So what is Tory policy on tax havens?


3:55 pm - August 8th 2009

by Paul Sagar    


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Left Outside recently wrote a solid deconstruction of the Conservative International Development paper, also cross-posted to LC. The conclusion? One World Conservatism is a well intentioned but fatally flawed scheme.

But I want to go further and ask what the Tory policy on tax havens is.

Tax havens – or as they are more accurately termed, secrecy jurisdictions – facilitate mass capital flight from developing nations. Capital flight is the number one reason developing nations cannot grow their economies and develop out of poverty.

It is, in turn, seconded and worsened by corruption (which tax havens also facilitate) and its effects exacerbated by a lack of secure, constant and domestically-accessible tax revenue (ditto).

Oxfam estimates that developing countries miss out on up to $124 billion in lost income from offshore assets held in tax havens each year. This is just the figure for assets held offshore.

Because developing nation tax authorities are unable to touch these sources of wealth, the Tax Justice Network estimates that developing nations effectively lose $250 billion dollars per year to secrecy jurisdictions.

And there’s more: contract kick-backs that employ secrecy jurisdictions to launder dirty money; the use of secrecy jurisdictions to facilitate false transfer pricing; the practice of spiriting resources and wealth out of developing nations and into secret bank accounts held offshore by wealthy unaccountable elites, and many other forms of corruption rob the developing world over and over again.

At present, not only does the UK allow Jersey, Guernsey, the Cayman Islands, the British Virgin Islands, the Turks and Caicos Islands (etc etc etc) to go on operating as tax havens, it actually subsidises some of them.

Despite some promising-sounding rhetoric after the G20, Gordon Brown’s government has not delivered on its promise to get tough on tax havens. The OECD’s new ”white list” system is an invitation for secrecy jurisdictions to coat themselves in a false veneer of co-operation and transparency.

Tax havens are the international development elephant in the room. If the Tories were serious about development they would acknowledge this stonking great pacidurm and get tough on the UK’s network of secrecy jurisdictions. This would tackle a major problem head-on, and send a message to the rest of the world that Britain is serious about tackling international poverty (not to mention global financial stability).

So why is tackling offshore havens is simply not on Tory agenda?

1. An increasing cossiness with the tax avoidance industry

2. A desire to once more be Champions of the City, after 12 years of Brownist usurpation (the City of London is, of course, rightly thought of as a tax haven itself, as well as being the centre of a vast network of smaller satellite havens).

3. The presence of major party-funders who are themselves tax exiles, often residing in secrecy jurisdictions and some of whom own tax haven banks.

And so for the world’s poorest, the future continues to be bleak, in part because the future’s blue.

———–
cross-posted from Bad Conscience

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About the author
Paul Sagar is a post-graduate student at the University of London and blogs at Bad Conscience.
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Story Filed Under: Blog ,Conservative Party ,Economy ,Foreign affairs ,Reform ,Westminster

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Reader comments


“Tax havens – or as they are more accurately termed, secrecy jurisdictions”

I prefer the term ‘jurisdictions which respect privacy.’ You folks on the left are all in favour of privacy, right? Right? Oh wait, apparently not; apparently privacy is only important when it comes to the relatively trivial aspects of people’s lives like the kind of information contained in ID cards, but individuals’ personal financial details and bank accounts are entirely fair game.

Not to mention that what exactly constitutes a ‘tax haven’ is never clear; one gets the impression that it has no determinate referent except for ‘somewhere whose taxes are lower than I’d like them to be.’

“Capital flight is the number one reason developing nations cannot grow their economies and develop out of poverty. ”

Well, no. Crap, vindictive, kleptomaniac government which makes anyone capable of doing so take their money out of the reach of a crap, vindictive, kleptomaniac government leads to capital flight which is the number one symptom of the reason that developing nations cannot grow their economies and develop out of poverty: crap, vindictive and kleptomaniac governance.

Come on now, do you really believe that Zimbabwe, Equatorial Guinea, Sudan, Nigeria, Burma, the list goes on, do you really believe that the problem is capital flight or the crap governments that lead to capital flight?

Tim,

You make good points, but look where they lead.

Those kinds of regimes DO have “crap, vindictive and kleptomaniac governance.”

But what encourages that? Well, in part at least, it’s the ability of the dominant elites to remove wealth and resources from those countries, for their own personal gain.

That ability is massively enhanced by the secrecy in banking and trust laws, and the “ask no questions” approach of tax havens.

Raymond Baker’s book Capitalism’s Achiles Heel goes into extensive detail about the ways and extent to which corrupt elites have used tax havens to rob their own nations. You should read it.

Furthermore, do you not think it’s a little bit harder to disentangle cause and effect than you’re allowing for? Could there not in fact be a vicious spiral at work: crap, vindictive and kleptomaniac governance goes hand in hand with allowing corporations and high net worth individuals to avoid paying tax…without which a stable, prosperous society cannot be built…which in turn perpetuates crap, vindictive and kleptomaniac governance?

I’m not saying tax havens *started* this vicious cycle…but taking them out of the loop would go a long way to halting it.

I am not so sure. Capital might do less harm sitting in an off-shore account than in the hands of a brutal regime. The key to the problem is making it difficult for those governments to grab that capital in the first place, and that is done with enforceable property rights overseen by an independent judiciary. Once you have that, tax havens or no tax havens, you will see things improving.

“crap, vindictive and kleptomaniac governance goes hand in hand with allowing corporations and high net worth individuals to avoid paying tax…without which a stable, prosperous society cannot be built…which in turn perpetuates crap, vindictive and kleptomaniac governance?”

Sure….it’s just that we’re missing one recusion from the front there: or perhaps one phrase. Allow me to put it as I see it:

“crap, vindictive and kleptomaniac governance causes corporations and high net worth individuals to avoid paying tax…without which a stable, prosperous society cannot be built…which in turn perpetuates crap, vindictive and kleptomaniac governance?”

In my world view it’s the CVK that is the problem which has to be solved.

To argue a tad by analogy….these islands were, for a long time indeed, not rich. They are now. The usual, from an economist’s point of view (no, I’m not one, only an interested amateur) argument is that only after we didn’t have CVK governments was the development of general wealth possible. Things like security of property, all that stuff that is all over development economics about “institutions”.

Where I hugely part company with TJN and the likes of Richard Murphy is in that, while we all think that effective government is necessary for development to happen, they seem to think that government with money (ie, able to capture capital flows and tax revenues) will be effective.

Me? I think history and even current observation shows that no, that’s bass ackwards. Effective governance first, then tax and capital will stay to profit from them.

5. Tim Worstall. Good point on the need for effective government. All countries suffer corruption because of human nature. The problem is for some countries the corruption and incompetence significantly undermines their ability to function. If we looks at countries such as Botswana, a major reason for their success is the competence and honesty of the government.

What’s the Tory policy on anything? I doubt Cameron himself yet knows which populist policies he will be asked to adopt for the next election.

There is a strong case against tax havens on third world/international development grounds with an appeal to our sense of solidarity with the poor of other countries, but surely we also need to make a very simple self-interest case against tax havens as British taxpayers.

Every penny Rupert Murdoch, Richard Branson, Tesco and the whole bloody lot of them avoid in tax through pisstaking accounting manoeuvres, we have to make up for them. (“I prefer the term ‘jurisdictions which respect privacy’. Talk about defending the indefensible.)

Cameron will obviously take the Brown line that our best interests lie in having a City of London which is a tax haven, and lies at the centre of a global web of tax avoidance, in effect ripping off the taxpayers of the rest of the world. It is a disastrous strategy and is the source of much of the rising inequality that is ruining the country. It also risks the US & EU one day getting fed up and rightly fucking us over. We really need to avoid finding out what it’s like to have a shit economy and no friends.

What’s the Tory policy on anything?

Upping VAT to 20% seems like that policy is nailed on.

Every penny Rupert Murdoch, Richard Branson, Tesco and the whole bloody lot of them avoid in tax through pisstaking accounting manoeuvres, we have to make up for them.

Tesco avoided a stupid tax (stamp duty is genuinely insane; it’s one of the few taxes I’d dodge out of sheer principle and give the money to charity), and still pays real tax on its profits. Murdoch’s an utter bastard, but his 1990s ‘no UK tax’ stuff is largely based on the enormous losses he made out of sending satellites into space and massively subsidising bits of stupidly hardcore IT in everyone’s front room (a Sky+HD box is about as clever as the $1800 computer I’m writing this on, and costs gbp100 to users – BSkyB is now profitable, but in the 1990s its hardware was equally hardcore for a startup). Last year, Newscorp paid over the ‘expected’ (accounting profit * holding company tax rate) US tax charge. And as far as I can make out, Branson hasn’t really run a cash-generating business since he sold the record label to EMI.

& yes, it’s the existence of Switzerland and the Assorted Dirty Crooked Islands that allow the PM of $crooked_developing_country to transfer billions of dollars from the poor to his retirement slush-fund. But at the same time, a lot of countries impose such absurd levels of official tax + ‘needed to operate’ bribes from anyone who operates there, which aren’t paid by any of the PM’s friends, that channelling development money through wholly official routes just means it *all* gets nicked and sent to Switzerland by the PM. Is it better in the medium term for development funds to invest in ways that avoid that, or to stay out altogether because they don’t want to get their hands dirty?

“Every penny Rupert Murdoch, Richard Branson, Tesco and the whole bloody lot of them avoid in tax through pisstaking accounting manoeuvres, we have to make up for them.”

That isn’t exactly and precisely true. Corporate profit taxes are subject to “tax incidence”. It’s ain’t necessarily so that the person hading over the cheque is the person bearing the economic burden of the tax. TJN (ie, I’ve had this “discussion” with Murphy and he denies it happens and Christiansen, their economist, said it only happens in a closed economy….entirely wrong, it’s an open one that allows it) denies it flatly. St Vince of Cable and Larry Elliott both (to take two lefties) agree that it is true. It is some combination of workers, consumers and shareholders who pay such corporate profit taxes, not the corporation.

Best empirical evidence (Congressional Budget Office) is that 70% of a corporate income tax is really paid by the workers in the form of lower wages. So “we” pay it anyway.

The argument extends to some extent to all taxes on capital. In an open economy, capital is more mobile than labour so capital is more likely to be getting the global return. Thus taking it locally will not depress capital’s return but that of the less mobile factor, labour.

Some countries have understood this an adjusted their tax regimes accordingly. The Nordics for example: Sweden especially has low taxes on both corporate and capital income (no, really, go look it up) because it is lots of capital added to labour which leads to high incomes for labour (the other way of putting that is “investing in high paying, high productivity, jobs”).

There’s a very good argument that we shouldn’t be taxing corporations at all.

sorry for not replying to comments, have spent the whole day puking my guts up.

i’m going to crawl back to bed now, so will try and answer points tomorrow…

Well, that’ss fair enough. We know from many of your comments that libertarian ideas have the capacity to make your wretch:) Hope you are feeling better.

Nick:

“The key to the problem is making it difficult for those governments to grab that capital in the first place, and that is done with enforceable property rights overseen by an independent judiciary. Once you have that, tax havens or no tax havens, you will see things improving.”

– It’s the presence of tax havens that makes it very difficult for stable regimes to enforce propert rights overseen by an independent judiciary!

Tim,

“To argue a tad by analogy….these islands were, for a long time indeed, not rich. They are now. The usual, from an economist’s point of view (no, I’m not one, only an interested amateur) argument is that only after we didn’t have CVK governments was the development of general wealth possible. Things like security of property, all that stuff that is all over development economics about “institutions”.”

Well, be careful. These Islands (though remember that Delaware, the Netherlands, Dublin’s Financial Centre and The City of London are arguably tax havens/secrecy jurisdictions) are rich in terms of overall GDP, and the individuals at the top of the pile have done very well…but there’s lots of evidence that the poor in these countries have seen very little material benefit, and have to cope with endemic corruption, narcisim and cronyism which secrecy promotes.

Furthermore, even if these Islands have gotten rich, is it right that they should have done so by undermining the tax regimes of democratically elected governments elsewhere?

By the way, I’m currently helping with an extensive research project into the origin of UK-connected tax havens. Basically, the UK government deployed it as a development strategy that then got out of control, and the genie would not go back in the bottle. It’s going to be a while in the completion, but you may well be interested in the eventual findings/interpretations.

“Where I hugely part company with TJN and the likes of Richard Murphy is in that, while we all think that effective government is necessary for development to happen, they seem to think that government with money (ie, able to capture capital flows and tax revenues) will be effective.

Me? I think history and even current observation shows that no, that’s bass ackwards. Effective governance first, then tax and capital will stay to profit from them.”

Sure, this is where we differ on empirical grounds as well as theory.

I reckon you should give Raymond Baker’s book Capitalism’s Achiles Heel a try, though. Baker’s a businessman and pro-free-marketeer who opposes tax havens/secrecy jurisdictions on the basis that they fuck up the beneficial effects of free markets.

It may be that we actually don’t disagree as much as we think.

Strategist,

I agree.

John B,

You may not like stamp duty, but last time I checked it wasn’t up to individuals or companies to pick and choose which laws they wish to follow. If you don’t like a law, you and anyone else should organise politically to change it through the democratic mechanism. Simply ignoring or breaking the law isn’t acceptable in a democracy governed by the rule of law.

Paul, it’s good to be on the same wavelength as someone else on this website!

“By the way, I’m currently helping with an extensive research project into the origin of UK-connected tax havens. Basically, the UK government deployed it as a development strategy that then got out of control, and the genie would not go back in the bottle.”

That’s interesting. I hope you will be following the story up to the point where the genie becomes Mephistopheles and cashes in to acquire possession of the soul of UK parliament & government. We have got to the point where after the next election 100+ Tory newbie MPs from the key marginals will owe their new status entirely to the largesse of tax exile Lord Ashcroft. And of course the big 4 accountants, the private equity lizards et al will expect no less than their payback for pouring money into the Tory party and its charmed circle.

“but there’s lots of evidence that the poor in these countries have seen very little material benefit,”

By “these islands” I meant the UK. I take it that you agree that we have indeed all seen some benefit over the past few centuries?

“Simply ignoring or breaking the law isn’t acceptable in a democracy governed by the rule of law.”

The corollary to which is that if it ain’t a democracy and it ain’t governed by the rule of law then ignoring or breaking is just fine and dandy.

Which of course provides us with the justification for tax and secrecy havens. Less than half the world is democratic and even within that minority, there are places without the rule of law.

So why are you and the TJN insisting that people must obey the tax laws of places that are not democratic nor ruled by the law?

“Simply ignoring or breaking the law isn’t acceptable in a democracy governed by the rule of law.”

I think Paul was responding to JohnB’s bravado in taking an optional approach to UK stamp duty like his heroes at Tesco.

Or indeed like the Guardian Media Group…

JohnB, are the Guardian Media Group your heroes too? You clearly share much.

@14,17 – we know that Tesco and GMG neither ignored nor broke the law: they structured transactions in a way that, perfectly legally, allowed them to avoid paying stamp duty. That isn’t in dispute.

The question is whether those actions were morally right) – I’d say that stamp duty is a sufficiently stupid tax that yes, they were.

Simply ignoring or breaking the law isn’t acceptable in a democracy governed by the rule of law.

Depends on what the law is.

“Or indeed like the Guardian Media Group…”

Indeed. This week’s Private Eye has a nice little piece on this.

” Simply ignoring or breaking the law isn’t acceptable in a democracy governed by the rule of law.

Depends on what the law is”

Actually, that’s true.

But that thought is usually one about justified civil disobedience against a law which is perceived as being unjust…I’m not sure you can really maintain that Tesco’s efforts to avoid paying legally due tax to the people of a society from whom Tesco makes enormous profits is an act of civil disobedience in the name of some higher principle like, say, justice, that trumps the law…

Tax avoidance isn’t illegal and therefore it can’t be civil disobedience (well, not as I understand civil disobedience, ymmv).

The stamp duty avoided by Tesco is orders of magnitude less than the money wasted by the state.

In the scheme of things it’s nothing to be concerned about – there are larger fish to fry, a lot closer to home.


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