Friday, March 27, 2009

Tax havens and the economic crisis - a reminder

As a reminder to those who aren't familiar with our website, we have a relatively new section dedicated to looking at the links between the global economic crisis and tax havens. This short summary at the top contains a few core themes; underneath that we have pasted a number of documents and articles supporting the case. This section is growing all the time.

Many of the roots of the current global economic crisis trace back to offshore financial centres located in tax havens. These include both those located in the smaller, mostly island states like Cayman and Jersey, and the larger tax havens like the City of London, Switzerland, Dublin, Delaware or Luxembourg (see examples of why this might be so here and here.)

These tax havens did not "cause" the crisis, but they contributed powerfully to it. This happened in a number of main ways.

First, they offered what has been called a "get out of regulation free" card to businesses that abuse them.

Second, unhealthy competition on tax and regulation between tax havens, and between them and other jurisdictions, eviscerated and degraded regulations that may have staunched the crisis.

Third, tax incentives, typically through tax havens, played a major role in accelerating the build-up in debt and leverage across the global financial system.

Fourth, “satellite” tax havens like some Caribbean islands or Britain’s Crown Dependencies are often conduits for illicit and other financial flows, often from developing countries into the wealthy financial centres like London, New York, which provide their own incentives for these flows too, and these contributed to large-scale macroeconomic imbalances. The entire mainstream economics profession has neglected to measure most of these vast flows.

Fifth, one of the most important features of the crisis is that the financial system has become frozen as a result of mutual mistrust and impenetrable complexity making it impossible for partners to understand the financial positions of their partners. The secrecy jurisdictions, by giving companies incentives to festoon their financial affairs across multiple jurisdictions, and by covering these affairs in a veil of secrecy, have played a major part in this.

Sixth, they provided the ideal situation for all manner of fraudulent business models - such as those offered by Bernie Madoff - to proliferate, adding to the mayhem. (Other themes, which we will add shortly, are in TJN's Action Programme Ending the Offshore Secrecy System which we will incorporate in due course.)

Not only that, but by draining reputable jurisdictions of the tax dollars of their wealthiest citizens and corporations, and by fostering massive capital flight out of developing countries, they have made it so much harder for victims of the crisis to pay to clean up the mess.

Click on the section to read more.


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