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James K. Boyce

Tax havens have gotten a lot of press lately. In Britain, the UK Uncut movement has mounted demonstrations across the country against tax dodging by large corporations and wealthy individuals – making the connection between profits parked abroad and deficits and budget cuts at home.

Last month in the U.S., The New York Times revealed that GE, one of the nation’s largest companies, earned 46% of its revenue in the U.S. over the last three years but booked less than one-fifth of its profits there, shifting most of its booked profits to low-tax countries. In 2010, taking advantage of loopholes in U.S. tax laws (for which the firm had lobbied Washington lawmakers), GE paid negative taxes: despite $5.1 billion in declared pre-tax U.S. profits, the firm received a $3.2 billion tax credit. This and other blatant examples of corporate tax dodging are inspiring the birth of US Uncut, an American cousin of the British movement.

The term “tax haven” is a euphemism, however, for two reasons.

First, “haven” carries the connotation of a safe refuge from oppression. As Nicholas Shaxson writes in his new book, Treasure Islands: Tax Havens and the Men Who Stole the World, tax havens “offer escape routes from the duties that come with living in and obtaining benefits from society.” They provide refuge not from oppression but from responsibility – the responsibility to contribute to the physical and institutional infrastructure of the economies in which the dodgers themselves make money.

Second, “tax” havens are not just about dodging tax. Money flows to these places not only to hide from the taxman, but also to hide from the law. As secrecy jurisdictions, tax havens allow asset holders to hide their identities from authorities in their own countries, and often from authorities in the secrecy jurisdictions themselves. For a modest price, front men, dummy corporations, and multi-layered transactions provide anonymity.

Shielding the loot of corrupt politicians, crooked officials, and organized criminals from discovery and recovery, secrecy jurisdictions act as financial sinkholes – places where vast sums of money flow between the legitimate world economy and the illicit underworld economy.

Tropical islands are the best-known secrecy jurisdictions. In a 2008 debate, presidential candidate Barack Obama cited a single building in the Cayman Islands that “supposedly houses 12,000 corporations,” making it “either the biggest building or the biggest tax scam on record.” That same year, a U.S. Government Accountability Office report revealed that Citigroup had 90 subsidiaries in the Cayman Islands alone.

But as Shaxson’s book makes clear, the U.S. and Britain are themselves big players in the secrecy game. Both countries welcome foreign money of dubious origins, with few if any questions asked.

The costs of financial sinkholes are borne by ordinary citizens throughout the world, not only by taxpayers in the industrialized countries but also by many of the world’s poorest people. In our forthcoming book, Africa’s Odious Debts, my colleague Léonce Ndikumana and I document the flight of $735 billion (in constant 2008 dollars) from sub-Saharan Africa from 1970 to 2008. Most of this disappeared into financial sinkholes; recorded African deposits in Western banks amounted to less than 6% of this amount.

To put Africa’s capital hemorrhage into perspective, the total foreign debt of the same countries stood at $177 billion at the end of 2008. In this sense Africa is a net creditor to the rest of the world: its external assets far exceed its external liabilities. A crucial difference, however, is that the assets are private and hidden, whereas the liabilities are public, owed by the people of Africa through their governments.

Much of the credit for growing public awareness of these issues goes to advocacy groups like the Tax Justice Network, Global Financial Integrity, and Global Witness, who have exposed the shadowy underside of the international financial system. Governments are starting to take more notice, too. In 2009 a Norwegian government task force produced a comprehensive report on how tax havens undermine development in low-income countries. In the U.S., Senator Carl Levin (D-Mich.) is championing legislation to clamp down on offshore secrecy jurisdictions and to get the U.S. out of the money-hiding business.

When the countries of the world joined together to eradicate smallpox a generation ago, they achieved a historic victory for global public health. International cooperation to plug the world’s financial sinkholes could bring a comparable victory for global economic health. This is a cause that can unite ordinary Americans and Africans alike.

42 Responses to “Tax Havens or Financial Sinkholes?”

  1. Dev Kar says:

    Jim:

    Thank you for sending me this article which is very well-written and informative. Articles such as yours show that the academia is beginning to recognize the harmful impact of tax havens on both developing and developed countries.

    If you happen to be in Washington DC please do contact us. We would love to meet you and discuss subject matters of mutual interest. All the best,

    Dev Kar

  2. James Garang says:

    Professor Boyce,

    This is a great piece and one that explains succinctly the danger of tax havens. It is high time that responsible governments address the matter. I hope your book will generate enough debate and bring the issue to policymaker’s attention.

    Thanks,
    James

  3. Jon Frate says:

    Firstly, much like the anti-climate scientists, anti-science religious nutjobs, and the quack-science faith healers, taxation is one of those things that’s complicated, and when a little bit of truth is mixed in with a little bit of conjecture and innuendo, the wrong conclusion can be reached.

    Secondly, considering the point above, you need to STOP perpetuating the MYTH that GE somehow cheated on their tax bill. Their accrued profit vs. tax bill as a result of writing off past losses was perfectly legitimate and no different than what bob the builder or joe the plumber might do in their small enterprise where they have a good year followed by a bad year, followed by a good year. You claim to be intelligent, and either you’re intentionally misrepresenting the complicated tax situation, or perhaps you’re not as intelligent on this subject matter as you claim and it’s time to educate yourself.

    Thirdly, GE has posted a response to all this baffle-gab that’s ricocheting through the blogosphere and that’s amplified by the quack-science, oops I mean quack-economist psuedo lefty or righty political class that wants to prove a point (the right says – GE cheats on it’s taxes, corporations are selling out America to get into bed with China, the left says – GE Cheats on it’s taxes, the right is selling us out to get into bed with Corporations). Neither is the truth. Here is the crystal clear explanation, I wish you would have read it before posting:

    http://www.gereports.com/setting-the-record-straight-ge-and-taxes/

    Fourthly, your ethnocentric view of the world becomes transparent in the way that you feel other (smaller) countries need to structure their tax affairs. What business of yours is it if UngaBunga Land decides to deliver services by taxing consumption and not taxing income? Or better yet, what business of England or America is it if the Dominican Republic, Taiwan, Cayman, feel that their tax department collects enough money by taxing business that happens in their own country, and not taxing global income equally. Surely when the UK government gives tax incentives to property owners to remodel their homes, or when the non-dom rules are used to promote investment by Russian Billionaires, it benefits England, and the Dominican should have no say in dictating England’s Tax policy?

    Fifthly, what’s wrong with tax competition? If Cayman can operate by charging 3% taxation on income, then what’s wrong with this driving England to rethink it’s tax policy? Maybe next budget, they will stop silly wars into Libya and Iraq. hundreds of billions wasted building an empire abroad, maybe that money can be better spent on health and education, and taxes can be brought down as a result to compete for business?

  4. Dr. DIAS says:

    Most if not all these Havens are depositing Drug money, stolen funds from Governments, corporations, and of course the money launders who use the major international Banks at will!

    Most if not all large multinational corporations, banks and governments move $Millions if not $billions without any real control or oversight between each other!

    One good example, “How a big US bank laundered billions from Mexico’s murderous drug gangs”

    http://www.guardian.co.uk/world/2011/apr/03/us-bank-mexico-drug-gangs

    Yet, if you have $10,000.00 or more in cash in your hand it is confiscated immediately as illegal gain!

    Tax policy is now driven to take more, make more from the poor, the underprivileged, and the Middle class.

    All the while all large companies, corporations, the CEO’s, CFO’,( all the “O”), Management, and the big stock and bond holders pay little or no Taxes, period.

    These so-called wealthy elites really do not realize that they still have to breath the same air and travel on the same streets just like the rest of us.

    Money can only buy so much security and protection.

    It only took a few radical religious fanatics(less than a couple thousand) to cost this Planet’s Government $billions and now $trillions to have a very uneasy sense of security, that is really a shame and does not give any real security.

    The only safe and clean Place left for these overly corrupted greedy “O” is the moon!

  5. Jon D. says:

    Good rebuttal Dr. Dias,

    I completely agree with you that corporations have taken advantage of the corruption in third world governments to avoid paying their taxes at home. Only a hard line right wing nutcase would think otherwise. Just look at how much tax income was lost during the Bush tax cuts, all of which went to the so called “job makers”. Well I don’t see any jobs being made, just a lot of hoarding by filthy rich who are completely disconnected from the real world and the severe problems affecting it today. If anything is really going to change in this world, the rich supposedly well educated must step up to the plate and take responsibility for paying their taxes. If not third world poverty, our crumbling infrastructure in the U.S etc etc will get worse and this world will become completely unbearable to live in for the majority. The one issue blocking any real political decisions on this matter is the amount of money in politics that makes honest politicians into corporate cronies.

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