Catholic development organisations. It is concerned with the crucial issue of "Finance for Development" - and helps prepare the ground for the Doha summit meeting in November and December this year.

The report contains very many excellent recommendations. These, include:
  • More effective international co-operation on fiscal matters
  • The adoption of a UN Code of Conduct on tax evasion and avoidance
  • Upgrading the UN Tax Committee
  • Giving developing countries policy space to develop effective progressive taxation
  • Strengthening judicial co-operation between states on tax and corruption, and on repatriating stolen assets (see here for an example of why this might be important)
  • Getting the IMF to monitor financial centres properly
  • Strengthening the follow-up process.
The report is worth reading in full.


Tuesday, June 24, 2008

Revoke UBS' banking license

Swiss bank UBS is in deep difficulty in the United States, with its officials accused of helping wealthy clients evade U.S. taxes. The defendant, Bradley Birkenfeld, helped wealthy US clients set up nominee and sham entities, usually in tax havens including Switzerland, Panama, British Virgin Islands, Hong Kong and Liechtenstein. Take a look at this US Justice Department press release, and the attached statement of facts which says, among many other things:

"Rather than risk losing the approximately $20 billion of assets under management in the United States undeclared business, which earned the bank approximately $200 million per year in revenues, managers at the Swiss Bank, including defendent Birkenfeld, assisted these wealthy US clients in concealing their ownership of the assets held offshore by assisting these clients in creating nominee and sham entities. These entities were usually set up in tax haven jurisdictions, including Switzerland, Panama, British Virgin Islands, Hong Kong and Liechtenstein . . . . by concealing the U.S. clients' ownership and control in the assets held offshore, defendant Birkenfeld, the Swiss Bank, its managers and bankers evaded the requirements of the Q.I. program, defrauded the IRS and evaded United States income taxes."

(In that statement Q.I stands for Qualified Intermediary, of which more below.) The statement added:

"The Swiss Bank trained bankers traveling to the United States in techniques to avoid detection by United States law enforcement authorities, including training bankers to falsely state on customs forms they were traveling to the US for pleasure and not business."

In other words, they were training them in criminal activity. Read the rest of the statement of facts - it is quite astonishing that this could even happen. As a media report on the matter said, the defendant:

"even agreed to buy diamonds for a US client using Swiss funds and 'smuggled the diamonds into the United States in a toothpaste tube'.''

Things are looking so bad for UBS, in fact, that media reports are speculating that:

"In a worst case scenario, UBS could lose its banking license which could have adverse effects on the global private banking franchise."

Quite right. UBS must, quite simply, have its banking license taken away. It has, according to this rather compelling evidence, been wilfully aiding and abetting criminal tax evasion - on a large scale. There are, we hear, four thousand US clients now being investigated.

We have described a number of different approaches for tackling offshore abuse and abusive taxation systems, some of which require international co-operation. But some of these measures can be taken unilaterally. This measure - withdrawing banking licences - is one such measure. Switzerland has been abusively and aggressively invading US sovereignty by encouraging and helping US citizens to commit crimes under US law, by asserting Swiss bank secrecy - and now the United States is starting to fight back. As the Financial Times remarks:

"The year has also brought a renewed challenge to bank secrecy. Matters began badly when German prosecutors launched a high-profile campaign against alleged tax dodgers after having acquired stolen data about customers of the trust subsidiary of LGT, Liechtenstein’s biggest bank."

Is the US fighting back on tax evasion? We hope so. The mood is certainly changing.

The UBS case has an interesting historical pedigree, linking both to the former Clinton administration and to the current Republican . It revolves around the curious concept of "qualifying intermediaries" - financial institutions that can act on behalf of their clients and who serve as conduits for clients' funds - so that there is no legal requirement to disclose who the clients are. The qualifying intermediary regime was set up by former U.S. Treasury Secretary Robert Rubin in the Bill Clinton administration (now director of the Executive Committee of Citigroup.) What he did, in effect, was to set up a new secrecy space in America, in order to attract foreign capital. He knew what he was doing. It was a clear move to reinforcing the US position as a tax haven. The regime subverts the obligation of the United States to exchange tax information under the tax information exchange clauses in US income tax treaties and in US Tax Information Exchange Agreements (TIEAs) that the U.S. has signed with a number of foreign countries (which are supposed to improve transparency.)

Birkenfeld, of course, was acting as a Qualified Intermediary. It brings dishonour to the Clinton administration, and particularly Rubin. The current Republican campaign is compromised, too, notably through former Texas Senator Phil Gramm - who is vice chairman of UBS in the United States. As the Houston Chonicle put it:

"Gramm, now an investment banker with UBS, has vigorously stumped for Sen. McCain, R-Ariz., and serves as an unpaid general co-chairman of McCain's campaign, generating speculation that the former Texas A&M economics professor might become Treasury secretary in a McCain White House."

The offshore world has created a wholesale contagion - of the entire political system. Gramm is just one example. There are legions of others. Former British Prime Minister Margaret Thatcher's financial affairs were handled out of the British tax haven of Jersey - in offices right outside the school gate where TJN's director John Christensen went to school. Her New Zealand-born husband Dennis Thatcher claimed non-domicile status. Her son Mark - currently caught up in allegations of coup plotting in Equatorial Guinea - is currently believed to be skulking in the British-linked tax haven of Gibraltar. Britain's Conservative Party has been bankrolled by the offshore-steeped Lord Ashcroft who is deeply embedded in the deeply murky and opaque tax haven of Belize. And so on, and on, and on.

The crime-infested offshore system infests politics around the world. The time has now come to stand up to it.


International News - June 24

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

The UN is failing on international tax - so the OECD calls the shots
June 20 (TJN) - Dries Lesage of Ghent University, who was part of TJN's delegation to the UN Tax Committee in Geneva in late 2007, has recently published a new report about the role of the UN in international tax and the financing for development (FfD) process around Doha.

Tax and the IMF's policy advice
June 19 (TJN) - IMF advice to developing countries on aspects of tax policies appears to have contributed strongly to inequality, according to a new briefing paper prepared for the Bretton Woods Project by three researchers at the London School of Economics.

International Accounting Standards, again
June 20 (TJN) - We have already reported several times on the International Accounting Standards Board (IASB) TJN's Richard Murphy has now been in discussions with the IASB. He describes what happens, in his latest blog.

A One-Time Tax Break Saved 843 U.S. Corporations $265 Billion
Some 9,700 United States corporations had foreign subsidiaries in 2004. While only 843 corporations took advantage of the tax break, those companies are the biggest and wealthiest in America. A 2007 academic study found that the tax break did not stimulate investment in the United States economy and that repatriated money was often used for disallowed purposes, like stock repurchases. “It basically worked out to be one big giveaway,” said Robert Willens, a tax and accounting authority in New York. “The law never took into account the fact that money is fungible.”

UBS shares hit by talk of further losses, tax evasion case
June 22 (AFP) - "In a worst case scenario, UBS could lose its banking license which could have adverse effects on the global private banking franchise."

Ex-UBS Banker Pleads Guilty in Tax Evasion
June 20 (NYT) - Prosecutors and lawyers for Mr. Birkenfeld contend that he was not a rogue employee but rather part of an broad effort by the bank to flout American tax laws with offshore banking services sold to wealthy Americans. Justice department press release here:

Salinas funds finally head back to Mexico
June 18 (Swissinfo) - Switzerland will hand over $74 million (SFr77.3 million) to Mexico from bank accounts linked to the brother of a former Mexican president. The funds - more than $110 million in bank accounts linked to Raul Salinas -were originally frozen after the Swiss authorities initiated criminal proceedings against Salinas in 1995 for money laundering.

Analysis: India to check money laundering
India's lone banking regulator, Reserve Bank of India, recently blocked the application of Swiss bank UBS for a banking license in India on the ground that it was involved in $8 billion money-laundering racket.

Espagne : la justice affirme avoir démantelé la "plus importante mafia russe"
June 14 (Paradisfj) - The organisation Tambovskaya-Malyshevskaya, “the world’s most important Russian criminal structure” has been “totally dismantled” in an operation involving 400 police officers in southern Spain, the Spanish prosecutor’s offices said. In French

India Under Threat
June 23 (Tax Research) – On a report that UK business leaders are concerned that the Indian government could clamp down on the tax havens of Mauritius and Cyprus as it struggles to come to terms with soaring inflation and budget problems.

David Cay Johnston Launches Tax Notes Column
June 23 (Taxprof) - David Cay Johnston: “Our tax system is working against us. It is slowly making us poorer. And it is also making some of the already rich much richer, a perversion of historic proportions that few Americans grasp.”

House may slap taxes on BI to boost budget transparency
June 20 (Jakarta Post) - The Indonesian central bank may have to pay income tax starting next year if it records a budget surplus, a further deliberation on the income tax bill reveals. "Perhaps BI will be more transparent about its budget if it is subjected to tax."

Why the London loophole should be closed
June 23 (FT) - The proposed legislation is more commonly referred to as the “London Loophole” Act, and is somewhat akin to the “Enron Loophole” legislation recently passed by the US Congress. The legislation and the CFTC’s action are intended to close a significant regulatory lacuna - traders can arbitrage between the two markets, and the CFTC in effect regulates only half of the trading.

Obama Vows To Close "Enron Loophole" For Oil Speculators
June 23 (US News) - Obama would ensure that U.S. energy futures cannot be traded in offshore, unregulated markets; and work toward international regulation of oil futures markets, in cooperation with like-minded countries.

Tax Lawyers for Obama
June 21 (TaxProf) - Tax Lawyers for Obama: Lawyers and other professionals with a special interest in tax policy who support Barack Obama for president. Tax Policy Discussion Group: Discussion of tax policy issues from the perspective of Obama supporters, with a particular emphasis on reform and development of tax ideas that can bridge both the right and the left.

New searches in Liechtenstein tax scandal: media report
June 21 (AFP) — New searches have been carried out in Germany in a major Liechtenstein tax evasion scandal, the weekly Der Spiegel said in a report released Saturday.

Singapore: Asia's Switzerland for millionaires
An industry report by consultancy Capgemini and US investment bank Merrill Lynch said the financial wealth held by Asian HNWIs could reach a staggering 12.7 trillion dollars by 2011, growing at an annual rate of 8.5 percent, above the global rate of 6.8 percent.

Vodafone fights massive Indian tax claim
June 23 (Accountancy Age) - Vodafone is facing another tax battle, this time with the Indian taxman over a claim for $2bn (£1bn) from its purchase of controlling stake in Indian business Hutchison Essar last year. The claim is for $2bn in capital gains tax on the $11bn deal as Essar's assets are based in India

India Under Threat
June 23 (Tax Research) - On a report that “UK business leaders are concerned that the Indian government could clamp down on the tax havens of Mauritius and Cyprus as it struggles to come to terms with soaring inflation and budget problems.”

Globalisation, Tax Competition and the Harmonisation of Corporate Tax Rates in Europe: A Case of Killing the Patient to Cure the Disease?
This paper surveys the literature on tax competition, and uses it to analyse current European proposals to harmonise corporate tax rates.

Ireland is wrong to put its miracle at risk
June 22 (FT) – Wolfgang Munchau - Readers steadfastly maintain that the country’s economic success had nothing to do with the EU and everything to do with domestic policy – in particular with low corporate taxes and skilled labour. The view expressed by those correspondents is as wrong as it is revealing.

UAE updates money laundering regulations
June 22 (FT) - The United Arab Emirates has implemented new anti-money laundering regulations as it seeks to meet international standards of financial compliance. The central bank last week notified banks and exchange houses of the 13 new regulations.

Full Paris tax agenda on ice after Irish poll
June 18 (FT) - France has dropped plans to push forward with tax harmonisation under its European Union presidency, following Ireland’s rejection of the Lisbon treaty.

Investors mull exiting Netherlands over tax
June 18 (Reuters) - Private equity investors are threatening to leave the Netherlands due to a proposed law that could raise the tax they pay on investments to as much as 52 percent from 1.2 percent currently, investors said on Wednesday.

Rangel Taps Private Equity To Pay For AMT
Jun 17 (The Politico) - Folks in the private equity industry felt a jolt Tuesday when House Ways and Means Chairman Charles B. Rangel (D-N.Y.) announced his plans to raise taxes on investment income those money managers take home each year.

Clouds disturb sunny outlook
June 18 (FT) - Two storms are looming for 2008 in Switzerland's private banking sector. While the first - extremely challenging markets - may be transitory, the second - the threat to bank secrecy - looks more permanent.

Kieber Sale of Liechtenstein Data Triggers Backlash (Update1)
June 18 (Bloomberg) - Kieber is in a witness protection program because bankers, LGT clients and even drug dealers who had money in Liechtenstein are trying to find him, says Blum, who declined to identify the country that is protecting his client.

Ghana: Government Urged to Reconsider Tax Exemptions to Mining Companies
June 13 (Allafrica) - The General Secretary of the General Mine Workers Union (GMWU) Ghana, Mr. Prince William Ankrah has called on government to re-consider the tax concessions given to mining companies that operating in the country. In his view, instead of the nation benefiting from the tax exemptions the companies rather use the funds to employ expatriate workers to the detriment of Ghanaian workers with equal educational qualifications.

Tanzania: Slight Relief from Mining
June 13 (AllAfrica) - The government yesterday introduced a 0.3 per cent Alternative Minimum Tax (AMT) of the turnover on corporate entities making losses for three consecutive years, a move aimed at the lucrative mining industry. Companies that post losses annually can't pay the 30 per cent corporate tax, a provision mainly benefiting large mining sector firms which for the past decade have been declaring losses, with $1billion annual turnover.

New Report from CTJ:
House Proposal to Pay for AMT Relief by Closing Loopholes Would Make the Tax Code Fairer and Avoid Increasing the Deficit; Media Matters for America Catches Numerous Attempts to Distort Obama's Tax Plan; FY 2009 State Budget Carnage: Rhode Island; New Jersey; Florida; Delaware Budget Negotiations: Better Than Most States, But Still a Disappointment; State Transportation Woes Have Common Thread; People Will Not Automatically Love You if You Slash Taxes at Any Cost; Alabama Case Contests Discriminatory Property Tax Restrictions

Britain's new class structure
June 20 (Guardian) - Britain now has five distinct classes. The poor . . . then a wholly distinct class has now developed at the very top. What is striking is that these Babylonian excesses are now locked in more closely than ever to the exercise of power.

Offshore Jamaica - The Path Ahead
June 18 (Jamaica Observer) - International tax consultant Dr Trevor Thomas launched his book "Offshore Jamaica - The Path Ahead" . It comes just one month before the expected completion date of a study on the development of a Jamaican international financial centre by KPMG.

The UK: no place to quit.
June 17 (Tax Research) - The FT says: :Britain is the most popular destination in Europe for investment by foreign companies. Funny that: I thought everyone was leaving?


Monday, June 23, 2008

Banks and bad competition

"I may like many bankers, but I rather dislike banks. I recognise their necessity, but fear their irresponsibility." So spoke one of Britain's leading economic commentators in January.

Now another of Britain's leading economic commentators, Will Hutton, has just said this:

"It is true that competition tends to deliver efficiency and generalised economic benefits. But competition between banks is different. The reason is that, unlike other industries, the soundness of what any one bank or building society does depends on the behaviour of all the others. If they all compete to lend aggressively without any regulatory constraint, that provides home-buyers the plentiful mortgages to buy homes whose prices go up. That in turn makes the original collateral even sounder. Thus emboldened, banks lend again and again. The result is a credit boom and asset price bubble that no power on earth, except prohibitively high interest rates, can keep in check. Unfortunately, the same works in reverse."

This is somewhat analogous to our own arguments about tax competition: people who believe that "all competition is good" fail to see that there is good competition - such as competition between suppliers in clean and properly regulated markets, and bad competition - like competition between companies on who can pay the biggest bribe to win a contract. Banks, as Hutton points out, engage in bad competition in this respect.


Friday, June 20, 2008

International Accounting Standards, again

We have already reported several times on the International Accounting Standards Board (IASB) which sets standards on how transparent companies are worldwide. A previous blog of ours talked about the IASB like this:
"(It is) a curious organisation that decides how companies publish their company accounts. Despite its grand-sounding name, the IASB – which takes decisions that will profoundly affect all of us – is a wholly private company based in London and registered in the American secrecy jurisdiction of Delaware. It is funded by the Big Four accountancy companies and by some of the biggest multinationals in the world. In effect, this private company, which is subject to no democratic processes, is writing some of our most important laws. We are not talking about "soft" laws like guidelines or codes of conduct -- but hard European law. In the past, the latest accounting standard would simply have been nodded quietly through, and it would become law. But a few of us have noticed what is happening -- and we are alarmed."

We bring you an update. TJN's Richard Murphy has now been in discussions with the IASB. He describes what happens, in his latest blog.


The UN is failing on international tax - so the OECD calls the shots

We have just blogged on failings in the IMF's tax advice to developing countries. We now turn to the United Nations, where a matter of crucial importance is at stake in the run-up to the Doha summit meeting at the end of this year. The Doha meeting is the next big milestone in a long UN process looking at financing for development (FfD,) which builds on the earlier Moneterrey Consensus. To date, there has been far too much focus on aid for developing countries, insofar as it has distracted from domestic resource mobilisation - principally tax, which is the most sustainable and the most beneficial, source of finance for development.

Dries Lesage of Ghent University, who was part of TJN's delegation to the UN Tax Committee in Geneva in late 2007, has recently published a new report about the role of the UN in international tax and the financing for development (FfD) process around Doha. His report argues that international tax cooperation (outside a restricted OECD context) has had a perniciously low profile, and that the Doha event

"is a rare occasion of international political momentum, not to say the only occasion in the foreseeable future, to make substantive progress with regard to this agenda at th
e multilateral level."

And it seems that the United Nations is simply not taking the matter of international taxation seriously enough. Essentially, it has relegated these matters to an arcane committee which has neither the competence, nor the will, nor the mandate, nor the ability, to address the issues seriously.

As with several of TJN's areas of interest, this may seem like an arcane matter, but in fact its importance is potentially quite colossal: potentially of far more importance to developing countries than the $100 billion-odd in annual foreign aid.

Lesage's new report makes some crucial points. First, the tax dimension of the FfD process deserves far more attention than it has been given until now - especially with respect to globalisation-related issues such as taxing multinational companies, fraudulent capital flight to offshore finance centres, the developing world's very weak capacity to tackle such issues, and the importance of international co-operation.

Essentially, there are two models are prevalent in international taxation, which concern how rights are allocated between countries to tax multinationals and individuals. The relative weights of these rights have very large implications for the finances of developing countries. One set of guidelines, put forwards by the OECD (the club of rich countries), unsurpsisingly favours the rich countries; the other set, the United Nations model, is generally favourable towards developing nations. (The implications of these differences are potentially huge: for more information on this, notably the issue of source-based and residence-based taxation, click here.) Given that the UN has been so weak on articulating its proposals and taking up developing nations' concerns, the OECD has been able, effectively, to call the shots on international taxation.

The forum where these issues are discussed is the UN Tax committee (formally known as the otherwise known as the Committee of Experts on International Co-operation on Tax Matters.) And the UN Tax Committee is, in short, failing in its responsibilities to the developing world - not just with respect to international tax models, but more broadly. As Lesage observes:

"Although the current mandate of the Committee is broad enough to discuss all relevant global tax issues, most of its work has so far been dedicated to updating the UN Model. This way, the UN Tax Committee does not really function as the centre of global taxation governance."

It is essential that the UN Tax committee is strengthened, both in terms of its mandate and in terms of the interests and capabilities of its members. As pointed out in an earlier report (on p8-9 of this edition of the TJN newsletter, Tax Justice Focus), one of the problem is that while the Committee allocates posts to "developing countries," many of these developing countries (as well as some of the richer nations) are tax havens. This subverts the entire process, from the start. But that is not all.

The technical experts who compose the current UN Tax committee are generally the same as those drawn from an earlier ad hoc committee – and their expertise tends to be in drawing up bilateral agreements, not in the broader issues. They appear to be unwilling to address seriously the much wider and more important political issues of capital flight, tax competition, and so on, and TJN gets the impression as a result of attending their meetings and talking to their members that they are almost oblivious to the fact that they were made a committee in the context of Financing for Development! It is astonishing to listen to their deliberations, which quickly get bogged down on highly obscure definitional points and technical wordings, while the weighty political matters are hardly addressed. As Lesage politely observes:

"the UN record on taxation is rather limited thus far."

Lesage makes some important recommendations, including the following:
  • there should be a minimum consensus on upgrading and reorganising the UN Tax Committee and strengthening the FfD Office, so that global tax issues get at least an institutional home. Of course not all issues can be dealt with in Doha in detail, but they should at least give the UN Tax Committee the means to become a motor for ongoing discussion, study and multilateral policy.
  • A UN Code of conduct on international taxation must be pushed forwards (see the first article in this edition of Tax Justice Focus).

  • More weight needs to be given to tax matters in several chapters of the Financing for Development project. Development-relevant and globalisation-related tax issues were not addressed in the final report of the Monterrey Consensus (the pre-cursor to Doha) - which was a step backwards following powerful lobbying which eliminated the tax dimension. These issues must now be addressed in a more profound way, and Doha is the prime opportunity to do this.

  • Better multilateral assistance can be given to national tax administrations on matters of international taxation.
Finally, another of Lesage's recommendations is worth noting. It is time - it is not too late - to build up an international political coalition around a feasible agenda. TJN is contributing to this, but it is important for governments concerned with international development to step up to the plate too. Some are coming, but too few - and the most powerful players, such as the UK and the US, have been less than helpful so far. One coalition that might play an important role would be the Leading Group of countries.


Thursday, June 19, 2008

Tax and the IMF's policy advice

* Update June 27th: IMF praises Liechtenstein *

IMF advice to developing countries on aspects of tax policies appears to have contributed strongly to inequality, according to a new briefing paper prepared for the Bretton Woods Project by three researchers at the London School of Economics. They say:

"Over the past three decades, the IMF has been heavily involved in tax reforms in developing countries, in the form of both advice and conditions linked to the Fund's loans. The tax package put forward by the IMF places great emphasis on the value added tax (VAT), a consumption tax levied at each stage of production and sale, and pushes countries to have few rates and few exemptions."

VAT is typically a regressive tax, which means that the poor shoulder a greater burden than wealthier people. They studied 54 IMF reports on lower-income and middle-income countries and found that

"the IMF recommended or endorsed VAT in 90 per cent of the sample, and told countries to broaden their tax base 80 per cent of the time. Eighty percent of the Article IVs recommended a decrease in tax exemptions, but in only 25 per cent of the total sample were the distributional consequences of abolishing tax exemptions addressed."

and they added that:

"Does the IMF look at the distributional consequences of its advice? The answer seems to be 'not a lot'. The IMF mentions distributional consequences of their taxation advice in 25 per cent of the total sample. However, only one of these instances occurred in a low-income country, whilst the IMF acknowledges or addresses distributional consequences in 40 per cent of the lower-middle-income countries."

Amid a world of high inequality in poor countries, exacerbated recently by high oil prices and rising food prices (which, like regressive taxes, hit the poor hardest), this issue is increasingly important. The report takes a more in-depth look at the cases of Mexico, Bolivia and Mozamique. But we would also like to point out a paper prepared for TJN by Arun Kumar looking at the effect of such taxes in India. It said similar things, such as:

"Indirect taxes taken as a whole are regressive while if direct taxes are properly designed and collected, they are progressive. This is important in a poor country like India. Thus, government should collect more from direct taxes and as little as possible from indirect taxes."

and yet, he noted, just one percent of the Indian population pay direct taxes while one hundred percent pay indirect taxes; "thus, those who are considered to be too poor to pay direct taxes because their incomes are low are also forced to pay taxes." India has one of the world's lowest ratios of direct taxes to GDP, he said, and added that:

"The growing black economy led to more and more tax evasion by the well off. Hence in spite of their obviously rising incomes, the direct tax to GDP ratio stagnated at a low value. Government’s attempts to raise the rates of direct taxes did not make a dent. Nor did the lowering of the rates of direct taxes."

Kumar's paper makes many other points, such as drawing attention to research on the (theoretically stagflationary) macroeconomic effect of indirect taxes on demand whereas progressive direct taxation impacts most upon high income earners and wealth holders, with a greater propensity to consume imported luxury goods.

All of this adds to something of an indictment of IMF policy advice on VAT. The Bretton Woods Project report concludes:

"It appears that the IMF had and continues to have little thought about the distributional consequences of rushed VAT implementation, and that consulting with actors outside the government has been neglected."

This is an important matter, and deserves further research. The authors did not tackle another crucial matter, which we have blogged about before and devoted a section of the TJN web site to: how different kinds of tax have different effects on state-building and developing links of political accountability. The last chapter in the book Taxation and State-building in Developing Countries , as well as Alex Cobham's article in Tax Justice Focus looks in more detail at the problems with the standard tax advice given by the IMF and others to developing countries. This is an area where much more research is needed.


Tuesday, June 17, 2008

International news - June 17

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

UK calls for international co-operation on tax
June 12 (TJN) - The UK has had a long record in obstructing international co-operation on tax. Britain is, in fact, responsible for setting up some of the world's most abusive tax systems. So we are exceedingly pleased to see Her Majesty's Treasury speaking out about the need for international co-operation on tax.

Liechtenstein, witness protection, and the Mafia
June 11 (TJN) - A mysterious website has issued a US$7-million bounty for a now-famous whistleblower, Henirich Kieber, who recently broke open the supposedly impregnable bank secrecy of the tax haven of Liechtenstein, which for years has helped itself to other nations' tax dollars and taxable incomes and now seems to feel affronted when other nations find out about the crimes that it has facilitated.

The Incidence Brigade
June 11 (TJN) - Greg Mankiw of Harvard University has wheeled out an old argument about tax incidence: that “a corporation is not really a taxpayer at all. It is more like a tax collector.” Richard Murphy calls these people "the Incidence Brigade".

A carbon audit of the tax code
June 11 (TJN) - U.S. Senator Max Baucus has introduced legislation . . . as described earliler "The Carbon Audit of the United States Tax Code by the National Academy of Sciences would involve a review of the tax code to identify those tax provisions and policies that have the greatest influence on the generation of carbon emissions and other greenhouse gases and to estimate the magnitude of those effects.

Regulation model has failed, says Merkel
June 10 (FT) - Continental Europe should take the lead in devising new rules for financial markets because the Anglo-Saxon model of regulation has failed, German Chancellor Angela Merkel told the Financial Times. “We need to think about the relationship between capital and risk,” Ms Merkel said. “But these rules can only be discussed at an international level."
Also see here on proposals for a new International Centre for Financial Regulation (ICFR).

Demands on regulation of financial markets (statement)
June 16 (UNI) - UNI-Europa Finance calls for effective regulation of financial market and sets out 13 key issues to be addressed by regulators and companies. Including calls on transparency, tax havens, tax breaks for private equity, and more.

Throwing in the towel at the sixteenth round (Jet de l’éponge au seizième round)
June 10 (Denis Robert) - Denis Robert, who was inundated by lawsuits after the publication of his book Révélation$ (about the Luxembourg-based financial clearing house Clearstream, “which operates in more than 100 countries, including 40 tax havens”) on why he is throwing in the towel. “It is a victory for Clearstream, its lawyers, its leaders, its bankers, and its board. A victory for censorship.” In French.

Ireland insists it is not poaching British business
June 10 (FT) - The Irish government has reassured the UK, its key ally in the European debate on corporate tax policy, that it played no role in wooing UK multinationals. But some tax lawyers say Ireland has been targeting international holding companies.

Judge Rejects Charges for 13 on Tax Shelter
July 17 (NYTImes) - A federal judge dismissed charges yesterday against 13 former employees of the accounting firm KPMG, delivering a blow to prosecutors who once heralded the case as a showpiece in the government’s crusade against questionable tax shelters.

Guy Hands in tax battle over 7ft shrimp
June 15 (Times) - EMI chairman Guy Hands is one of more than 60 wealthy investors taking legal action against Baker Tilly over advice the accountant gave about tax relief available on film production companies.

High price to pay for private equity
June 16 (The Age) - Australians had a lucky escape when private equity consortium Airline Partners Australia (APA) failed to get hold of Qantas last year. The deal was to be financed by loading Qantas with debt, financed by asset stripping and using the corporate tax liability wiped out by the failure to generate profit to pay interest on the debt.

Kenya: Tax wars looming with MPs and judges
June 16 (East Africa Standard) - Finance minister Amos Kimunya has opened tax wars on two fronts — and he is unlikely to win, The Standard can report. Two roadblocks lie in the path of his ambition to tax MPs — tasked with making or amending laws — and High Court judges, who are constitutional office holders. The Finance minister's move appeared to set the Government and the Judiciary in a collision path and open conflict.

RP tax effort seen weakening
June 15 (Philippines Inquirer) - Department of Finance estimates showed that tax effort could hit only 15.1 percent next year, lower than the 15.4-percent target, if no revenue-raising measure are implemented to offset the effects of the cut in corporate tax.

US banks fear being forced to take $5,000bn back on balance sheets
June 4 (FT) - Accounting changes could force US banks to take thousands of billions of dollars back on to their balance sheets in the coming months. A key component of these global talks will be the accounting regime for off-balance sheet vehicles, with some senior regulators pressing for a global initiative to bring these vehicles back on to the balance sheet, not just in the US but in Europe as well.

Hedgeweek Comment: Hedge funds get breather in Washington tax ordeal
June 12 (Hedgeweek) - Proposed legislation that sought to alter US tax policy so that hedge fund managers using offshore tax havens would no longer be able to defer taxes on their compensation, obliging them to pay taxes immediately on this income, was blocked in the end - just.

UK most popular in Europe for foreign investment, says study
June 17 (FT) - Britain is the most popular destination in Europe for investment by foreign companies , according to a survey published today - and is likely to remain so for years to come. The tax regime came sixth as a factor, after infrastructure and the regulatory climate - and closely followed by the quality of labour.

An ‘exodus’ is not the only problem on tax
It would always be better for a company to operate in a low-tax country if all other things were equal. They never are. According to the World Bank and PwC, the US – seen by many Britons as a superior commercial environment – has higher total business taxes than the UK, which has the lowest in the Group of Eight leading industrialised nations and the fifth lowest in the European Union.

Citizens for Tax Justice
OBSTRUCTIONISM IN THE SENATE: Action on Climate Change Blocked; Like President Bush, Republican Leaders Insist on Increasing the Deficit with Tax Cuts; McCain Again Says Investment Tax Cuts Help Everyone, Reality Is That Most Goes to the Richest 1 Percent; California: New Taxes on the Horizon? Connecticut: Playing Politics with a Legitimate Crisis;
Massachusetts: How's that Mandate Working?; Bittersweet: North Carolina Looks to Increase Its EITC

A template for tax
June 10 (FT) - France intends to use its presidency of the European Union later this year to pursue plans for a single, voluntary, corporation tax base for multinational companies. FT editorial weighs it up.0

Government outlaws tax avoidance schemes
June 14 (Guardian) - The UK government is outlawing a number of offshore corporation tax avoidance schemes, one of which has been operated by Tesco, the supermarket giant has confirmed.

The U.S. cracks down on rich tax evaders
June 15 (LA Times) - A tax bill expected to be signed into law this week contains a provision designed to crack down on the roughly 500 rich people who expatriate themselves each year to avoid U.S. income and estate taxes.

This year Congress again felt the need to tighten the vise
June 15 (Nation News) - As Obama moves to become the next president of the United States, regional leaders are imploring him not to forget the economic development interests of Caribbean nations. They also want him to re-think proposed legislation before the Senate that would, if enacted, cripple the offshore financial services sector of the region's economies.

U.S. seeks Swiss help in UBS tax evasion probe
Jun 15 (Reuters) - U.S. authorities have sought legal assistance from Switzerland's Federal Office of Justice in an investigation into tax evasion through offshore bank accounts at UBS (UBSN.VX: Quote, Profile, Research), Swiss media reported on Sunday.

Tax havens: The Financial Pirates of Treasure Island
June (MO) – The Lesotho Highlands Water project, tax havens, and TJN.

Germany flags inflation concerns ahead of G8 meet
June 10 (Guardian) - Ministers were also united in their desire to see greater transparency on oil markets, Germany and France would also go into the G8 discussions seeking to address what further steps could be taken to curb tax dodging in tax havens, Mirow said.

FT series: Shedding secrecy
An FT multi-part series on shipping tycoons. John Fredriksen; Greek shipowners embracing the half-public, half-private model; Two container lines from Mediterranean foundations: Nobu Su – an unassuming-looking Taiwanese: Hong Kong’s Helmut Sohmen; Maersk McKinney-Møller,; two of the world’s biggest container lines, Orient Overseas Container Line and Evergreen Marine

Bono: helping make poverty reality
June 12 (Tax Research) - I know the messages of tax justice have reached the man. I know how they got there. And in the last couple of days I’ve had my attention drawn to an article about a talk he gave in Ireland made after those messages should have reached him. So I know he’s ignoring the issue. So I’ve bided my time. I’ve been patient. And now I’m fed up with the hypocrisy of the man.

We are no tax haven Cox repeats in the wake of Bank of Bermuda revelations
June (Royal Gazette) - Minister Cox assured the public, its partners and stakeholders in the industry that Bermuda will continue to protect the Island's reputation and defend criticisms that Bermuda is considered a tax haven.

Tesco: tax avoiding, again (this time it’s Luxembourg)

June 11 (Tax Research) - Private Eye’s dig into Tesco’s tax affairs continues. In the edition published today it has revelation of another tax avoidance scheme, this time based in Luxembourg. I guess that adds variety to the one revealed a fortnight ago in Zug, or the one about which Tesco is suing the Guardian, based in Cayman.


Thursday, June 12, 2008

UK calls for international co-operation on tax

The UK has had a long record in obstructing international co-operation on tax. Britain is, in fact, responsible for setting up some of the world's most abusive tax systems. So we are exceedingly pleased to see Her Majesty's Treasury speaking out about the need for international co-operation on tax. This is timely, for it follows statements by a number of influential thinkers - former US Treasury Secretary Lawrence Summers is a recent example - about the growing need for co-operation. At a recent tax forum in Warsaw financed by the European Commission (and at which TJN's John Christensen was a speaker), HM Treasury official James Robertson said this:

“There is a strong economic and social case for strong co-operation and exchange of information between Governments and tax authorities around the globe, and particularly within the EU, in order to meet the challenges being posed by globalisation, not just for economies as a whole, but also specifically for national tax systems.”

This is exactly right, and we will hold the UK government to this. We do hope the UK will henceforth comply not only with the letter, but also the spirit, of these words. Unfortunately, we have reason to doubt that this will happen. First, Robertson went on to call for "flexibility" on tax - a very general statement which does not fit comfortably with the word "co-operation" and may render his earlier statement rather meaningless.

The United Kingdom not only has a record of obstructing international co-operation on tax - it is also responsible for having put into place a huge part of the abusive international system of tax havens. During the years of decolonisation the British Foreign and Commonwealth Office (FCO) actively sought to turn many of its former colonies, such as the Caribbean islands, into tax havens. This was partly motivated by a desire to avoid creating long-term dependencies on the UK (by allowing them to finance themselves by appropriating money from other nations' economies and tax systems) but also to retain some links with London, bolstering its status as a world financial centre. In effect, the Crown Dependencies and Overseas Territories are satellites of the City of London, channelling capital and other nations' tax dollars, not to mention a lucrative bonanza of fees for lawyers, accountants, bankers and others.

Britain has been helped by the silence of the regulators. It has resisted efforts to look into the tax dimensions of the international financial architecture, working discreetly behind the scenes (in partnership with many others) to help ensure that tax is kept off the agenda wherever possible. Very senior European officials have told TJN - and occasionally spoken openly about - Britain's role in putting stumbling blocks in the way of, or inserting loopholes into, the European Union's Savings Tax Directive - which is, while still deeply flawed, currently the world's most impressive effort at a co-operative international attempt to tackle the problems of abusive tax practices. It has used tricks such as diverted attention to more peripheral issues - such as drugs and terrorist financing - to hide the elephant in the room: tax.

Read more about Britain's role here. Read more about the importance of tax co-operation here.

(As an aside, a couple of important initiatives on tax are going on in Europe at the moment. One is work on a Common Consolidated Corporate Tax Base (CCTB), which the EU's tax official Mathias Mors commented about in Warsaw. For those interested in reading about recent developments, click here and here.)


Wednesday, June 11, 2008

Liechtenstein, witness protection, and the Mafia

A mysterious website has issued a US$7-million bounty for a now-famous whistleblower, Henirich Kieber, who recently broke open the supposedly impregnable bank secrecy of the tax haven of Liechtenstein, which for years has helped itself to other nations' tax dollars and taxable incomes and now seems to feel affronted when other nations find out about the crimes that it has facilitated.

This story in the Globe and Mail has more details. The story is worth reading, for it gives a flavour of the dark and sinister nature of the forces of secrecy that suffuse and support the tax haven world:

"In an e-mail exchange, an administrator with the website who signed off as "Tom," told The Globe and Mail that many interested parties are trying to track down Mr. Kieber. . . . "Kieber is not able to live with his new identity. He makes great mistakes, still keeping contact to the members of his family. In the end, he will lose his liberty because of that," the administrator said in one e-mail. "Kieber is a very difficult problem for Liechtenstein, and the preparation for his capture and his repatriation to Liechtenstein must be made without any publicity. Without the press and spectators. In addition, another wealthy circle of persons is interested in Kieber."

The lawyer Jack Blum, who is a senior adviser to TJN, speculated that the creators of the website might be on-line and communicating with journalists because they're "fishing," the Globe and Mail reported. "It's letting everyone out there know that the reward exists, that's why you do it," he said. "I don't think that's a kid on his computer."

We are delighted to hear, as Bloomberg reports, that a U.S. Senate committee headed by the crime-fighting Carl Levin has issued subpoenas in connection with its investigation into alleged tax evasion by U.S. citizens with accounts at Liechtenstein banks. He has not said whether they were issued to any banks or individuals, how many were issued and when they were sent.

Blum said that Kieber is now in "deep witness protection" - a state of affairs that is highly reminiscent of those who have spoken out against the Mafia. This similarity is by no means coincidental: when confronting tax havens stuffed with criminal money, and with groups like this vengeful "wealthy circle of persons" this is exactly what we are dealing with.


The Incidence Brigade

*Update, Sept 2008: see how accountants deal with incidence, here.*

Greg Mankiw of Harvard University, a former chairman of US President George W. Bush’s Council of Economic Advisers, has wheeled out an old argument about tax incidence: that “a corporation is not really a taxpayer at all. It is more like a tax collector.” The ultimate payers of the corporate tax, he continues, are “those individuals who have some stake in the company on which the tax is levied. If you own corporate equities, if you work for a corporation or if you buy goods and services from a corporation, you pay part of the corporate income tax.” He then goes on to cite a report produced by a member of the U.S. Congressional Budget Office estimating that “domestic labor bears slightly more than 70 percent of the burden.” Shareholders suffer too, as do consumers, in the form of higher prices.

Many U.S. Republicans, like some in Europe (such as Mike Devereux of the Saïd Business School in Oxford,) love this argument, or variants of it, as reasons for abolishing or cutting corporation taxes. Richard Murphy calls these people "the Incidence Brigade". A key line of thinking goes like this: “labour” and “workers,” and shareholders and consumers (in other words, you and me) ultimately carry the burden of corporate taxation. So why tax corporations? Taxing corporations won’t help workers and by extension, they argue (more subliminally,) it won’t tackle inequality, one of the great challenges of our age. (Others argue that corporation tax cuts pay for themselves – which has been exposed as palpable nonsense.) So you can cut, or even eliminate, corporation taxes, the argument goes.

This is a matter of great importance. It is a kind of slippery-slope argument – and it lacks any solid foundation. Any reasonable person would immediately (and rightly, as it happens) have a strong gut feeling that the proposal – that letting corporations pay little or no tax won’t make our countries more unequal - is nonsense. The gut feeling would be right. But we need more than gut feeling to dispose of this pernicious argument – which is, admittedly, one of the more sophisticated and sly lobbying efforts in favour of corporate tax cuts.

There are many ways to demolish this argument (as a result, this blog is longer than usual). Here are just a few.

First, the entire premise is mistaken. Why do these proponents of willy-nilly tax-cuts on corporations focus only on the narrow issue: labour, in this case (and, to a lesser extent, shareholders and consumers)? This should instead be viewed in the context of broader society. Do or can corporation taxes make the whole tax system more progressive? The fact that corporation taxes fall (as they do) on different groups in different ways say absolutely nothing about the distributional implications of these taxes. What these lobbyists are trying to do is this: they are trying to conflate in our minds the word “labour” with the notion of “ordinary Joes like you and me” - then hoping that nobody will notice that they have said nothing of any significance at all. (It is a bit like what happens when rain falls on a football match, and somebody argues that the rain doesn't really fall on the football match - it falls instead on the players, the referee, the other match officials, etc.- in other words, it's a pretty meaningless argument.)

Are corporation taxes progressive (i.e. they tend to reduce inequality), when viewed from the point of view of a whole tax system? It’s easy to work it out. Instead of trying to crunch through all the numbers, working out who gets what, it’s easiest to turn the question on its head. Consider the distribution of wealth and income between “labour” (as Mankiw and others would say) and “capital” (or the owners and controllers of wealth.) Raising the relative share of taxes on “capital” tends to reduce inequality; and vice versa. All we need ask is: do corporation taxes fall in any meaningful way on “capital”? It doesn’t take a rocket scientist to answer: of course they do. Why, after all, would the business lobbyists fight so hard against these taxes, if it didn’t sting them? How does this square with the evidence of companies spending so many millions on tax avoidance? So corporation taxes clearly make for a more progressive tax system – and significantly so.

Even then, let’s also think about what “labour” might mean. Ask yourself what “labour” means in the context of ExxonMobil, which earned $40.6 billion in annual profits last year (and that, by the way, is after the company paid many local taxes in places like Angola)? Or what “labour” means in the context of Microsoft’s gargantuan profits. Or take this story, for example: the average Goldman Sachs employee (that is, “labour” or the ordinary Joe at Goldman) gained $661,000 just in bonuses last year – out of a total $1.1m average in total benefits. They will be taxed at the highest rates, so corporation taxes, even when they fall on “labour,” will make the tax system more progressive when considered from a holistic point of view.

Also, the real beneficiaries of corporation tax cuts are so often directors who see the value of tax cuts translated into higher values for their personal stock options – they are the representatives of capital. Take a look, for example, at this unhealthy state of affairs at Citigroup, and read this fascinating exploration of one such case by Richard Murphy.

What is more, many individuals, and especially wealthier ones, incorporate themselves as corporations so as to obtain favourable tax treatment. What does “labour” mean in the context of corporations like these? Tax cuts on corporations will benefit these wealthier individuals.

A problem with the arguments put forwards by people like Mankiw and Devereux is the unworldliness of their analyses. Take, for example, a mining company working in Zambia. It might not have a large labour content, and few or no stockholders in Zambia. However, a large proportion of its profit arises in Zambia, as its activities are in Zambia. Would Devereux seriously argue that tax avoidance or tax cuts are a good idea in this case? This company ain’t relocating anywhere if it’s taxed more highly (within limits): the minerals are there, so that’s where the company must be (and if it goes, another one will come along.) If Zambia raises its tax rates, this means more money for a poor African country and less for the western owners of capital. (As an aside, this then brings us to the question of source -based and residence -based taxation – which we’ll blog about shortly.)

“Ah!” The lobbyists may then cry. “But if you lower taxes on corporations, they can grow their profits faster, and re-invest, and then you can bake a bigger cake, with more goodies for everyone!” Wrong: once again this uses narrow reasoning to obscure the broader picture. If you raise taxes on corporations, you could use this to finance tax cuts for everyone else – so you might be able to bake just as big a cake – and certainly a less unequal cake too (which is one of the key goals of tax policy, especially these days.) In fact, plenty of research has shown that less unequal countries tend to grow more quickly in the long run, so you get even more bang for your buck when inequality is reduced. And if it’s your own country you’re worried about, poorer people tend to buy more locally-sourced goods, boosting domestic demand more.

So the lobbyists turn to another argument. “Tax the corporations,” they say, “and they will simply relocate to another jurisdiction. This harms the workers – by losing them their jobs!” Once again the argument looks alluring, until you dissect it. First, the former U.S. Treasury Secretary Lawrence Summers recently made this comment in the Financial Times.

"Financial regulation is only one example of where the mantra of needing to be “internationally competitive” has been invoked too often as a reason to cut back on regulation. There has not been enough serious consideration of the alternative – global co-operation to raise standards."

He was writing about regulation, but he could just as easily have been writing about tax. The correct solution is this: tax corporations properly – then co-operate internationally to prevent the free-riding of corporations that choose to extract all the benefits of an appropriately taxed economy – while failing to pay their share of those taxes.

Also, while this free-riding does take place – and is used as Exhibit One by the lobbyists for corporate tax cuts, there is less evidence that high taxes actually do scare real corporations away: the reverse is true, in fact. In case it needs pointing out, taxes don’t go up in smoke. They pay for the essential ingredients that make markets and corporations tick: roads, education, healthcare, regulatory authorities, inflation-fighting central banks, and so on. So taxpayers generally get their money back, at the end of the day – with interest. It’s a question of how the benefits are shared out. Take Denmark, as an example, described in this long article in Foreign Affairs:

"The Danes are passionate free traders. They score well in the ratings constructed by pro-market organizations. The World Economic Forum's Global Competitiveness Index ranks Denmark third, just behind the United States and Switzerland. Denmark's financial markets are clean and transparent, its barriers to imports minimal, its labor markets the most flexible in Europe, its multinational corporations dynamic and largely unmolested by industrial policies, and its unemployment rate of 2.8 percent the second lowest in the OECD (the Organization for Economic Cooperation and Development). . . On the other hand, Denmark spends about 50 percent of its GDP on public outlays and has the world's second-highest tax rate. "

We don’t advocate all countries should adopt Denmark-sized high tax rates: that’s for voters, not us, to choose. But this shows that taxes work when done properly. Let’s give another example, from the current edition of Foreign Affairs.

"For more than a century after 1894, most of the cars manufactured in North America were made in Michigan. Since 2004, Michigan has been replaced by Ontario, Canada. The reason is simple: health care. In the United States, car manufacturers have to pay $6,500 in (private) medical and insurance costs for every worker. If they move a plant to Canada, which has a government-run healthcare system, the cost to them is around $800 per worker.. . . jobs are going not to low-wage countries but to places where well-trained and educated workers can be found."

As if all that isn’t enough – there is more. A whole literature has developed and is developing about the “no taxation without representation” argument. As a recent academic book on developing countries says:

"The political importance of taxation extends beyond the raising of revenue. We argue in this book that taxation may play the central (their emphasis) role in building and sustaining the power of states, and shaping their ties to society. The state-building role of taxation can be seen in two principal areas: the rise of a social contract based on bargaining around tax, and the institution-building stimulus provided by the revenue imperative. Progress in the first area may foster representative democracy. Progress in the second area strengthens state capacity. Both have the potential to bolster the legitimacy of the state and enhance accountability between the state and its citizens."

It is direct taxation (such as income taxes or corporation taxes), in contrast to indirect taxes (such as value added taxes or customs duties), that promote these kinds of relationships of accountability.

And then the lobbyists argue that corporation taxes hit consumers, by raising prices. But is this true? Even in the most basic economic theory, in competitive markets companies are “price-takers” (in other words, they have to at least match the prevailing market price to stay in business) rather than “price-makers” where they have, say, a monopolistic position and can set their prices where they want them. Corporation taxes won’t change that equation. And if the company has a monopolistic position and is a price-maker, it will likely as not be receiving supernormal profits from its position – which makes it an excellent candidate for higher corporation taxes.

Apart from all this, it’s easy enough to dissect the specific points in the reports such as from the Congressionial Budget Office (CBO) which are so often quoted by the “tax incidence” brigade in the army of corporation tax-cut lobbyists. But this blog is long enough: we’ll get to that in due course.

But if you still want to read more, try our recent blog, citing a new report, which raises a whole different set of points. And don’t forget Richard Murphy’s set of arguments, which contain plenty that is not in this blog. Try this one, for example.

A few months ago TJN’s John Christensen debated some of these issues with Michael Devereux on BBC radio (the link’s no longer available, sorry). Those of you who heard it will remember that Devereux substantially conceded point after point on these issues, once pressed by Christensen. It’s rather odd that he has not incorporated any of those points into his subsequent analysis.

Update, Feb 5, 2009: new comment article on this:

"Others contend that avoiding corporate taxes doesn't really count, because companies aren't real people. If companies avoid tax, they say, this simply pushes up the value of shareholders' investment. And since the extra value will be taxed as either dividends or capital gains, corporate tax avoidance is really just a form of tax deferral.

This is a seductive but misleading argument. First, and most obviously, not all company shareholders are UK tax resident. If shareholders live in a tax haven, shifting income from companies to individuals does not defer tax, it eliminates it. Second, corporate taxes cannot be looked at in isolation; they are part of the national fiscal fabric. If there were no UK corporation tax, other taxes would increase to compensate. In the current model, stripping out part of the expected corporate tax take puts a strain on the rest of the fiscal system.

But does avoidance bring backdoor benefits? Pension funds are some of the biggest shareholders in UK companies, so does reducing corporate tax benefit pensioners? It is of course true that pension funds invest in the stock market. But it is a stretch to believe tax planning feeds through to higher pensions. For most people, this simply isn't the case.

Those on old-fashioned final salary pension schemes receive the same pension whatever the investment return. Those on state pensions depend directly on future tax revenues, and so are disadvantaged by avoidance. In the case of with-profits pension funds, the sum an individual receives on retirement depends on the discretion of the insurer - there is no direct relationship with increases in the fund.

When it comes to unit-linked pension funds, however, value does directly reflect underlying investments, and it is thus true that holders might benefit from tax avoidance. But even here there are problems. The company could spend the increased revenue on other goodies, such as bigger offices or better bonuses. And even if lower taxes do translate into higher profits, this doesn't automatically increase the company share price. As anyone who has lost money in the recent downturn knows, a company's after-tax profit is just one of many factors affecting the price of its shares.

It is simply disingenuous, therefore, to see tax planning as providing backdoor help for tomorrow's pensioners. It is of course legitimate to advocate the abolition of corporate taxes, and perfectly valid to argue that UK rates are anti-competitive in a global market. But this isn't what avoidance is about. Tax avoidance means taking a unilateral decision to minimise your company's tax."


A carbon audit of the tax code

U.S. Senator Max Baucus has introduced legislation with a number of interesting themes. We welcome his proposals on taxing hedge funds (or, to put it another way, curbing the tax subsidies enjoyed by hedge funds), which would raise over $50 billion over the next decade.

One of Baucus' interesting proposals is for a carbon audit of the tax code. As Congressman Earl Blumenauer described an earlier congressional version:

"The Carbon Audit of the United States Tax Code by the National Academy of Sciences would involve a review of the tax code to identify those tax provisions and policies that have the greatest influence on the generation of carbon emissions and other greenhouse gases and to estimate the magnitude of those effects. The study would evaluate the potential for changes in the tax code to reduce carbon emissions. The study will examine areas where the connection between the tax code and carbon emissions are obvious (e.g., energy taxation) and will consider areas where the connection between the tax code and carbon emissions may be less obvious (e.g., tax policies affecting urban development, which affect climate through travel demand and land-use change)."

This is highly sensible. Countries around the world should urgently take note.