Friday, June 19, 2009

Tax havens and development: a damning report

For years, working alongside our friends and colleagues at the Global Financial Integrity Project, we have been pushing tax havens (we prefer the term 'secrecy jurisdictions') onto the development agenda. These places, we have argued:

- undermine development in the richest as well as the poorest nations;

- cause macroeconomic distortions by switching the tax charge from capital to labour;

- induce criminality and corrupt practices;

- harm public finances and impede effective regulation of financial markets;

- worsen wealth and income inequality;

- undermine democratic forms of government and damage public respect for the rule of law.

Our charge sheet is long and detailed, but en bref secrecy jurisdictions act as massive faultines in the globalised financial markets, and systemic solutions are required to eradicate the loopholes they offer.

Until very recently, however, we have been whistling in the wind. None of the international financial institutions has looked seriously at the issue. The OECD's (excellent) 1998 report on Harmful Tax Competition was kicked into the long grass by a coalition of lobbyists in Washington and elsewhere. This was the dirty little secret of powerful nations, including Austria, Belgium, Luxembourg, Switzerland, UK and the USA - jointly and separately capable of blocking any meaningful efforts to tackle the secrecy jurisdictions. This is what stimulated civil society, starting with Oxfam's ground-breaking report on Releasing the Hidden Billions for Development, to form a global coalition to tackle what many regarded as an intractable issue.

Times are a'changing, however, and the new report issuing from the Norwegian Commission on Capital Flight From Developing Countries is a sign that the more progressive governments are taking this issue very seriously indeed.

A quick word about the Commission itself. The Commission was convened at the request of Erik Solheim, Norway's respected and influential Minister of the Environment and International Development. Erik Solheim is a trend-setter in international circles, and the Norwegians are well known for their capacity to handle tricky issues, e.g. corruption, at the international level. The Commission, which was appointed in June 2008, was chaired by Professor Guttorm Schjelderup from the Norwegian School of Economics and Business Adminstration, and comprised a wide range of experts in economics, finance, criminology and development.

And the conclusions they have drawn make for damning reading which the IMF, FATF, FSF and others should pay attention to without delay.

Take the following, for example:

Tax havens increase the risk premium in international financial markets
(they) enhance counterparty risk and information asymmetry between different players, which undermines the working of the international financial markets and contributes to higher costs and risk premiums for all countries.

Tax havens damage institutional quality and growth in developing countries.
They can contribute to weakening the quality of institutions and the political system in developing countries. This is because tax havens encourage the self-interest that politicians and bureaucrats in such countries have in weakening these institutions.

Tax havens undermine the working of the tax system and public finances
This has made it difficult for other countries to maintain their capital taxes, and has thereby contributed to lower taxes on capital. Developing countries have a narrower tax base than rich countries, and also obtain the largest proportion of their tax receipts from capital. Accordingly, lower capital taxes mean either a decline in revenue and / or higher taxes on a narrower base.

Tax havens reduce the efficiency of resource allocation in developing countries
This can lead to a redistribution of resources by the private sector away from activities which yield the highest pre-tax return to ones which give the best return after tax. Such behaviour reduces overall value creation.

Tax havens make economic crime more profitable
ecrecy legislation provides a hiding place for players who want to conceal the proceeds of economic crime. Tax havens thereby lower the threshold for such criminal behaviour.

And so it goes on, page after page of measured argument, amounting to a damning indictment of secrecy jurisdictions and all those who use them, protect them, and - perhaps this is worst - have ignored them for decades.

The Commission's report includes a range of recommendations directed at the Norwegian government, including a proposal that Norway takes the lead in promoting an international convention on transparency in international economic activity. We find this an excellent idea. For too long the proponents of free market ideology have pushed market liberalisation but resisted attempts to make markets more transparent. On the contrary, it is often the most rabid free-marketeers who also protect the secrecy jurisdictions. This blogger, an economist, was taught at a very early age that markets only function efficiently when they operate in a transparent fashion. An international convention to promote this ideal sounds like a terrific idea.

Good for Norway in taking the lead. You can download the report here.


Post a Comment

<< Home