Tracing the Hidden Treasure

Want to know how to close the ‘budget hole’? It’s very simple: tax the rich to get back the treasure. No, I don’t mean raising the marginal rate of income tax above 50%, although there’s every reason for doing so. Rather, make the rich (including their companies) pay the taxes they already owe, and put an end to their tax avoidance and evasion.

After all, the rich have got a lot richer over the past 30 years. In Britain, the top 1 percent owns over one fifth of the wealth (and the top decile over one half). While inequality grows, bankers continue to get outrageous bonuses at everyone else’s expense. Tax havens are a crucial piece of this complex puzzle.

The right wing response is invariably that while tax evasion is illegal, tax avoidance is perfectly legit. To put it mildly, this argument is disingenuous. Tax avoidance has turned into a huge money-spinning game of cat-and-mouse with HM Customs and Revenue in which fat cats and corporations employ a myriad of legal dodges – many ‘offshore’- to avoid the taxes. As a consequence, ordinary punters must pay more.

To give you some idea of the sums involved, one estimate is that £100bn a year is lost by HM Treasury because taxes are unpaid, because of tax loopholes and because of tax evasion. This sum is 7 percent of the UK’s annual GDP, greater than the ‘structural deficit’ which the government wants to eliminate by 2015.  Even the Treasury now officially admits that the annual tax gap is over £40bn.

If you want a mountain of evidence about tax dodging, you could not do better than read Nicholas Shaxson’s new book Treasure Islands. Shaxson, an Associate Fellow of London’s prestigious Chatham House, has spent many years researching his subject with the help of the Tax Justice Network. In total, he estimates that about $1.2 trillion a year leaks into tax havens from developing countries alone – that’s ten times the value of total annual aid to these countries, or about 2% of total global GDP. Another recent academic piece by Gabriel Zucman of the Paris School of Economics estimates that the ‘offshore’ stock of hidden household wealth amounts to $5tr, or 8% of global GDP.

Nor are tax havens (aka ‘secrecy jurisdictions’) merely a cluster of palm-fringed tropical islands in the Caribbean – keep in mind Monaco, Andorra and Liechtenstein – whose inhabitants pay low or no tax. In Shaxman’s words: “these small islands are generally sideshows to the big event. The biggest tax havens in the modern global economy are big OECD rich country economies – the United States, the United Kingdom, Switzerland.” One could also add to the list The Netherlands, Ireland and Luxembourg. The common feature of these countries is that they provide conduits through which individuals and corporations can park their money in places which allow them to do things which they couldn’t do at home.

Britain is a major conduit for two reasons. First, it hosts one of the world’s largest financial services sectors (‘The City’) and, secondly, it has strong links with Crown Dependencies (eg, the Channel Islands, the Isle of Man) and semi-independent territories (eg, the Cayman Islands, Bermuda, Gibraltar and Turks and Caicos). Historically, the Crown Dependencies have played an offshore role. Moreover, with the decline of empire after the Second World War and the rise of the unregulated eurodollar market, “this network of jurisdictions scattered around the whole world [has served] to attract capital and then feed that money and the business of handling money into the City.” In short, Britain is the centre of a ‘spider web’ of tax havens across the globe: money is laundered and/or repackaged at the periphery, often using shell corporations with untraceable directors and unlisted agents.

Or take the case of The Netherlands which, like Britain, retains financial ties to its pre-war empire. In 2008 alone, it is estimated that $18tr flowed through Dutch offshore entities, a sum 20 times the size of Dutch GDP. Or again, North Korea’s Kim Jong-Il is said to have stashed away $4bn, his favourite destination being Luxembourg. The Chinese are said to prefer Hong Kong and Macau. Latin Americans can opt for the complex network of havens in the Caymans, the Virgin Islands and so on, or follow the drug money to, say, Panama.

Has ‘offshore’ played a role in the 2008 financial crisis? Many would argue that it most definitely has. Well before 2008, the murky financial dealings of firms such as Parmalat, Enron and Long Term Capital Management were shielded from public view by the ingenious use of tax havens. In the words of Richard Murphy, such havens provided the get-out-of-regulation-free card which helped financial corporations like Lehman Brothers become too-big-to-fail. As corporate and banking money shifted to secrecy jurisdictions, the pressure to deregulate the main OECD economies in line with neo-liberal ideology grew. Offshore special purpose vehicles helped hide the excessive leverage which underlay the crisis. Moreover, huge, unregistered cross-border flows have contributed to growing world trade imbalances.

Perhaps most importantly, the rise of tax havens is a key explanatory factor in the spectacular growth of income and wealth inequalities in the US and the UK – inequalities which are reflected in the growing fiscal crisis that has led the neo-liberal drive towards fiscal retrenchment and the destruction of the welfare state.

On 26 March 2011, one of the largest demonstrations in Britain’s history took place in London to protest against budgetary cuts imposed by the ConDev government. Up to half a million people marched, while on the fringes a few hundred members of UK Uncut – a group dedicated to street-theatre protest against tax avoidance and evasion – occupied  the premises of some of London’s leading corporate tax avoiders. These few hundred were treated like criminals by the police and many of them arrested. But their trespass stands as nothing next to that of the big-time looters. Who are the real criminals?

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