‘There may be some financial calculation which shows it to be advantageous that my savings should be invested in whatever quarter of the habitable globe shows the greatest marginal efficiency of capital or the highest rate of interest. But experience is accumulating that remoteness between ownership and operation is an evil in the relations among men, likely or certain in the long run to set up strains and enmities which will bring to nought the financial calculation.’ John Maynard Keynes
How much lies offshore
The fiscal world is run by ultra high net worth individuals, that is individuals who have at least $30 million in assets. These individuals include heads of corporations and the members of wealthy dynastic families. They almost all hoard their money through tax havens, making tax havens quintessentially the real power-players economy as well as relics of colonial times. Before the Panama Papers changed everything, ultra high net worth individuals had been strengthening their grip on society, turning back society into a Orwellian nightmare.
Why do tax havens play such a colossal role in turning back modern times seemingly to the economic standards arrived at during medieval feudalism? Why are they far bigger than what is popularly believed? These are the questions this blog aims to address.
Firstly, they are not the same as they most popularly appear? Most people think tax havens are a few islands. However, the world contains approximately 60 tax havens in which Gabriel Zucman, an Associate Professor of Economics at UC Berkley, has “conservatively” estimated approximately $7.6 trillion from all nation’s wealth lies offshore (8%) in 2014. [1] More realistically, James S Henry, an American economist, lawyer, and investigative journalist has estimated that between $21 to $32 trillion lies offshore (22 -34%) in 2010. [2] Those numbers and percentages have certainly grown considerably over the last decade, with James S Henry more recently in 2022 estimating that $50 trillion lies offshore. You might not know how many millions are in a trillion? Well, a billion is a million million, and a trillion is a thousand billion. so the amount lying offshore is a huge deal.
Numbers nevertheless are abstract and frankly non-emotive tools, so perhaps its more poignant to compare the issue of tax havens to one of the most famous economics disaster of recent time, Greece's national debt in 2008, which was 264,775 million euros . That was enough to put the millions of Greeks out of job, homeless, and hundreds suicidal and make headlines in all papers. Strangely, the far bigger global issue of tax havens hardly ever does.
Tax Havens make up the system that allows and aids the wrong powerful people to control the financial world. It has been found that the monies stored in tax havens belong to celebrities, royals, politicians, the wealthiest Arabs, terrorists, banking families and big-tech giants; in short, all the ones who are intent on whipping the world to work for them.
The modern rise of the Tax Haven Industry, a modern colonial movement and how Britain got Americanised
This is a relatively modern problem, in terms of its scale. In fact, it all really started in London, in 1959 with the birth of the Euromarket (Eurobond-market). Before that there was only really a much more cautious Switzerland. ‘By late 1959 about $200 million or so was on deposit in the Euromarket in London; by the end of 1960 it had reached a billion, and a year later the total was $3 billion’. [3] It then exploded, Wolf of Wolves Street style, reaching $500 billion in 1980, then a net $2.6 trillion eight years later. This Americanised England. In 1964, eleven US banks had branches in the City of London. In 1975, fifty-eight did! The American banks killed the little English banks, and along with them almost all the banks which actually cared about the customer.
In present day, London and New York, not the little islands in the Caribbean, are the leading offshore tax havens.
London hosts more foreign banks than any other financial centre. In 2008 the city accounted for half of all international trade in equities, nearly 45 percent of over-the-counter derivatives turnover, 70 percent of Eurobond turnover, 35 percent of global currency trading, and 55 percent of all international public offerings. New York is bigger in areas like securitisation, insurance, mergers and acquisitions, and asset management, but much of its business is domestic.
Tax havens controlled by London with Wall Street interests in mind include Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat, the Turks and Caicos Islands, Jersey, Guernsey and the Isle of Man. In the Cayman Islands – ‘the governor sent from London remains responsible for defense, internal security, and foreign relations; he appoints the attorney general, the judiciary... The final appeal court is the Privy Council in London.’ [4] It is our little Britain. It is clear to see from this that the tax haven industry is actually a modern equivalent to colonialism, particularly as the Euromarkets came to prominence so shortly after the final fall of the British Empire.
Panama was turned into a tax haven so that the Standard Oil company could avoid paying US taxes during the construction of the Panama Canal. Panama became a US colony like a lot of little Latin-American countries, to the detriment of Panama itself. In fact, American policy served to insulate the Panamanian economy from the Canal, which is one of the greatest monuments in the world.
US tax havens include Alaska, Florida, Nevada, New Hampshire, South Dakota, Delaware, Tennessee, Texas, Washington, Wyoming and has associated state tax havens such as Puerto Rico, the American Virgin Islands and the Marshall Islands.
Thus, to what extent is there still colonial rule in the 21st century, with America as opposed to England (remembering that London serves Wall Street interests) being ultimately the lead colonial rulers? Well as I began with, colonial rule is still very existent. France is no better, as she has also used tax havens to keep control of African countries throughout the last century in a style that is reminiscent of the slave trade. And once French ruled Canada is the new tax haven, with Canadian limited partnerships. The modern disease, the cancer of economies, is expanding.
How Tax Haven´s work
Tax havens work in sleek unison. Whilst London has a special relationship with Wall-Street banks, Switzerland has a special relationship with Europe and the rest of the world.
In 1974 the first modern survey made by the US Treasury on the holdings of US financial securities by non-American residents showed that Switzerland, a country that has scarcely more than 0.1% of the world’s population, held almost a third of all American stocks that belonged to non-Americans, far more than the United Kingdom (15%), Canada (15%), France (7%), or Germany (3%) In the spring of 2015 foreign wealth in Switzerland will have reached $2.3 trillion. Around $1.3 trillion belongs to Europeans, or the equivalent of 6% of the financial holdings of EU households.
Tax havens have in fact had a tendency to specialize in the various stages of wealth management; to demonstrate this consider how tiny Luxembourg is ‘the number- two country in the world for the incorporation of mutual funds, after the United States´.
More than 60% of accounts in Switzerland are held through the intermediary of shell companies headquartered in the British Virgin Islands, trusts registered in the Cayman Islands, or foundations domiciled in Liechtenstein. The Anglo-Saxon trusts do not compete with the opacity services sold by Swiss banks; the two techniques of dissimulation have, on the contrary, become fundamentally intertwined.
Captured Countries and States
Economist Gabriel Zucman points out there are two tax havens that have become so international that over a third of their GDP is ‘net primary income paid to the rest of rest of the world – salaries, dividends and interest’. These are Puerto Rico, where ‘almost all the capital there is held by Americans, who hire the local population; all profits return to Uncle Sam’ and Luxembourg.´
He highlights a fundamental difference between Puerto Rico and Luxembourg – ‘Puerto Rico is not an independent nation. The US Congress imposes most of the laws there, but the local population does not have American citizenship. It cannot elect a senator, a representative, or the president of the United States.’
Luxembourg is not just independent, it is a member of the European Union, where it has a right to veto tax reform proposals. This means ‘the representative of the 500,000 inhabitants of Luxembourg can impose his will on 500 million Europeans’ and in ‘secret’. Indeed, the serially corrupt Jean-Claude Juncker was both the 21st Prime Minister of Luxembourg from 1995 to 2013 and 12th President of the European Commission from 2014 to 2019.
The tax havens themselves are suffering because of it, that is besides the bankers. In the Caymans the privacy laws are so strict, you can go to jail not only for revealing information but just for asking for it. Cayman registered banks hold 1 trillion dollars in assets, equivalent to 100,000 per cent of that microstate’s gross national product. It is clear where the power lies, its not the locals. It is in the smaller islands like Jersey and the Cayman Islands where society suffer the most. Dealing with such high levels of money makes the environment claustrophobic, as the islands get financially captured and critical opinions become rarer.
Luxembourg, being for its size one of the biggest havens, has suffered one of the most. It was most affected by the financial crash - between 2007 and 2009, the GDP per worker was lowered by 10% (as opposed to 2% in France). But long before 2007, its economy has been demising. Luxembourg's growth has been low, 1.4% per year since 1970, in a time in which inequality has risen dramatically and the countries main steel-industry has been demised. Politically it has become one of the corruptest places on earth as well.
Small islands and states are prone to be financial captured and turned into tax havens for the elite, and this can literally destablise the world, more than any scandal typically shown in the news.
In the tax haven of Delaware a monumental state legislature was passed. It showed Delaware to be a legislature for hire, ultimately captured by two banks- Chase Manhattan and J.P. Morgan, who wanted to end historical laws appertaining to usury provisions. The law was rushed through, in a race with Citibank who had targeted South Dakota to pass favourable laws, and in the knowledge that there would be considerable opponents to the law in Washington and New York. Delaware’s Consumer Affairs Department never saw the bill before its passage because it would have objected to it.
The banks success meant ‘two hundred years of legislation capping interest rates in the United States had now lost all force’. The laws changed the national landscape. Under the new laws that Chase Manhatten and J.P Morgan in effect wrote ‘Delaware was to remove interest rate ceilings on credit cards, personal loans, car loans, and more. Banks would have powers to foreclose on people’s homes if they defaulted on credit card debts; they could establish places of business overseas or offshore, and they got a regressive state tax structure to boot. And crucially, because Delaware law could now be “exported” to other states, this was to be rolled out across America.’
‘Perhaps no other public policy better illustrates the centrality of the 'marketplace' and the primacy of big business in Delaware," remarked William Boyer ."It also illustrates how a small group of Delaware business executives and lawyers can prevent the public and its elected representatives from participating actively in the formulation, review and authorization of important public policy.’
The law did benefit Delaware whose revenue just from the bank franchise tax before 1980 was around $3 million per year. By 2007 it was taking $175 million. More significantly, this law encouraged the rise in consumerist culture that has happened; and contributed heavily to the 2008 financial crisis and how people were able to handle such a crisis- ‘with interest rates caps removed, the credit card industry took off, and Americans splurged on debt. By mid-2007, as the global financial crisis emerged, U.S. consumers owed nearly $1 trillion on their credit cards—and that is not to mention loans people took out against their homes to pay the credit card bills.’ Usury, especially over the top usury has been one of the biggest crimes of humanity.
Another example of monumental legislative change happening from inside a tax haven impacting the whole world happened in the small island of Jersey, when the Big Four Accounting firms were permitted far more generous terms of liability and far more freedom from regulation. Unfortunately, in 2008 the four big Accounting Firms failure to Audit properly junk derivatives led to the financial crisis. These limited liability provisions ‘took away the most powerful incentive for self-policing by the corporate professions of law and accounting and help explain the wave of corporate cheating that swept the country.’
Short-sited but initially financially appealing ideas which do wreck people´s lives in the grand scheme of things are overly put into legal affect in small captured tax havens.
Impenetrable trusts - protecting criminals and the rich - the government´s 99.99% failure rate.
As mentioned all the big superficial financial players, companies and organisations have their monies concealed in havens. It is an abysmal state of affairs because of tax haven secrecy laws. Countries are so unequipped at dealing with the modern cancer of tax havens that they are rendered helpless. According to U.S treasury officials ‘in a good year they caught 0.1 percent of the illicit inflows into the country – a 99.9 percent failure rate. A Swiss central banker told… his country’s record was probably worse: 99.99 percent.’
The World Bank carried out a survey of how criminals use legal structures to hide stolen assets and ‘said trusts were so difficult to investigate or persecute that they are seldom prioritised in corruption investigations’.
There are even offshore jurisdictions where it is established trusts are impenetrable, such as the Cook Islands and Nevada. ‘To date, no effort to break a Cook Islands asset protection trust has been successful’. A Florida based plastic surgeon, Richard Edison, nicknamed Dr. Dread was ‘sued after five of his patients died and he left a sponge in a woman’s breast. His assets, in a Cook Islands trust, were immune.’
Nevada has ‘18,000 corporate structures based on the island, a significantly higher number than Nevis has people’ and it has been discovered that the likes of ‘Ukraine’s ex-president Viktor Yanukovich hid his ownership of coal mines behind Nevis companies’, after documents he had tried to destroy were ‘fished out of the Dnieper river in 2014’. Like the Cook Islands, ‘there has not been a single case of a creditor ever managing to pierce a Nevada trust’, although Nevada is viewed as more respectable.
Moreover, like in Nevis, Nevada ‘asset protection ordinances mean that – providing two years have passed since you put your property in trust – your creditors have no way of getting hold of it’; and in ‘Nevadan law, you can even be a beneficiary of your own trust, which means you’ve given your property away, so it can’t be taken away from you, and yet you retain all the benefits of owning it.’
If a person compares the ways in which governments treat people who engage in welfare fraud and people who engage in tax evasion, they would find a stark difference.
More proportional resources are spent investigating welfare recipients than taxpayers, inevitably more criminal prosecutions of welfare fraudsters than tax evaders take place and
welfare fraudsters are punished harder. Take in New Zealand for example, 'for an average level of offending of $76,000, 67 percent of welfare fraudsters received a prison sentence. For an average level of offending of $229,000, 18 percent of tax evaders received a prison sentence'.
It is known, governments worldwide are far more interested in catching generally poor, desperate criminals than bigger, richer and greedier criminals, perhaps out of a desperation to preserve the status quo, a lack of ambition and because maybe its just easier. Needless to say, this is a gross injustice.
The colossal failure of the Foreign Account Tax Compliance Act (FATCA)
In 2001, USB 'agreed to become a Qualified Intermediary (QI), under which… the Swiss banks could keep their secrecy as long as they promised to collect tax on the Treasury’s behalf’. However, it preceded to do the opposite and ‘aggressively expanded, marketing undeclared accounts to as many rich Americans as it could’ and helping ‘its US clients structure their Swiss accounts to avoid reporting billions of dollars in assets to the IRS’.
This betrayal came to light after the self-proclaimed “Lucifer’s banker”- Bradley Birkenfeld, whistle-blow on his employees at a time they were not in a position to defend themselves- the 2008 financial crisis had put UBS on the brink of existence. Eventually, UBS were fined $780 million.
More importantly, it led to the US passing a federal law - Foreign Account Tax Compliance Act (FATCA), whereby ‘foreign banks refusing to disclose accounts held by US taxpayers face clearly defined economic sanctions: a 30% tax on all dividends and interest income paid to them by the United States’.
This law led to over a 100 countries sharing their information on assets held by US citizens or residents. What makes the US so hypocrical is that since US institutions do not share what’s happening in the United States regarding other countries assets, in essence, via using the threat of sanctions ‘the United States had bullied the rest of the world into scrapping (their) financial secrecy, but hadn’t applied the same standards to itself…’; indirectly, giving tax havens in the US, like Nevada, an advantage over Switzerland for example, and making uncorperative black-listed haven like the Cooke Islands more appealing for US citizens.
Double taxation, transfer pricing and comparative advantage (how monopolies earn their super-profits)
It is known that corporations and monopolies thrive from not paying taxes using offshore havens. This is shown by the popularity of tax havens in the Corporate World. For example, the British Virgin Islands, with fewer than twenty-five thousand inhabitants, hosts over eight hundred thousand companies. Gabriel Zucman points out that out of US’s 650 billion of foreign profit, 55% is made in six low or zero tax countries: the Netherlands, Bermuda, Luxembourg, Ireland, Singapore, and Switzerland.
The data shows it is clear that corporations are picking their location based on perks with legislation and tax exemptions, as opposed to whether they are more technical, specialised or creative work-forces there, so that they can be more productive.
Profitability is coming first, contributing to monopolies earning unnatural super-profits at the consumers cost. Nicholas Shaxson writes ‘In October 2010 Google Inc. cut its taxes by $3.1 billion in the previous three years through transfer pricing…. The problem is getting worse. Microsoft’s tax bill has been falling sharply, for similar reasons. Cisco is at it. They are all at it. Transfer pricing alone cost the United States an estimated $60 billion a year.’
Raymond Baker estimated for the World Bank that ‘only about a third of total illicit cross-border flows represent criminal money—from drug smuggling, counterfeit goods, racketeering, and so on. Corrupt money—local bribes remitted abroad or bribes paid abroad—added up to just 3 percent of the total. The third component, making up two-thirds, is cross-border commercial transactions, about half from transfer pricing through corporations.´ Relating to this, economist Nicholas Shaxson reflects that there 10 billion euro in total European cartel-related fines in the five years to 2017 may sound grand, but at 2 billion per year represented just 0.03 per cent, or about one three-thousandth, of European corporate profits over the period, which is astonishing, given how extensively monopolies now pervade our economies.
A defence can be made for why this is all necessary and that is because corporations and individuals previously could be subjected to double taxation. Individuals could be taxed at both the corporate and personal level, or alternatively in investments and in international trade, individuals and corporation could be taxed twice by different countries. However, when tax havens eliminate double taxation, something else happens too: double non-taxation. Showing this, it was found in 2017 that one of Apple’s Irish subsidiaries typically paid less than 0.1 per cent in tax because when Apple’s operations are internationally incorporated in Ireland, under US law Apple would not be a tax resident in the US.
As Ireland uses a different test for tax residence – whether Apple was functionally managed and controlled from (US) - it too did not tax Apple. In the end, 215 billion was estimated to have been stashed offshore by the end of 2017 by Apple. This is a clear market loss.
Facebook, Netflix and Amazon are three of the most highly profitable and popular businesses, yet all three avoid paying tax through transfer price, gaining an upper hand over small competitors who don’t. In Amazon’s case, this is particularly bad because by now it is one of the world’s biggest monopolies, is owned by the world’s richest man Jeff Bezos, and yet is tax avoiding in the most aggressive manner. What these companies are doing is out of pure greed and there is not enough public backlash nor any able governments to stop them.
The failure of Britain's Offshore Private Finance Initiative (PFI) projects
PFI schemes in the UK represent another market failure. Just nine infrastructure funds, all based offshore, hold controlling stakes in nearly half of all the 700 odd PFI projects in Britain. A study of the five largest PFI firms showed they paid no tax on their profits in 2011-15. Treasury data shows that while the capital value of assets under PFI schemes added up to 59.4 billion in 2016, the British taxpayer would end up paying out more than 306 billion over the lifetime of these projects. Tax Havens and transfer pricing have made PFI schemes much more costly and PFI projects represent a total disaster.
The grand excuse for Tax Havens - they make countries more economically competitive.
Arguably, Tax Havens became such a big thing (where $50 trillion flows off too) not just because they gave countries like the United States and United Kingdom colonial-like power, but also for the still selfish but more innocent view that various country's governments had or pretended to believe in, which was that setting up their laws to turn their countries into havens would give their countries a competitive advantage over those that didn't. This applied for bigger countries and smaller ones alike.
As shown by what happened in Luxembourg and Delaware, this competitive advantage often was trivial and far from offsetting the costs to the country offering lax tax laws, and even further from offsetting the cost to the world for these countries' and states' decisions.
Peter Kropotkin put it succintly - 'Competition is the law of the jungle, but cooperation is the law of civilization'. Whilst its easy to accept that the competitive, cold and inhuman nature of politics today is so ingrained that its futile to fight it, the cost of this nature of today's politics is so mammoth that to not fight it would be a great shame. The main reason why countries should avoid desperate measures such as turning itself into a tax haven, for competitive reasons, other than it just doesn't work out for that country anyway is the philosophy behind this. Its essentially a policy aimed at making other countries the loser, as opposed to the country itself any better, in a race to the bottom.
Nicholas Shaxson hit home with his analogy that when a firm competes against another and loses, it goes bankrupt which is very negative, but for only a small, generally wealth group of people -its shareholders. It’s far from ideal for its employees, but in a functioning economy these employees should be able to find work at other firms (the winning firm perhaps), and the damage can be contained to some extent. However, when a country loses or collapses it can lead to war, starvation, corruption and take decades to heal.
Therefore, countries most certainly should not be competing like firms, offering the lowest tax in order to take revenue from governments that indulge in borrowing or are in huge financial debt thanks in part to the laws created by tax havens. It is important to note that if countries take a more cooperative approach to other countries, helping other countries get stronger as well itself, it is likely to benefit itself – for instance, by gaining more international business etc.
Rising Inequality and more Banking and Currency Crisis
The founder of modern-economics, Adam Smith, wrote - ‘it is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.’ He was hinting at the reasonableness of the notion that policies can be centred around seeking equality (but only to an extent). So the price of freedom does appear to be to tax the wealthy.
Ever since the Anglo American Tax Haven network came to fore, two economic changes have happened that have increased global levels of inequality.
Firstly, taxes in the biggest economies have been regressively reformed, leading to a loss in tax revenue and more wealthy billionaires: ‘U.S. corporations paid about two-fifths of all U.S. income taxes in the 1950s; that share has fallen to a fifth. The top 0.1 percent of U.S. taxpayers saw their effective tax rate fall from 60 percent in 1960 to 33 percent in 2007, while their share of the income pie soared. Now, had the top thousandth paid the 1960 rate, the federal government would have received over $281 billion more in 2007.
Secondly, between ‘1940 and 1971, developing countries suffered no banking crises and only sixteen currency crises, whereas in the quarter century after 1973 there were 17 banking crises and 57 currency crises’ . Tax Havens affect tax policy in a regressive way – they clearly benefit the most wealthy and not everyone else- so it can be deduced that we have departed away from Adam Smith’s simple viewpoint of progressive taxation.
So all in all it's clear, even without touching much on the corruption side of tax havens, that they are the spider web affecting all of the economy. May they fall as fast as they rose!
References
(1) The Finance Curse: How global finance is making us all poorer, Nicholas Shaxson, 2018
(2) Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens, Nicholas Shaxson, 2011
(3) The Hidden Wealth of Nations – The Scourge of Tax Havens, Gabriel Zucman, 2015
(4) Moneyland: Why Thieves And Crooks Now Rule The World And How To Take It Back - Oliver Bullough, 2018
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