Tuesday, March 20, 2012

We need tax havens closed down to avoid another financial crisis and increase revenues , the 50p tax rate is a side issue, the mansion tax a gimmick

Chancellor George Osborne's cut in the 50p top rate of tax is supposed to bring in extra revenue by making the wealthiest pay tax in the UK, while business Minister Vince Cable is calling for a “mansion tax” supposedly to target the “super rich”. Another Lib Dem – Lord Oakeshott – says it’s because otherwise taxing the super rich is like pinning down jelly. In fact the real problem – the thing allowing the super-rich and big firms to avoid taxes; and the thing that caused the financial crisis and will cause another if they’re not closed down –is tax havens. Some will tell you closing them down is impossible – they’re wrong. It’s been done before and it can be done again.

Deputy PM Nick Clegg suggest a minimum tax rate, which is a better idea, but both avoids the main problem – tax havens, including the City of London ‘Square Mile’, which is governed only by the Corporation of the City of London – mostly bank and hedge fund executives.

To listen to most politicians you’d believe that they’ve now re-regulated banks and financial firms as much as is possible and that taxing and regulating big firms, banks and billionaires further is impossible as they’d just go elsewhere .  Nicholas Shaxson’s book ‘ Treasure Islands ’ shows this is a long way from the truth. It should be required reading for every voter in every country in the world (1).

The ‘Mansion Tax’ might get a little extra tax out of some of the super rich (while also e.g punishing widows and people who’ve retired for having a bigger than average house or a house in an area with high property values, the same way the Rates used to). It will barely make the super-rich of big firms blink though. If you want to get significant taxes out of them, you have to close down the tax havens

Bretton Woods

Shaxson shows that after World War Two the Bretton Woods agreement between the western European countries and the US imposed capital controls – i.e limits on how much money could be transferred from one country to another by private individuals and companies, with any large amount requiring an explanation of the reason and approval by government, which would not be granted unless benefits to the country the money was coming from could be shown.

There were also fixed exchange rates between the dollar and other currencies, avoiding currency speculation of the kind that led to Black Wednesday and the Asian Financial Crisis in the 1990s.

(Other aspects of Bretton Woods, such as the Gold Standard, were more questionable)

However from the day Bretton Woods came into force, bankers, the financial industry and politicians they lobbied were looking for ways to get around it and weaken it to the point it would collapse entirely. By 1971 they managed to achieve that.

How tax havens cause financial and economic crises – and will cause more if they aren’t closed down

Their main method has been tax havens, not only because of low (or no) taxes, but also because tax havens provide secrecy, allowing banks and companies to avoid regulation. They do this in several ways. For instance by allowing banks and companies and people to registering their company or shell companies or accounts in tax havens. Tax havens also allow professional front-man directors, managing executives, treasurers etc who are listed as the executives of thousands of different firms registered in that haven. So if anyone tries to find out about who owns and manages that company, they’ll only find the front people. Secrecy is the most important aspect, because if no-one knows who really runs an account or firm or what company or individual is putting money into it or taking it out (e.g to donate to political parties’ or politicians’ campaign funds), no-one can regulate them.

Enron, World.com, Parmalat and Long Term Capital Management for instance were all registered or had shell companies in the Cayman Islands, a British dependency.

While many tax havens are small islands and so ‘offshore’ some of the onshore tax havens like the US State of Delaware Luxembourg, Switzerland and the City of London (Square Mile) mentioned earlier are even bigger centres of corruption. Delaware has more companies registered in it than any other tax haven due to it’s lack of regulation, almost zero taxes and high level of secrecy.

The ‘financial derivatives’ like ‘Collateral Debt Obligations’ which led to the financial crisis were mostly invented and issued by firms registered in tax havens.

The onshore and offshore tax havens are similar in being small, largely being governed by the heads of companies in the tax haven (Jersey, City of London) or by governments so small that they are captured easily by big banks’ and companies’ lobbying and donations (Delaware).

The City of London is governed by the City of London Corporation headed by the Lord Mayor (no relation to the democratically elected mayor of the rest of London). City of London Corporation elections work like those of a medieval city dominated by merchant guilds rather than a modern democracy. There are 9,000 ordinary electors, but 39,000 votes held by companies. The votes held by companies are held by their Chief Executives, who get a number of votes based on their number of employees. (Tony Blair, who dropped the Labour party’s previous policy of abolishing the Corporation in 1996, passed legislation in government increasing the number of votes in it going to company executives from 26,000 to 39,000).

When Labour party member Maurice Glasman stood against one of the candidates in a Corporation election, it was unprecedented. The heads of the companies in the Square Mile are almost always elected unopposed by any other candidate.

This means that, in practice, as many of the UK’s banks and other financial companies are in the Square Mile governed by the Corporation, the UK’s financial industry remains entirely unregulated. Neither the British government nor the Mayor of London, nor the London Assembly, nor the EU, can regulate what goes on inside the Square Mile under their ‘Ancient Charter’ dating to before the Norman conquest of England.

What’s more the City of London Corporation and the firms that make it up are in denial about CDOs and other financial derivatives having caused the crisis and continue to lobby the government to avoid ‘unnecessary’ regulation of the financial sector and to allow it to continue to create now and ‘innovative financial products’ of the kind that caused the crisis.

If the tax havens aren’t closed down another crisis is not just a possibility – it will almost inevitably happen again, because the banks and firms involved are so big they can always extort a bail-out to avoid taking down the entire economy with them – and then re-invest some of the money they get from that in lobbying and donations to party funds.

How Tax Havens push up taxes for the majority

Shaxson found that an estimated $12 trillion – a quarter of the world’s wealth – is untaxed in tax havens, put there by individual people or their financial advisors. The amount put in them by banks and big companies is not known, but we do know that every major company and bank in the UK, from RBS to Tesco has dozens of subsidiaries, ‘joint ventures’ or ‘associates in tax havens like Jersey – and that the purpose of these subsidiaries and other agreements is to avoid tax. So at a guess at least half the world’s wealth is going untaxed in tax havens.

We also know that the Inland Revenue, which would jail ordinary people or heads of small businesses for evading or avoiding tax, instead negotiates ‘sweetheart deals’ with big banks and firms, allowing them each to avoid tens to hundreds of millions each a year – and that’s only from the accounts the Inland Revenue knows about.

That pushes taxes up for everyone else – all the ordinary people and small businesses who can’t afford the lawyers and accountants they’d need to avoid tax.

If that money was taxed, so those who can afford to pay paid what they can afford, taxes for everyone else would fall, extreme cuts in public spending would be unnecessary as tax receipts would rise and the kind of fraud that allowed the financial crisis to happen could be prevented.

How Tax Havens allow developed and developing world corruption

It also helps corrupt governments and dictatorships around the world – including in the poorest countries – to divert taxes and aid money into secret accounts in tax havens. So the next time you hear someone complain about how corruption makes aid pointless, point out that it couldn’t happen on the scale it’s happening without the tax havens and lack of controls on capital transfers, which are the result of the actions of developed world governments like the US, Britain, France and Switzerland. The centres of corruption are tax havens in the developed world.

Tax Havens launder drug , criminal and terrorist money

The secrecy which tax havens provide which is designed to allow people and companies to avoid or evade tax also allows drug traffickers, organised crime and terrorist groups to launder money. Shaxson provides several concrete examples including the BCCI affair and the Florida mafia

The Fiction that most Tax Havens are independent

The British government maintains a fiction that it has no control of what goes on in it’s tax haven dependencies – especially the Cayman Islands, Jersey and the Isle of Man. Shaxson’s book provides plenty of examples of them being able to get their way when they want something in these places – and plenty of quotes showing the British government giving their dependencies a nod and a wink on how it would be better if matters were ‘resolved’ without the UK government having to act itself and end the convenient fiction.

The biggest threat from tax havens – and how they can be closed down, as they were under Bretton Woods

The most frightening thing about tax havens though is that they are all still operating, providing secret accounts and shell companies for banks and firms worldwide – and as long as that’s the case another global financial crisis could happen tomorrow.

The ‘nothing can be done’ excuse – and why it’s false

Most of the politicians and bankers and billionaires will tell you that there is nothing that can be done about this – that modern technology and business practices have gone beyond the ability of governments to regulate them. That’s nonsense. It was possible to transfer money between countries fairly rapidly in 1945-1970, but Bretton Woods prevented it being done constantly without good reasons – and growth rates in that period were far higher (at an average of 4% a year) in the developed world than they have been since 1970. Before 1945 there was the same chaos in international finance, leading to the same problems – the 1929 Great Crash and the global Great Depression. So this is not a matter of new developments making new capital and exchange rate controls impossible – they are just as possible as they were in 1945 to 1970.

The ‘lack of political will’ excuse – and how to create the political will

Many will tell you that the problem is a lack of political will – again, nonsense. If enough people demand that their governments close down tax havens and impose regulation on them, it can be done, just as it was done after World War Two. Tax havens rely on money being able to get in and out. Simply ban all money transfers in and out of them until new regulations are in force and enforce full sharing of all information on accounts and companies registered in them.

The problem is that the billionaires and big firms and the newspapers and TV stations they own and the politicians they lobby and donate to have persuaded everyone that the people costing them money are fraudulent welfare claimants, when in fact, for instance, only 0.6% of benefit claims in the UK are estimated to be fraudulent. As long as the majority allow themselves to be conned in this way there certainly won’t be the political will to do anything about the tax havens that are really pushing taxes up for the majority and causing economic crises. If they are informed and persuaded of the real problems – and that allowing the tax havens to remain will result in another financial crisis and recession if they’re not closed down, that will rapidly change though.

Politicians lack the ‘political will’ to do anything about tax havens as long as the majority don’t realise how they’re suffering due to them because the same big firms and super rich people benefiting most from tax havens are also the ones donating most to the funds of the big parties and spending most on lobbying government.

The ‘requires an international agreement we can’t get’ excuse – and the alternative of leading by example

Then there’s the excuse that it would require an international agreement and that that’s not possible. In fact it’s been done before (Bretton Woods) and progress can be made even without one – because if one country starts closing down it’s tax havens then the voters in others won’t accept that closing down tax havens is impossible any more -  and the dominoes will start to fall.


(1) = Michael Shaxson (2011) ‘Treasure Islands: Tax Havens and the Men who Stole the World’ Bodley Heads, London, 2011

(2) = Guardian DataBlog October 2011 ‘Tax havens and the FTSE 100: the full list’- The top 100 British multinationals have declared full or joint ownership of 34,216 companies - 25% of which are located in jurisdictions classed as tax havens. http://www.guardian.co.uk/news/datablog/2011/oct/11/ftse100-subsidiaries-tax-data

(3) = Guardian 20 Dec 2011 ‘HMRC hid 'sweetheart' tax deals for big business, MPs say’, http://www.guardian.co.uk/politics/2011/dec/20/inland-revenue-sweetheart-tax-deals

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