Alter Planet

Following President Obama's victory on healthcare, Citizens for Tax Justice in Washington, D.C. (an important player who did a lot to dispel some of the nonsense that was being spouted during the process of pushing forward the bill) has published another useful analysis:

"The Institute for Research on the Economics of Taxation (IRET) is at it again. If you've ever wondered where the Wall Street Journal's editorial board gets its most half-baked ideas about taxes and economics, the IRET is your answer. Last year, they released a remarkable report concluding that repealing the estate tax would actually increase federal revenue. (See CTJ's response.)

Now the IRET claims that the Medicare tax reform included in the health care compromise before Congress would decrease GDP by 1.3 percent and actually reduce federal revenue by $5 billion a year.
. . .
Sadly for IRET, no one believes it. Even George W. Bush's Treasury concluded that the gross increase in revenue resulting from the economic impact of tax cuts is tiny and comes nowhere near the level needed to actually offset the cost of tax cuts (much less result in a net revenue gain). Economic advisers to conservative Republican presidents agree. For example, Martin Feldstein, Chairmen of Council of Economic Advisers under President Reagan, and Glenn Hubbard and Greg Mankiw, both CEA chairmen during the George W. Bush administration, all have been quoted as saying that tax cuts do not raise revenue. One would assume that they believe the reverse, that tax increases do not reduce revenue."

More from this in our 2007 article Laffer in la-la land. And the CTJ article has plenty more.

From Denmark's latest draft development strategy, informally translated from the Danish:

"Denmark will support the development of more effective tax systems, in order to help partner countries in the long run to be able to finance public expenses to health, education, infrastructure, water and sanitation. A larger tax income creates potential for initiatives that will also benefit poor people. Funds that illegally escape tax should be captured and be included in the financing of development in the countries. Income from natural resources should be for the benefit of the entire society. Denmark will support international efforts against tax havens and illegal financial transactions."

Bit by bit, progress is breaking out.

A useful comment article in the UK's Guardian newspaper, as part of the long-running Ashcroft scandal:

"There is no reason at all why the identity of each person claiming non-dom status in Britain should not be published on an open register. There is nothing inherently intimate or private about the matter, and publication of the names could not possibly lead to any increase in tax avoidance or non-co-operation. Routinely making public the identities of those who claim to be foreigners would help to police false claims – and Ashcroft for one, who set up his own Crimestoppers charity, would surely be the first to vote in favour of that."

Not specifically a core TJN position, since we haven't formulated a position on this specific point, but an interesting option to consider.

The Financial Times reports that following the G-20 summit meeting in London, which led to a surge of new tax information exchange agreements being signed in the second half of that year, tax authorities are better placed to challenge the transfer pricing strategies of multinational companies:

More than 300 tax information exchange agreements – three quarters of the total number in existence – were signed last year. As well as helping tax authorities chase down individual evaders, the agreements allow tax authorities to request information from offshore financial centres on margins and other matters relevant to “transfer pricing” enquiries, which determine how multinationals split taxable profits between countries.

As a result, according to the FT:

Multinationals are increasingly shying away from using tax havens in favour of routing transactions through low tax countries that have the benefit of tax treaties. Those treaties already contain provisions giving overseas tax authorities the scope to request tax information.

Does this mean the game's over for MNCs? The OECD's Jeffrey Owens, quoted in the article, seems fairly bullish: “I think the world is in the process of changing. It will have a big impact on corporations and high net worth individuals.”

In support of the potential shift of power away from the corporations in the direction of the state, the FT cites the case of a successful use of an information exchange treaty by the Chinese tax administration:

It concerned a Chinese shoe manufacturer which it suspected of under-declaring profits because it was related to a big US customer. It discovered “important evidence” allowing it to increase its tax demand after it issued an information exchange request that allowed it to show that payments were made to an overseas bank account controlled by one of the company’s biggest shareholders.

For many years TJN has argued that transparency is crucial to tackling abusive tax practices. Information exchange is an important part of creating a transparent operating environment. But we see tax information exchange agreements as only part of the process since they perpetuate the cat and mouse process of tax authorities chasing after information that MNCs have not been required to disclose in the first place. This is why we advocate accounting standards that require basic reporting on a country-by-country basis. This is what the FT article is referring to when it notes:

Over the past year, campaign groups have succeeded in persuading the OECD to consider new guidelines on transparency after claiming that transfer pricing abuses allow companies to divert revenues from developing countries to tax havens.

But our concerns about transfer pricing abuse run deeper. While information exchange will help tackle some forms of abusive practise, the problem remains that transfer pricing is a fundamentally flawed system for determining profits and tax liabilities between the different parts of multinational company.

The OECD has produced guidelines for how transfer pricing should be carried out, but these are phenomenally complex and don't overcome the problem of how to arrive at a world market price for a product or service that is only traded within the confines of an MNC. Worse, the existing guidelines don't even begin to tackle the vexed problem of how to price the value of an intellectual property right like a brand name or logo. Oil giant Royal Dutch Shell, for example, recently packaged its shell logo into a special purpose vehicle located in the Swiss canton of Zug. Who is to say what the value of that logo is, and how much can be charged to each and subsidiary in every country where the company operates, for the use of that logo? Critics of the existing system are bang on the button when they call it "a licence to print money."

And before you dismiss this as some minor matter of little importance to the real world, just bear in mind that the OECD has recently stated that 70 per cent of cross-border trade occurs between subsidiaries of MNCs. So there's plenty of scope for mispricing to cause mayhem.

TJN thinks this issue calls for fresh thinking. We have started an enquiry into the whole issue of transfer pricing, and in due course we will report back with our recommendations. Meantime, watch this space.

From Reuters:

"Timothy Ridley, former chairman of the Cayman Islands Monetary Authority, expressed doubts about whether the government had the political will to cut a bloated civil service to maintain the financial viability of a 'no direct taxation' model.

"What we have now is not sustainable even with savage cuts in expenditure. The sooner government and the community as a whole wake up to this fact the sooner we can address the issues in a meaningful way and develop broader and more stable revenue sources," Ridley said."

This section is, admittedly, buried at the bottom of the story. Scroll back to the top of the story, and we have folk like Antony Travers saying things can continue as before. Funny that Travers can be saying things like that, given that he seems to have been panicking about the problems, for some time.

This all sounds awfully like what seems to have been happening in Jersey. The havens are hurting - and rightly so.

We are not amused, however, to see that the "independent" commission set up by the Cayman authorities to consider the request by the British government to introduce a sustainable fiscal programme was headed by an American, James C Miller III, who just happens to be linked to the American Enterprise Institute - a right wing lobbying organisation - and was Director of the US Office of Management and Budget during the disastrous period of Ronald Reagan's presidency: not exactly the qualifications needed to put public finances on an even keel. It is entirely predictable that people such as this get appointed to these posts (the old boy's network is live and kicking in the offshore financial world). Equally predictable have been the core proposals that the Miller Commission came forward with: slash public spending and resist the introduction of direct taxes.

Same old Cayman, same old monkey business. The future does not look bright for the people of Cayman.

Further to yesterday's blog on the $10 trillion offshore figure, we'd like to stress that Global Financial Integrity's estimate, which chimes nicely (albeit using different data sets) with TJN's The Price of Offshore is as they say, just part of the equation. They cite two key reasons why this figure is likely to be too small:

"First, there is no reporting of business managed off the balance sheet. As the International Monetary Fund notes in the Offshore Financial Centers IMF Background Paper, “anecdotal evidence suggests [off-balance sheet activity] can be several times higher than on-balance sheet activity” (IMF).

Second, BIS data do not include information on assets held by mutual funds or private trusts and companies, the beneficial owners of which do not need to be reported."

Read more in the report. The growth rate is striking, as the graph shows:

"Clearly, the growth rate of offshore deposit holdings has outpaced the rise of world wealth."

Note that our Price of Offshore study relates solely to financial deposits, which we estimated at around $9 trillion, but we also added a further $2 trillion of non-financial assets, including works of art, real estate, private jets, yachts, race horses, etc, all of which would incur taxes (estate, inheritance, wealth, capital gains, etc) if taxable onshore. The new GFI figures show sustained growth since 2005 and are consistent with our data.

From our friends Global Financial Integrity in Washington:

"A new report released today from Global Financial Integrity (GFI) on private, non-resident deposits in secrecy jurisdictions finds that the United States, United Kingdom, and the Cayman Islands are the most popular destinations for financial deposits by non-residents. Switzerland, Luxembourg, and Hong Kong also make the top 10 list of destinations.

"This report looks at deposits held offshore by private entities on a country-by-country basis, achieving a level of specificity previously unavailable to the public," explained GFI director Raymond Baker. "With overall deposits in secrecy jurisdictions currently approaching US$10 trillion, this report measures a sizable chunk of global wealth and helps us to better understand where individuals and corporations are putting their money."

Privately Held, Non-Resident Deposits in Secrecy Jurisdictions analyzes data from the Bank of International Settlements and the International Monetary Fund to measure total deposits by non-residents in areas considered secrecy jurisdictions under the definition established by the Tax Justice Network.

Notable report findings include:

• Total Current total deposits by non-residents in offshore centers and secrecy jurisdictions are just under US$10 trillion;
• The United States, the United Kingdom, and the Cayman Islands top the list of jurisdictions, with the United States out in front with more than US$2 trillion in non-resident, privately held deposits in the most recent quarter for which data are available (June 2009);
• Contrary to expectations of perceived favorability for deposits, Asia accounts for only 6 percent of worldwide offshore deposits, although Hong Kong is the tenth most popular secrecy jurisdiction by deposits in this report;
• The rate of growth of offshore deposits in secrecy jurisdictions has expanded at an average of 9 percent per annum since the early 1990s, significantly outpacing the rise of world wealth in the last decade. The gap between these two growth rates may be attributed to increases in illicit financial flows from developing countries and tax evasion by residents of developed countries.
  

The report also contains two case studies of Switzerland and Iceland, which show measurable fluctuations in financial deposits correlated to events in which financial secrecy or overall market solvency were threatened.

"This report shows that offshore deposits are on the rise, and the quantities of money being sent into these jurisdictions are massive," said Mr. Baker. "The report also helps us to better understand where reporting may be improved to better differentiate between licit deposits and illicit deposits, which will ultimately enable better law enforcement in cases of tax evasion and other financial crimes."

Privately Held, Non-Resident Deposits in Secrecy Jurisdictions is the second report by GFI economist Ann Hollingshead. Her earlier report, Implied Tax Revenue Loss from Trade Mispricing, was released last month. Click here to download a copy of Privately Held, Non-Resident Deposits in Secrecy Jurisdictions, click here to download a copy of Implied Tax Revenue Loss from Trade Mispricing, or contact Monique Perry Danziger at 202-293-0740 to request a copy or schedule an interview."

This essential research nicely complements TJN's work on its Financial Secrecy Index which, although using and combining very different data sets, produced similar findings in terms of the top-ranked secrecy jurisdictions. The $10 trillion figure is also in the same ball park as TJN's $11 trillion figure (again, using different data) revealed in The Price of Offshore, put together by a team of TJN researchers.

This blogger has just come across a document from the World Bank Institute which, while containing nothing especially new, does contain a decent brief outline of some of the ways that tax incentives and the offshore system can interact, especially with respect to developing countries.

"The following are among the more common abuses associated with tax incentives:

Round-tripping. Round-tripping typically occurs where tax incentives are restricted to foreign investors or to investments with a prescribed minimum percentage of foreign ownership. It seems to be a common phenomenon in China, and partly accounts for the very high level of FDI in that country, as well as for the high levels of both inward and outward investment in Hong Kong. Typically, money leaves China and returns in the form of “foreign” investment from Hong Kong. Similar practices have occurred in a number of transition economies, especially in connection with the privatisation of state-owned firms, where the existing management has acquired ownership of the firm through
the vehicle of an offshore company."

This is the classic offshore pattern: local elites go offshore, disguise themselves as foreigners, and thus qualify for tax breaks. Because they're located in Cayman or Luxembourg or Mauritius (often via a host of other places), the authorities will be none the wiser. The end result: local elites shift the tax charge onto less wealthy locals (and, through secrecy, they may well be in a better position to extract rents through monopolistic practices). Here is another one the World Bank outlines:

Double dipping. Many tax incentives, especially tax holidays, are restricted to new investors. In practice, such a restriction may be ineffective and may be counter-productive. An existing investor that plans to expand its activities will simply incorporate a subsidiary to carry on the activity, and the subsidiary will qualify for a new tax holiday. A different type of abuse occurs where a business is sold towards the end of the tax holiday period to a new investor who then claims a new tax holiday. Sometimes the “new” investor is related to the seller, though the relationship is concealed (TJN: guess how).
. . .
Transfer pricing. Transfer pricing has been described as “the Achilles heel of tax holidays,”though it can be a problem with other forms of investment incentives as well.

(TJN: Transfer pricing - more on this, coming soon . . .)

Again, nothing particularly new here - this is just a reminder of some of the things that go on, for anyone who might be interested in the wealth and poverty of nations. Another reminder - for those interested in tax incentives and so on, this far more recent IMF research is worth bearing in mind.

The Guardian newspaper seems to have picked up on a major story that others haven't noticed:

"A former employee of Lloyds Banking Group has accused the bank of artificially inflating its profits by almost £1bn through the use of aggressive tax-avoidance schemes and exotic "Lehman- style" offshore deals which he said amounted to false accounting."

Well done that whistleblower (it's predictable, isn't it, that he lost his job last September "in a move he said was driven by the desire to silence a whistleblower." The same thing seems to have happened at Barclays, which has been accused of even more appallling acts of tax abuse.) There is so much important stuff in this story that we'd urge you to read it in full; one paragraph (among many important ones) that stands out is this:

"If the finance director wanted a new tax figure their staff worked to that figure and they delivered it too," he said. "The tail was wagging the dog in that the need to hit the bank's effective tax rate forecasts was driving the business."

In other words, in the financial services sector, accountants are simply free to make up how much tax they want to dodge, then find the way to do it. It reminds us of what John Lanchester told us about Rupert Murdoch's News Corporation in the London Review of Books:

"The company’s profits, declared in Australian dollars, were A$364,364,000 in 1987, A$464,464,000 in 1988, A$496,496,000 in 1989 and A$282,282,000 in 1990. The odds that such figures were a happy coincidence are 1,000,000,000,000 to one. That little grace note in the sums is accountant-speak for ‘Fuck you.’"

This is what accountants are doing, day in, day out: holding up two fingers (or one finger, depending on your culture) to our societies.

But it is in the financial sector where some of the most serious tax-dodging goes on: it is no wonder that research by TJN a year ago found that:

"As in the USA, the largest user of tax havens in every country surveyed was a bank."

(And yes, in Britain, the winner was Barcays.) The Government Accountability Office in the United States had earlier found a similar result, with Citigroup recording 427 offshore subsidiaries (News Corp. had 152.)

Given that corporations have so much leeway to decide how much to fleece taxpayers, it's still a wonder that corporate responsibility groups haven't picked up on the fact that taxpaying has to be front and centre of corporate responsiblity. Read more on that here.

The International Relations and Security Network in Zurich has an article focusing on the work of our recent guest blogger Shelley Stark on the Hidden Treuhand business.

The new article contains some of the same analysis, but plenty of new material too. Well worth a read.

ON 17th March the US Senate passed an Act (the Hiring Incentives to Restore Employment (HIRE) Act) which includes provisions relating to what is termed Foreign Account Tax Compliance (FATC). These provisions are designed as a revenue raising measure aimed at offsetting part of the costs arising from the job creation aspects of the HIRE Act. We have seen a memorandum on the FATC provisions, and can highlight some of their key aspects.

According to the memo, tackling offshore tax evasion is a central part of the provisions:

The overall purpose of the Foreign Account Tax Compliance legislation is to detect, deter and discourage offshore tax abuses through increased transparency, enhanced reporting and strong sanctions. The ultimate goal of the Taxes to Enforce Reporting on Certain Foreign Accounts portion of the legislation is for the United States to obtain information with respect to offshore accounts and investments beneficially owned by US taxpayers in an efficient and timely manner rather than have the New US Withholding Tax Regime imposed.

The legislation's central provision imposes a requirement on what are termed foreign financial institutions (FFI) and "other foreign persons" to identify and disclose US citizens holding accounts with them or become subject to a 30 per cent withholding tax. As the memo puts it:

Foreign financial institutions and other foreign persons affected by the legislation will have a simple choice to make as to whether they agree to the Taxes to Enforce Reporting on Certain Foreign Accounts portion of the legislation.

Those institutions and foreign persons that would like to invest on their own behalf or on behalf of clients in the US capital markets will have to agree to comply with the legislative provisions.

Those that do not agree to comply with the legislative provisions will suffer a 30% withholding tax and thus will be unable to compete with those foreign financial institutions and foreign persons that comply with the Taxes to Enforce Reporting on Certain Foreign Accounts portion of the legislation.

Furthermore, as the memo makes clear, the provisions extend to foreign investment vehicles that are ultimately owned by US citizens:

The FFI would be required to report information with respect to accounts for (1) Specified US Persons and (2) a US Owned Foreign Entity. A Foreign Investment Vehicle that is owned by a Specified US Person is a US Owned Foreign Entity of the level of ownership in that entity by the Specified US Person and thus is subject to reporting.

While these provisions do not take the form of an international treaty, they do represent a step towards automatic exchange of information, at least with regard to US persons with accounts outside of the United States.

One obvious weakness, however, lies with the absence of any measures to cooperate with other jurisdictions by offering a reciprocal arrangement to provide information about non-US citizens using US banks to evade tax. Indeed, as our colleague Sol Picciotto has pointed out, the summary requires the IRS to draft its proposed regulations "in a manner that will not discourage or disrupt foreign investment in US capital markets." So the leopard hasn't changed its spots.

On Monday 15th March 2010 Nobel prize winner Amartya Sen gave the annual lecture at Demos. Our guest blogger, Christian Aid's David McNair, was in the audience. Normal 0 false false false MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;}

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As Amartya Sen took the stage to speak, his slight frame and gentle manner seemed to belie a force of intellectual rigor. A Nobel laureate for his work on economics, Sen pioneered the idea that development is ultimately about freedom. The freedom to choose one's life course and the capability to take advantage of that freedom.



Freedom has many dimensions.

 In his view, it is among the most feared of human conditions. Precisely because those in authority often fear the freedom of their citizens and the limitations it could bring to their own power. The fear leads to what Sen called "unfreedoms", or injustices, for others.



He urged the audience to take a more pragmatic approach and seek out injustices and use the power we have to challenge them. Currently, Sen said, we focused too much on just institutions to mediate a just society.

 To illustrate his point that economic and social advantage is reflected in capabilities (what one can do measured against the things that one values), Sen introduced the concept of the conversion handicap - the cost of converting income into a good living. A disabled person not only faces additional challenges in raising an income, but the cost of living is also higher. As such, the sole focus on income as an indicator of economic justice is inadequate.



Speaking about the shortcomings of GDP as an indicator of development, Sen suggested that individual characteristics such as biological makeup, circumstances, gender, talents, as well as the extent of pollution and local crime often impinge on human freedom in ways which are more significant that economic inequalities.

When asked for his opinion on bankers, Sen appeared to be single-minded. With greater economic power comes greater responsibility, he said, and the state must have a role to play in redistribution through progressive taxation.



For economists and those interested in development, Sen's words present a significant challenge. How do we develop public policies that lead to human freedom and challenge 'unfreedoms'? Here challenging economic inequality is the start, not an end in itself.

TJN adds: from his book Development as Freedom, Sen summarises:

"Development requires the removal of major sources of unfreedom: poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation, neglect of public facilities as well as intolerance or overactivity of repressive states. Despite unprecedented increases in overall opulence, the contemporary world denies elementary freedoms to vast numbers - perhaps even the majority - of people."

Hong Kong is one of Asia's most important secrecy jurisdictions - remember the kerfuffle at the G20 summit last April when Chinese premier Hu Jintao wrangled to get Hong Kong and Macau - two favoured secrecy jurisdictions for the use of Chinese elites - snipped off the OECD blacklist.

So it is no surprise to find this, in a superb story from the Financial Times:

"A territory better known for its breathtaking harbour-front skyline and its money-making possibilities has plenty of misery to go round. In a city of 7m people with an average per capita income of nearly US$30,000, 1.23m live below the poverty line, earning less than half of a desperately low median wage. The city’s Gini coefficient, which measures income inequality, is the worst in Asia (worse even than India and mainland China) before the limited effects of the city’s half-hearted income redistribution are counted."

(See some details about Hong Kong poverty and inequality here.) Now we've written a fair bit in the past about what we sometimes call the "Jersey Disease," a phenomenon similar in nature to the "Dutch Disease" that afflicts mineral-rich nations, where one dominant sector crowds out many others, partly through a rise in the real effective exchange rate, partly through the draining of social and economic capital into the dominant sector. Mineral dependence provokes the Dutch Disease (and other ills); tax havenry provokes the Jersey Disease. The result is, all too often, soaring inequality and social tensions. Read our last blog on the subject for more on that. The FT continues:

"Hong Kong has a tradition of small government and a credo of “positive non-interventionism”. A free-market philosophy lauded as key to Hong Kong’s success as a financial centre, positive non-interventionism has little to offer if you are living in a cage. The upshot is no public pension and very small unemployment benefits or disability allowances. As yet, there is no minimum wage. Government expenditure is around 16 per cent of gross domestic product. Now you know what Sweden spends the other 34 per cent on."

A while ago we blogged about similar problems in another major Asian secrecy jurisdiction: Singapore. Read our December 2008 blog about Singapore, and note the similarities with the Hong Kong that Pilling describes.

Now this is no coincidence: in states dominated by finance and tax havenry, the dominant ethic is almost always an outright libertarian one, or at least an atmosphere tilted that way. This pervasive hatred of regulation and governments so common in the secrecy jurisdictions not only encourages the idea that it's OK to subvert other governments' tax revenues, but it also leads to these tensions at home, not to mention the other things Hong Kong suffers from, such as a surfeit of complex monopolies harming ordinary people and benefiting a tiny elite.

Time and again, in haven after haven, the pattern repeats itself. Tax havens cause poverty - we say. And this applies inside the havens, as well as in the wider world.

"Only small secrets need protection. The big ones will be protected by public incredulity."
-- Marshall McLuhan

Hat tip: Jim Henry

A good article by Richard Murphy, on how Swiss bankers wants to set tax rates for nations around the world.

Good article by Prem Sikka on failures of accountancy, a major tax justice issue. The article is well worth reading, and this comment underneath is worth noting too:

"Over the years I have been involved in audits and have also been part of the teams auditing major banks. Iefore each audit we are briefed on the firm's strategy. Everyone knows that if anyone upsets the client company's directors and loses the job, they will have to look for employment elsewhere. We have to work within tight time budgets and no one wants to be stuck with an unusual or awkward items for too long.

If you did, the the partners think you have not been very efficient and the effect of that comes out through lack of promotion and/or salary increase. So everyone tries to avoid awkward looking items. I have never been been on any audit where the partners concerned have ever talked about our duties to the public. I will soon be leaving my job with one of the Big Four firms. I am amazed at why the media and the public has so much confidence in auditing."

The Swiss government continues to maintain its out-dated position on banking secrecy, but international tax lawyer Philippe Kenel, who also happens to head the Swiss Chamber of Commerce in Belgium and Luxembourg argues that this dogged unwillingness to recognise changing political realities will undermine the Swiss negotiating position. Interviewed in the Tribune de Gèneve, Kenel says:

"Switzerland's only chance lies with negotiating the end of banking secrecy while it still has some value. Judging by the speed with which banking secrecy is being eroded, acting once we have our backs up against the wall, would be tantamount to waiting to be shot down. By that stage there would be nothing we could receive in return."

Kepel also argues that the Swiss authorities should "immediately begin negotiations to move towards automatic information exchange (with the EU), pushing for a long-transition period in order to maximise the potential benefits." He goes on to suggest 2018 as a possible implementation date, arguing that a long lead-in time would allow Swiss banks and their customers ample opportunity to adapt to the changed situation. Call us impetuous, but we think that eight years is way, way too generous to both the banks and their customers: what is being proposed does not require a massive technological or administrative leap, and there is no justification for such a long delay.

Elsewhere, in SwissInfo, TJN's Markus Meinzer counters claims that automatic information exchange infringes on personal privacy: "Already with the [current system of] exchanging information on demand, information can only be transferred to public authorities that are involved in tax administration and tax justice. A citizen cannot obtain the data."

By adopting automatic information exchange as the model for its relations with the EU, Markus argues,Switzerland would contribute to combating harmful global tax competition and also strengthen the legitimacy of its criticism of the secrecy space provided by trusts and shell companies in other jurisdictions. This is an important point: the current Swiss pleadings ring hollow, suggesting to the detached observer that the Swiss have no real interest in improving the framework for international cooperation, instead pointing fingers at others to stall progress. This is unlikely to strengthen Switzerland's negotiating hand with the EU, and it sure as heck won't improve Switzerland's already tarnished international reputation.

By now even the most backwards of the cantons should have recognised that the end of banking secrecy is nigh. The only honourable way forward is to negotiate a speedy transition to fully automatic information exchange, and to join forces with governments and civil society organisations that are campaigning to put an end to other forms of secrecy, including trusts and treuhand.

We recently blogged on TJN's meeting with the secrecy-busting organisation Wikileaks and on Iceland's commendable efforts to turn itself into a kind of anti-tax haven. Now we note this, on the Wikileaks site:

U.S. Intelligence planned to destroy WikiLeaks, 18 Mar 2008
This document is a classifed (SECRET/NOFORN) 32 page U.S. counterintelligence investigation into WikiLeaks.

"The possibility that current employees or moles within DoD or elsewhere in the U.S. government are providing sensitive or classified information to Wikileaks.org cannot be ruled out''. It concocts a plan to fatally marginalize the organization.

Since WikiLeaks uses "trust as a center of gravity by protecting the anonymity and identity of the insiders, leakers or whisteblowers'', the report recommends "The identification, exposure, termination of employment, criminal prosecution, legal action against current or former insiders, leakers, or whistlblowers could potentially damage or destroy this center of gravity and deter others considering similar actions from using the Wikileaks.org Web site''. [As two years have passed since the date of the report, with no WikiLeaks' source exposed, it appears that this plan was ineffective].

As an odd justificaton for the plan, the report claims that "Several foreign countries including China, Israel, North Korea, Russia, Vietnam, and Zimbabwe have denounced or blocked access to the Wikileaks.org website''. The report provides further justification by enumerating embarrassing stories broken by WikiLeaks---U.S. equipment expenditure in Iraq, probable U.S. violations of the Chemical Warfare Convention Treaty in Iraq, the battle over the Iraqi town of Fallujah and human rights violations at Guantanamo Bay."

The report, which TJN has not reviewed (but on a skim-read looks rather baffling and murky), is here.

The Center for the Advancement of the Steady State Economy is carrying an article on its website by James Henry (TJN-USA) and Brent Blackwelder (Friends of the Earth) advocating two forms of Tobin Tax to combat the 'financial pollution' caused by (a) speculative activities on the wholesale foreign exchange markets, and (b) personal wealth held offshore and almost entirely untaxed (think of the possible headlines: "Kim Jong-Il to pay for climate change costs!")

The authors propose that these taxes would be levied as a 'climate change surcharge', linking climate justice to tax justice. Read on, and let us have your reactions.

14th March 2010

Two "Robin Hood" Taxes for the Price of One

Linking Climate Justice to Tax Justice

Co-authored by James S. Henry, economist, lawyer, and author of The Blood Bankers (Basic Books, 2005) and Dr. Brent Blackwelder, president emeritus of Friends of the Earth

The subject of taxes certainly isn’t the most riveting topic for cocktail party conversations. Most people don’t like thinking about the labyrinthine tax code or filling out convoluted forms. They certainly don’t enjoy paying taxes. But we believe that the time has come to reframe the debate on taxes and build up some popular passion and energy for a few basic adjustments to the tax code. With these simple, easy-to-implement changes, it turns out that we could move the economy in a direction that works much better for people and the planet, including a more stable climate.

We badly need to recapture the public discussion and debate on tax codes from the technical specialists and special interests, as well as the diehard anti-government reactionaries. The tax system is so critical to the functioning of any nation that as concerned citizens, it is essential for us to insist on making values like justice, fairness, and shared responsibility central to any political debate on this issue.

By framing all discussions of taxation with the jaundiced view that “politicians just want to raise your taxes,” critics have actually ended up promoting a tax system that rewards pollution and disproportionately exempts the wealthy from paying their fair share. Since more careful discussions of tax policy have become taboo, governments have ended up being deprived of revenues that are essential to provide services. Thus, the anti-government forces have created a vicious, self-perpetuating cycle: their programs to curtail revenues have often crippled government programs, helping, in turn, to reinforce the notion that government can’t get anything done.

The issue of government revenues has come to the fore as developing nations have tried to grapple with climate destabilization. Quite reasonably, they’ve been asking for assistance from the wealthy nations that, over the long haul, have undeniably been the biggest contributors to the problem, to help them pay the costs of adaptation.

The huge Copenhagen climate summit in December failed to achieve breakthrough results to reduce greenhouse gas emissions, but it did result in a pledge by the U.S. Secretary of State, Hillary Clinton, for $100 billion per year in climate adjustment assistance to poor countries by 2020. The actual amount required may turn out to be even larger, but if we start early and build up a reserve fund, we can be prepared – much like insurance. And the good news is, there is a way to obtain such large sums even in today’s difficult economic climate, while simultaneously helping to clean up and stabilize the global financial system.

The tragic earthquake in Haiti, although not caused by climate destabilization, graphically illustrates the sheer magnitude of physical and monetary magnitude of relief and adaptation measures that scientists predict may well be needed by poor nations as the earth’s climate is disrupted.

Our revenue plan involves two very modest, complementary transnational “climate change surcharges” on groups that not only could readily pay them, but also richly deserve to pay them: major banks and their superrich, often tax-dodging global corporate and individual clients.

The first component is a variation on the well-known “Tobin tax” on foreign currency transactions, originally suggested by Keynes in the 1930s. The version of the Tobin tax that we are proposing would be even less intrusive. It would only apply to wholesale foreign exchange transactions, not to retail customers. Nor would it really be an international tax, imposed on countries by some faceless OECD bureaucracy. Each country signatory would agree to introduce legislation to adopt its own national version of a “model” tax. Each country’s own tax authorities would be responsible for collection and enforcement. Given the astonishing $4 trillion per day of such transactions, a tax of less than a dime per $1,000 of transactions would yield at least $50 billion per year. A similar low marginal tax rate on all international financial transactions, including stocks, bonds, options, and derivatives, could readily collect at least twice that amount.

The second new revenue stream that we propose is an “anonymous wealth” tax. This involves levying a modest 0.5% annual “climate aid” withholding tax on the estimated $15 to $22 trillion of liquid private financial assets — bank deposits, money-market funds, mutual funds, public securities, and precious metals — that we and other analysts have estimated now sit offshore, almost entirely untaxed, in anonymous accounts, trusts, and foundations. This tax could raise at least $25 billion to $50 billion per year.

Furthermore, the administration of all these “private banking” assets is heavily concentrated in the hands of a comparative handful of leading First World banks, including all of the key players in the wholesale currency market, as well as the leading players in the recent financial crisis, and the largest recipients of “too big to fail” assistance.

This means that the anonymous wealth tax and the transactions tax complement each other neatly. The first one addresses the huge stock of undisclosed offshore wealth and income that has fallen through the cracks, while the other addresses the ongoing speculative activity that has been fueled by the accumulation of all this restless, internationally mobile private capital. From an administrative standpoint, major international banks, the “systems operators” for this highly problematic global financial industry, are perfectly positioned to help clean up its “bads.” In that sense, we can view these two modest taxes as “financial pollution” taxes, which will help to compensate the rest of us for bearing the costs and the risks of easy tax avoidance and excessive speculation.

In sum, we believe that these two modest tax proposals constitute a bold new potential solution to the problem of paying for climate adaptation, and a way of linking “climate justice” to “tax justice.” They not only are administratively and politically feasible, but most important, they also happen to be the right things to do on ethical grounds.

Administrative feasibility. This year the G20 and the IMF have already had very serious discussions of several variations on the Tobin tax, and just this week the European Parliament passed a resolution supporting it. Nevertheless, for reasons that are unclear, the U.S. Treasury Department and White House economists have been resisting. Apparently the economists are concerned about “market efficiency,” while the Treasury is still concerned about Wall Street.

These concerns are overblown. Of course all taxes interfere with perfect markets to some extent, but no one except radical anarchists are proposing that we all return to the mythological Eden of a tax-free world. This is especially true in a world with highly imperfect markets, where facts of life like imperfect information, excess financial speculation, financial crimes, ineffective law enforcement, and pollution often justify tax policies that offset these market imperfections.

The question in any real world situation is always whether the revenue generated is worth the price of any extra inefficiencies. We believe that in the case of our two specific proposals, the revenue gains dwarfs the inefficiency, if any. For example, in the case of the .005% levy on all wholesale and interbank foreign currency transactions among major currencies and cross-currency derivatives, such a tax could be implemented at very low cost, with limited opportunities for evasion. The wholesale foreign exchange market is already completely electronic, and highly concentrated. Indeed, in 2009, for example, more than 60 percent of all trading was handled by just five global banks — Deutsche Bank, UBS, Citigroup, RBS, and Barclays. This growing market generated over $4 trillion of transactions per day, more than twice the volume in 2004.

Similarly, in the case of the withholding tax on anonymous offshore wealth, the top 50 private banks in the world have more than $8 trillion in private financial assets under management, and another $4 to $5 trillion in assets under custody. Indeed, the top 10 alone account for nearly half of this amount. So long as the taxes were implemented uniformly across anonymous customers, it would be simple for these institutions to levy .5% annual withholding taxes on these assets.

Political feasibility. In principle, the revenue plan proposed here should be by far the most politically pain-free way of fulfilling Secretary Clinton’s Copenhagen climate aid pledge. It concentrates the costs on a very tiny, privileged group that is supremely able to afford them — the world’s wealthiest 10 million people on a planet with 6.8 billion humans.

From this angle, this proposal should attract widespread support from religious congregations and other nongovernmental organizations that are concerned about equity and global development. It should also attract support from national tax authorities, law enforcement agencies, and homeland security agencies that continue to see a large share of proceeds from international tax evasion and the underground economy slip through the cracks, despite their best efforts. Of course it should also attract support from environmental groups, and from public officials who are concerned about finding ways to pay for essential government activities without going deeper into debt.

Finally, this proposal could gain traction from the public outrage over the lingering effects of the financial crisis and the taxpayer bailouts that have been received by wealthy financial institutions that were “too big to fail.”

Moral justification. The moral foundation of this proposal is the idea of combining “global climate justice” with “global tax justice.” Global climate justice reflects the polluter pays principle — the judgment that it is fundamentally fair for rich countries to pay for most of the costs of adapting to climate change, since they have been overwhelmingly responsible for greenhouse gas emissions in the first place.

The concept of “global tax justice” reflects the judgment that it is fundamentally fair for the financially wealthiest citizens and corporations in both poor and rich countries alike to pay at least some taxes on their worldwide incomes and/or wealth to support their home countries.

One key source of the trillions in private funds that we propose to tax is underreported capital flight — money that is secreted offshore and invested abroad beyond the reach of domestic tax authorities. A second major source is under-taxed corporate profits and royalties that have been parked offshore in tax havens by way of rigged transfer pricing schemes. A recent report by the charity Christian Aid estimated the annual cost of these transfer pricing schemes to developing countries, in terms of lost tax revenues, at $160 billion per year. A third source is the myriad illicit activities that constitute the global underground economy — corruption, fraud, insider trading, drug trafficking, “blood diamonds,” and innumerable other big-ticket, for-profit crimes.

The ownership of the trillions in untaxed financial wealth is incredibly concentrated. At least 30 percent of all private financial wealth, and nearly half of all offshore wealth, is owned by world’s richest 91,000 people — just 0.001% of the world’s population. The next 51 percent is owned by at most 10 million people, comprising only 0.15% of the world’s population. About a third of all this offshore wealth has been accumulated from developing countries, including many of the largest “debtors.” And almost all of it has managed to avoid any income or estate taxes, both in the countries where it has been invested and the countries where it originated.

Tax policies are at their best when they provide the right incentives, secure funding for needed public goods and services, place the burden of payment on the right parties, and make progress toward a more equitable society. The proposed “Robin Hood” taxes on anonymous wealth and foreign exchange transactions meet all these criteria, and they are easy to administer. They are precisely the kind of progressive tax changes that we should all be happy to discuss, even at a cocktail party.

Following our blog about the IMF finding huge statistical discrepancies offshore (why did it take so long, we ask?) we'd like to highlight this section from Wealth Bulletin:

"Although the IMF is concerned about the undeclared assets held in offshore centres from a tax perspective, it is particularly concerned about how this money affects cross-border financial interaction and contributes to shocks in the global economy such as the recent credit crisis.

Milesi-Ferretti said: “The Cayman Islands were the largest foreign holder of private-label US mortgage-backed securities on the eve of the financial crisis. More information on the ultimate holders of these securities could clearly provide valuable insights on the transmission of the ‘sub-prime shock’ and the financial crisis more generally.”

Just as we have been saying all along. A recent IMF report linked to this material is available here.