Thursday, April 28, 2011

Taxes and the Commons Series: Tax Havens Cause $500 billion in lost revenue globally

In our final post of the Tax and the Commons Series, Kim Klein takes a look at tax havens and the real effect they have on revenue. Check back next Thursday for our series on Race and the Commons.

I first heard the word “tax haven” in 1989 when reading a story about a man who worked for Michael Milken the “junk bond king” and who was convicted, along with Milken, for fraud, racketeering and insider trading. This man added to those crimes the crime of cheating on Michael Milken. Whenever he saw Milken invest a lot of money in a stock, he invested some of his own money without Milken’s knowledge or permission. He kept his earnings in an account in the Cayman Islands under the name “Cookies.” He reasoned that he was getting the equivalent of a few cookies to Milken’s massive cakes. This man was caught because some enterprising bankers in the Cayman bank which held his money started to notice big influxes of money every so often. They followed the money trail and figured out what this man was investing in. They invested very little and kept their money in an account they called “crumbs.” Another enterprising but honest banker followed the activity of “crumbs” to “cookies” and was part of the evidence against Milken’s associate.

Today, Milken himself would probably be shocked at how much money is kept in these offshore accounts. According to Peter Gillespie, in his article, The Real Pirates of the Caribbean,
In today's globalized world, tax evasion is occurring on a massive scale. As corporations and wealthy individuals shift their assets into offshore tax havens, the annual loss in global tax revenues is more than $500 billion. This huge revenue shortfall is constraining the ability of governments to provide vital services to their societies, especially in the aftermath of the colossal bailouts of financial institutions. At the G-20 meetings in London, Toronto, and Seoul, civil society groups have advocated for improvements in the transparency of the international economic system and an end to offshore secrecy jurisdictions.
Switzerland, of course, has been a tax haven for almost a century, but today there are more than 70 tax havens, most of which are based in small states such as the Cayman Islands, the Bahamas, Bermuda, Panama, the Channel Islands, Monaco, Luxembourg, Lichtenstein, Singapore, and Switzerland.

Richard Murphy, of the Tax Justice Network says there are four reasons why tax havens exist:
  • First, they are used by those wishing to avoid or evade their obligation to pay tax. Tax avoidance is legal, but contrary to the spirit of taxation law, while tax evasion is always illegal, involving the non-disclosure of a source of income to an authority that has a legal right to know about it.
  • Second, they are used to hide criminal activities from view. That criminal activity might be tax evasion itself, but might also be money-laundering or crimes generating cash that needs to be laundered - theft, fraud, corruption, insider dealing, piracy, financing of terrorism, drug trafficking, human trafficking, counterfeiting, bribery and extortion.
  • Third, they are used by those who want their activities to be anonymous, even if they are entirely legitimate. Some people wish to hide their wealth from their spouses, for example; others might want to conduct trade which, though legitimate, might risk their reputation.
  • Fourth, they are used by those seeking somewhere cheaper to do business; in these locations they can usually avoid the costly obligation to comply with regulations that would apply onshore.
Tax havens are now an integral part of the international economy. At least half of all international bank lending and approximately one-third of foreign direct investments are routed via these secrecy jurisdictions. Gillespie estimates that more than half of all global trade is conducted through tax havens, and half the global monetary stock is estimated to pass through them at some point.

Tax havens host more than two million international business corporations. One modest building in the Cayman Islands is home to more that 12,000 of these firms. A January 2009 report from the U.S. Government Accountability Office revealed that 83 of the 100 largest publicly-traded companies in the U.S., including big banks receiving bail-out money, have scores of offshore subsidiaries.

In 2007, the pharmaceutical company Merck was assessed $2.3 billion in U.S. back taxes for transferring its drug patents to a Bermuda shell company and then deducting from its taxes the royalties it paid itself.

Tax havens are also used to conceal liabilities. Before being exposed as a spectacular fraud, Enron had established a network of 3,500 shell companies, 600 of which were registered in the Cayman Islands.

Scott Klinger, Chuck Collins, and Holly Sklar in their report, Unfair Advantage: The Business Case Against Tax Havens, point out:

“A half-century ago, nearly a quarter of federal revenue came from corporate taxes. This year, corporate taxes will contribute just 7.2 percent of federal revenue totals, or so estimates the OMB, the federal budget office.”

This shift has much to do with the creation of tax havens.

“Unfair Advantage” notes these examples:
  • In 2008, the 29 offshore subsidiaries of Goldman Sachs helped slash the tax rate on the bank’s $2 billion in profits to less than 1 percent. Goldman that year actually paid its CEO, Lloyd Blankfein, over three times more in personal compensation than the bank paid Uncle Sam in federal taxes.
  • In 2007, of the 100 largest publicly traded U.S. corporations, 83 ran subsidiaries in offshore tax havens.
There are many proposals for dealing with tax havens, and they will have to be regulated internationally. I don’t have the knowledge to discuss the proposals with any wisdom, but as a regular person who couldn’t even create an account in the Caymans, even if it were called “Dustballs”, I can say that capturing the $500 billion a year that is kept in these small countries would go a long way to closing many budget gaps. What this says to me is that we have choices: there are ways to close the budget gaps around the world. The money exists to have the communities and the countries we want, and it is not too hard to figure out where it is.

For more on tax havens read:

No comments: