No rules for the Rich: Tax Havens and Tax Evasion wrecking global economy

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On Saturday March 5th, at 10.30 a.m at the French Institute, 17 Queensberry Place, London SW7, John Christensen will speak on “No rules for the Rich - How Tax Avoidance is Wrecking the Global Economy”. The meeting, held in English but organised by the London branch of the Friends of Le Monde Diplomatique, is one of a series put together by readers of the left-wing monthly, which now publishes an English language edition.

John Christensen has been campaigning for some time to force governments to take on the tax-dodging corporations and rich individuals. As he says, “Hidden from public scrutiny, businesses and banking systems have been reconfigured to bypass nationally-based tax and regulatory regimes. Using around sixty-five global tax havens, wealthy individuals and businesses employ aggressive tax avoidance strategies and force governments to engage in harmful tax competition to attract investment. These practices distort trade patterns, undermine economic growth, increase wealth inequality, and cause endemic poverty, social instability and failed states, whilst poorer countries lose an estimated US$50 billion annually to dirty money flows.”

In a world where poor people are routinely hounded for any sign that they are being less than honest in their attempts to survive on unemployment and sickness benefits and the like, the rich get away with, and are even admired for, not paying their taxes. What lies behind this thinking is often a feeling that “well, they are only trying to keep what's theirs.” Yet this is, of course, profoundly misguided. As no less a luminary than Franklin D Roosevelt (hey, remember when US presidents could speak in sentences?) noted, “taxes, after all, are the dues that we pay for the privilege of membership of an organized society.” In other words, a proportion of any wealth must be seen as social – this isn't left wing thinking, it's been acknowledged at least since Thomas Hobbes, Royalist authoritarian that he was, pointed out in his mid-seventeenth century masterpiece Leviathan, that if it wasn't for society somebody bigger and nastier than you would simply come along and make off with your stuff.

Thomas Hobbes probably does not figure on the reading lists of many MBA courses, though he should. As one expert witness said when giving testimony to the US Senate Finance Committee in 2003, “Enron and other big companies have escaped taxes in recent years through financial manoeuvres so complex that the (US) Internal Revenue Service has been unable to understand them.”

Christensen argues that “Corporate social irresponsibility of such magnitude is only possible with the active connivance of a ‘pinstripe infrastructure’ of tax accountants and lawyers who create the 'offshore interface' that enables this type of aggressive corporate
behaviour.” Until recently, he points out “Enron – now widely condemned as a corporate delinquent - was upheld as a leading practitioner of the new economy.” Yet “at the 35 percent tax rate, Enron's tax on profits in (its last) five years would have been $625 million, but the company was able to use tax benefits from stock options and other loopholes to reduce its five-year tax total to substantially less than zero. Among the loopholes used to reduce the company’s tax liability was the creation of more than 800 subsidiaries in 'tax havens' such as the Cayman Islands.'”

Christensen will talk about why tax havens are allowed to persist and look at attempts to challenge abuses, such as the OECD initiative against harmful tax competition, and the recently implemented EU/Ecofin – information exchange agreement. He notes that in 2000, tax havens were, at a conservative estimate, estimated to be contributing to revenue losses for developing nations of at least US$50 billion a year, roughly equivalent to annual aid flows to those same countries. This estimate, however, took no account of outright tax evasion, or the use of tax havens to under-report profits.

It is not only poorer countries which suffer, moreover. “Tax havens are used to lower tax yields in mainstream economies, and reduce the rates of capital accumulation and long-term investment. Tax avoidance causes market distortions – enabling transnational businesses to act as economic free-riders and putting locally based businesses at an unfair disadvantage. Tax avoidance undermines the ethos of social equity. Tax havens provide safe conduits for the proceeds of political and economic corruption, illicit arms dealing, tax evasion, capital flight, and so on. Tax havens contribute to global financial instability, advantaging portfolio capital over fixed investment.”

While he agrees that corporations “have the right to establish ‘tax efficient’ arrangements to protect the value of their assets, and to minimise their tax liabilities,” this is “no justification for free-loading.” Tax evasion, he believes, “negates the social contract at the heart of democracy, distorts global markets by creating an uneven basis for competition between multinational and local businesses, (and) distorts investment patterns, lowering the real cost of capital and increasing the cost of labour and land.”

Dismissing the argument that “tax havens protect citizens from tyranny and corruption”, he points out that dictators routinely use offshore accounts, and denies that there can be any advantages to tax havens “other than where the investor is seeking to obtain an unfair tax or regulatory advantage, or wants to avoid disclosure of the origins of the investment. The secrecy space provided by tax havens creates an ideal environment for money-laundering and tax evasion.”

Tax havens “contribute to fiscal and regulatory degradation, serve the purposes of global ‘free-riders’ whose actions harm international markets, reduce government revenues available for essential public services, reduce the rate of accumulation of investment capital, encourage and facilitate criminality, (and) undermine the ethos of fiscal equity.”

Combatting them “requires global initiatives” and the UK government should take “particular responsibility for its overseas territories and crown dependencies.”

See also The European Services Directive