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:

• Treasure Islands: Tax Havens and the Men who Stole the World by Nicholas Shaxson, Bodley Head, 329 pp, £14.99, January 2011, and
• Winner-Take-All Politics: How Washington Made the Rich Richer - and Turned Its Back on the Middle Class by Jacob Hacker and Paul Pierson, Simon and Schuster, 368 pp, £11.50, March 2011

Economic Policy Institute

On Tuesdays, we share updates and information from key commons partners we think you should know about. Today we want to point you towards the work of the Economic Policy Institute (EPI). Their tagline is “Research & Ideas for Shared Prosperity,” and that sums it up well. EPI does fantastic research on the impact of various economic policies on low- and middle-income Americans. The State of Working America comes out every two years, and the accompanying website offers a wealth of charts and graphs based on specific demographic groups and issue areas.

When you have a second, visit their website and sign-up for their newsletter to hear about the their latest research and findings (right-hand side of the homepage, about half-way down). Their work on the Federal Budget, Deficit, and Taxes is particularly interesting given our recent series on taxes and includes a great analysis of The People’s Budget.

Come back Thursday to read the last post in our Thursday series on Taxes and the Commons. Kim Klein will look at tax options that won’t break the bank, but will generate a lot of revenue.

Taxes and the Commons Series: Tax Cheats – and even some of their critics – miss reason for the season

Tax Day has come and gone once again, and this year the big story was GE’s tax avoidance strategies. It’s a familiar meme that seems to get recycled in the public discussion about taxes around this time every year, just note the consistent spike in “corporate taxes“ google searches.

There’s no doubt that corporate tax avoidance schemes are a problem, but the solution is probably going to be more complicated than closing tax loopholes and shelters. After all, the ways GE plays the tax game isn’t limited to shady accounting practices. Corporate America lobbies aggressively for tax policies that favor their interests; like the “active finance exemption” that costs us $9 billion in lost revenue. They hire former IRS and Treasury staff willing to figure out better ways to cheat their former employer. And even if for one month a year the media beats up on them about how low the actual tax rates are for corporations, the other 11 months the media does the bidding of their corporate sponsors by parroting myths about “high” tax rates and defending the legality of their tax shelters and loopholes (as in this MSNBC clip below).

Visit msnbc.com for breaking news, world news, and news about the economy

Unfortunately some of the populist outrage about GE and the other corporate tax cheats actually reinforces the demonization of taxes and serves the interests of the corporations and the super-rich who have their own tax breaks and tax-avoiding strategies. The “make them pay” argument seems to rely on people’s own resentment about paying taxes. Surely, the anger about regular people being left with the bill of keeping our government running while rich corporations find every way possible to avoid contributing to our society is useful for organizing – and we’ve seen lots of creative actions these last few weeks, but tax season should be celebrated.

We need to cultivate a more fundamental ethic of the value of paying taxes. Faithful people don’t complain about their weekly offering at church – and I know that it’s not a perfect comparison for people from traditions where offerings are completely voluntary and secret, but in other churches donation goals are set for members by the pastor and the offering plate gets passed around as many times as it takes to hit the goal for that Sunday. In the same way that people live out their faith and values by sharing their wealth, our taxes are a demonstration of our commitment to the success of our community and nation. Corporations and the rich should have the same commitment to our nation, commons and collective well-being as the rest of us.

Patriotic Millionaires for Fiscal Strength

“We should pay more, we want to pay more…” – Patriotic Millionaires

On Tuesdays, we share updates and information from key commons partners we think you should know about. Today, we direct you to a petition you can sign to support US millionaires who want to be taxed more. In their own words:

Our country faces a choice – we can pay our debts and build for the future, or we can shirk our financial responsibilities and cripple our nation’s potential.

Our country has been good to us. It provided a foundation through which we could succeed. Now, we want to do our part to keep that foundation strong so that others can succeed as we have.

Please do the right thing for our country. Raise our taxes.

You can sign the Friends of Patriotic Millionaires petition here, and I would also encourage you to think about anyone you know who may fall into that bracket, whether on their own or in combination with a spouse or partner, and encourage them to sign as well.

Come back Thursday to read the next post in our Thursday series on Taxes and the Commons. Sean Thomas-Breitfeld will take a look at corporate loopholes and who isn’t asking to be taxed more!

Taxes and the Commons Series: Giving Thanks

In the second post of our Thursday series on Taxes and the Commons, Kim Klein looks at what we can celebrate about taxes as tax day approaches. Check back on Thursday the 21st for the next post in the series which looks at all the loopholes that certain corporations are thankful for. On the flip-side of that, stop by on Tuesday when we feature the work of our key partners, and learn about millionaires who WANT to be taxed more!

I am self-employed, which means that April 15 (or this year, April 18) is always an important day for me. I have to pay any tax I owe from last year, and also make the first of four payments on the money I will earn this year. We call these payments, “estimateds” for short. Usually I have waited until now to fund my IRAs, so all in all, this is an expensive day. Because of that, it is important to me to give thought and thanks for all the things taxes pay for that I use, need, enjoy or want to know exists.

So, in no particular order, here they are:

Infrastructure, such as sidewalks, streetlights, roads, traffic lights, storm drains, bridges, and the like.

Libraries everywhere. I love the Berkeley Public Library, and a few days ago I was in a wonderful library in Medford, OR. I have done hundreds of trainings in libraries all over the United States. Libraries are not just for books (although for me that is the # 1 greatest thing about a library), but also internet access, community meeting space, a central place for posting announcements of events, a source of information from the librarians “(what are 8 year olds reading now?”), etc. Not all libraries are funded by taxes, but most have some help from tax revenue and ideally should be mostly or entirely funded by tax revenue and sale of used books.

Public Transportation: In the Bay Area, BART runs mostly on time and goes a lot of places. Right now I am in Portland, where the bus is free in the downtown area. I know the quality and reliability of public transportation varies from place to place, but when it works, it is really helpful.

Inspections: I spend a lot of time in hotels, airports and office buildings and I use elevators, moving sidewalks and escalators to get to my room or flight or appointment. I love seeing the inspection stickers and knowing regular inspections are required by law. I also eat out quite often and I don’t worry that the kitchen of the restaurant is overrun with rats or crawling with cockroaches because of health inspections.

Social security and Medicare: I am not quite old enough for either of these programs, but I have many friends who are already using them, and I look forward to retiring and collecting social security. I am so conscious that the idea of social security would never pass now, and that Roosevelt would be considered so far to the left as to be unimaginable. A friend said recently, “Why are all programs that help ordinary people called ‘entitlements’ and programs that help corporations and wealthy people called ‘subsidies’?”

Federal Aviation Administration: Flying, although more and more unpleasant, is still the safest form of transportation we have.

Public Parks: the variety of these are astounding, from the major national parks like the Grand Canyon or Yosemite to the magnificent human built city parks such as Central Park in New York City or Golden Gate Park in San Francisco to the small “pocket” parks that provide open space and playgrounds in thousands of neighborhoods—to me, they are all a gift. Who has not enjoyed a park of some kind?


So you get the idea. You go through your week and you notice what you use, what you enjoy, what you rely on, and you think to yourself, “what made that possible?” In many cases, you will see that taxes paid for or subsidized whatever it is.

As Tamara Draught, Vice President of DEMOS, wrote recently, “Without the public systems and structures that taxes pay for, America as we know it would cease to exist. Taxes matter.”

For more on the work of Demos and “Taxes Matter” week, please visit the Our Fiscal Security website. One of their free, downloadable graphics is below, and illustrates my point exactly!

Faith in Public Life

On Tuesdays, we will be featuring links to some of our favorite websites, lists, and partners that broaden our thinking on the commons.  Check back Thursday for our next post from the Taxes and the Commons series that will look at what we can be thankful for when it comes to paying taxes, as April 18th draws closer.

Faith in Public Life is an excellent daily newsfeed of current events that reflect various points of view from people of faith, or about issues that have spiritual elements or overtones.  Faith in Public Life also publishes a daily blog and the following is a snippet from a much longer piece which you can read on their website.  Sign up at www.faithinpubliclife.org to read high quality and thoughtful reports and commentary from a faith perspective on the issues of the day.

Budgeting is about priorities, about using our resources in ways that reflect our values. Politicians want to preserve tax breaks for big oil companies, yet cut funding for vital programs that provide health care to our seniors, children and disabled citizens. That is a direct reflection of what our elected representatives care most about. Our public schools are a primary means by which we fulfill our moral obligation to prepare all children for a bright future. Yet, funding education cuts proposed in HR-1 would total $11.5 billion. Ten aircraft carriers, the first to be completed in 2015, the last in 2040, will cost $120 billion. Couldn't we just build nine and make sure our children get the education they deserve?

By: Michael Livingston, Director of the National Council of Churches Poverty Initiative

Taxes and the Commons Series: Shared Sacrifice

From the time I was about 9 years old, I did small jobs for neighbors to earn money.  I mowed lawns in the summer, shoveled walks in the winter, cleaned houses, babysat, and then as I got older, worked as a waitress and cashier in a restaurant.  My family did not have money, and I learned early on that if I wanted something,   I needed to work for it.  I saved most of the money I earned all those years for college and actually had a tidy amount to put toward tuition and books when I finally left home.  Most of the kids I grew up with did the same—we thought nothing of it.   We did not use this language of “austerity” or “shared sacrifice” that informs budget discussions today but we actually practiced it.  Because most of the families in my neighborhood went between “struggling” to “getting by” to “doing OK” and back again, we also helped each other.  The boys up the street knew a lot about bicycles and could find and patch a hole in an inner tube in about 15 minutes.  I read very well and could help with homework so we could all get to work or play faster.  

I am not nostalgic for my childhood, and I don’t look back at those times as the “good old days.”  But I am grateful that I know what austerity and sacrifice are, so I can recognize it when I hear about it on the news. 

Here are some shared sacrifices I would like to see, as suggested by the Center for American Progress:

• How about if people with vacation homes could not deduct their mortgage interest?  This would generate almost $9 billion over ten years, so that people needing low income housing could actually have it.  (The cut to low income housing programs is $8.9 billion).
• What if Congress had not extended the Bush era tax cuts for the top income brackets?  That would have generated $42 billion a year, almost enough to save all the programs currently at risk; the total cost of which is $42 billion.  (To name just a few of these programs:  early childhood, WIC, job training for unemployed, Low Income Home Energy, or LHEAP grants, community health centers, legal services for the poor, and Title X Family Planning.) 

In a new report by Chuck Collins, Sam Pizzigati and Alison Goldberg, the following policy suggestions are made.  Taken together, they would boost revenue by $4 trillion over the next decade.

• Close overseas tax havens ($90-100 billion)
• Add new tax brackets for households with more than $1 million in annual income ($60-80 billion)
• Institute a modest financial transaction tax ($150 billion)

The report shows how America's increasingly concentrated income and wealth, coupled with historically low effective tax rates on the richest households, are fueling the deficit.  For example, if U.S. corporations were taxed at the same effective rate that they paid in 1961, the additional tax revenue would total $485 billion.

Shared sacrifice?  I am not seeing it, unless one defines this as the super rich and corporations sharing in sacrificing the majority of Americans, particularly the poor, toward their own unending need to concentrate wealth in a smaller and smaller number of hands.

We Just Have to Know What We Want

I just did a “Talking About Taxes” workshop for the staff of a very large social service agency.  Of the 50 people in attendance, almost 3/4ths were under 35.  They were enthusiastic and interested in all aspects of the discussion and raised many good questions and comments.  But what struck me most was something one person said to me after the workshop, “Now I realize what we have to do:  put forward a vision of what we want and tell the policy people to create policies that will make it happen.  We don’t need to understand every little detail about taxes and tax policy:  we just have to know what we want.” 

What people seemed most struck by is the notion that taxes are a mirror of community values.  Some economists have said they can tell what the quality of public schools are going to be, what kind of arts and culture a community will have, and about how many poor people will live in a place just by looking at the tax code. 

“We just have to know what we want.”  Sounds simple, but it is hard.  However, as we move closer to Tax Day, I see more and more clearly that in not knowing what we want, and not standing up for what we want, we get what we have.  And I think most of us are pretty clear that what we have is not what we want. 

Let’s get busy imagining something else, and creating a structure to make it happen.   In honor of Tax Day, we will be featuring posts over the next six weeks that explore what it is that we want and the implication of taxes and tax policy on nonprofits, communities, and the values we want to reflect.   We will also be highlighting some of the work that other groups are doing on this issue as well.

We look forward to hearing your thoughts!