tax havens

Leave France for tax reasons? No! I consider myself a French citizen wih duties to my country.
Catherine Deneuve, interview with Le Monde, 6 March 2007

Banking secrecy is made for tax fraud.
Paul Vogt, mmeber (Liste libre) of the Liechtenstein Parliament, see Le Monde, 20 February 2008

Tax havens have been implicated in all the big financial scandals.
Ronen Palan, Director of the Department of International Relations, Université of Sussex, see Le Monde Economie, 20 May 2006

The idea that tax evasion should be regarded as an essential freedom is a libertarian nonsense that should be confined to the lunatic fringes of the American right.
Christopher Huhne MP, former Member of the European Parliament, see Financial Times, 4 December 2002

If youi hide your money, the next most likely thing to happen is that your money will then be hidden from you.
Article Hiding Money Offshore & Secret Bank Accounts in The Asset Protection Book (Adkisson Publishing Inc., Laguna Niguel (California), 2007), see link

Before we can bury tax havens, we shall have to bury libertarianism.

A growing worldwide abuse

We all know that tax havens are used by terrorists, by money-lauderers, by criminals of all kinds, by the corrupt governments of rogue states, by rich people worldwide who are unwilling to contribute their fair share of their communities' civic costs. How then can one justify these 'havens'? What reasons are there for tolerating them?

In principle, there is only one reason. In situations such that of Nazi Germany, those who dare to criticise, or attempt to flee, the malevolent regime need a safe haven for their property. Thus the Jews of nineteen-thirties Europe found the Swiss banks very useful (1). We need to preserve the possibility of placing one's assets beyond the reach of seriously evil governments. But the practice of fraudulently concealing one's wealth should be exceptional rather than normal.

Diversion of money into lightly-taxed jurisdictions has a long history, going back to ancient Greece and Rome. However, until the 1960s, tax havens remained what their name suggests: escape-routes from taxation for certain rich individuals and for a few big companies (2). But in recent decades they have mushroomed. This growth was doubtless provoked by the desire to escape from the high tax rates and restrictive regulations of the post-war period. But it has been enormously helped by the changes of subsequent years: the abolition of exchange controls, the increasingly fluid international movement of funds, the general deregulation of financial operations.

According to the Internal Revenue Service (3), it has been estimated that some $5 trillion in assets worldwide is held "offshore" in tax havens....one authority has estimated the annual revenue loss to the US at a minimum of $70 billion. That is, at least 3% of 2007 federal revenue, or half the federal deficit of that year.

Harmful Consequences

What damage is done by the concealment of money in tax havens? There are a number of unwelcome effects. First, tax evasion. Taxpayers - individuals or companies - in effect ficticiously claim a lightly-taxed place of residence. Thus they avoid paying the taxes that would be normal in their real place of residence. In principle, this practice is fraudulent; in practice, it is too often more or less legal. Many of the world's big companies have their offshore subsidiaries, so that their profits can be diverted, so far as possible, into low-tax jurisdictions.

Second, a more sinister problem: havens offer shelter not only from tax. They facilitate the undercover finance of terrorism and other criminal activities, and the concealment of the proceeds of crime; they are the delight of the world's mafiosi.

Third, tax havens also attract those who want to avoid regulation. Most hedge funds are based in offshore islands (4), not only to minimise their taxes but also to avoid scrutiny of their operations. They need give only minimal information to their shareholders, or to market authorities. But regulation of fund managers exists for good reasons. Evidently, to prevent them from defrauding their shareholders. But equally, to avoid the economic and social risks posed by the development of large, powerful, poorly-supervised businesses. Think of the infamous LTCM (5), of the providers of dubious sub-prime mortgages....

Fourth, havens allow debtors to hide their assets from their creditors; divorcees to avoid claims by their ex-wives; rich families to avoid death duties; perpetrators of torts to avoid paying damages to those they have harmed.

Apart from their usefulness to victims of oppression, it seems that financial havens, in general, can hardly be said to contribute to the common good. They mainly benefit those who want to enrich themselves at the community's expense, whether by failing to fund their fair share of public spending, or by pursuing rapacious business practices, or by evading their personal obligations. Tax avoidance by the richest imposes heavier tax burdens on the less well-off majority. How can that be fair or reasonable?

Corrective strategies

How then can we rid ourselves of abusive tax havens? This is a difficult problem. Concealment benefits very rich individuals and big companies; these often have enough political clout to stifle any attempt to suppress clandestine financial networks. Meanwhile, the moralising libertarians shout from the rooftops their contempt for the state and their glorification of anything that tends to reduce public revenue and spending. For them, the possibility of hiding their wealth and paying no tax on it is one of the foundations of liberty. This is a manifestation of a widespread modern heresy: the belief that freedom means the triumph of individual autonomy over the common good.

Nevertheless, the urgent need to conquer terrorism leads governments towards anti-concealment strategies; the need to make good the deficiencies in our public services, and to reduce excessive inequalities, points in the same direction.

Little by little, the major financial centres are recognising the imperative need to be able to track down dirty money. The legendary Swiss numbered accounts, identified only by numbers so that the banks knew nothing of the identity of the account holders, are no longer available. There are very few territories today where one can open a truly anonymous bank account.

There remains, however, the possibility in some tax havens of setting up an anonymous trust; that is, an agreement permitting a third party to hold in his own name, and manage, the money that one wants to conceal. Assets transferred into such a trust can be extremely difficult to trace. But one must have absolute confidence in the trustee. That may not be so easy in a tax haven of murky reputation.

European countries which are anxious to preserve banking secrecy are recognising that this secrecy must not extend to criminal situations. And also that the non-taxation of those who place their money outside their countries of residence is no longer acceptable. According to Urs Roth, chief executive of the Association of Swiss Bankers (6), bank customer confidentiality in Switzerland offers no protection whatsoever to terrorists, money launderers and other criminals. In most European states, banks are now obliged, either to provide information to foreign tax authorities on the accounts of foreign customers, or else to withhold at source a tax on revenue received by such customers.

The use of tax havens by large companies, to minimise taxes on their profits, remains a major problem. To counter this abuse, the governments of the thirty OECD countries have agreed on accounting rules which aim to limit the diversion of profits into offshore subsidiaries. Some companies, following such diversions, have had to pay large fines (7). But the problem persists.

The need for worldwide cooperation

It seems that the most effective method of castrating the tax havens would be an agreement between governments to prohibit transactions between their residents (individuals, banks and other companies) and entities situated in the main havens. Since 2003, the city of Buenos Aires (8) has attempted to ban from its region inward investments coming from tax havens. But an isolated decision like this is unlikely to be very effective.

However, according to Chavagneux and Palan (9), such a policy, if it were followed by the United States and the European Union, would push back the tax havens into the marginal position they occupied in the 1950s.

To achieve that, we shall need a big change in attitudes. Before we can bury the tax havens, we shall have to bury libertarianism. We shall have to move beyond an attitude that is so contemptuous of civic authority, of collective endeavours, of the public good. It is a question of restoring the classical ideal that aspired to the benevolent state, to enlightened citizenship, to wise governance. We need to discard the unbridled individualism that neglects, or even rejects, the search for the common good. For it is that perverse mentality that encourages us to avoid contributing to the common treasury, to seek always our own good before that of society, to neglect our responsabilities to our community.

* * * * *