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Jim Boyce: Tax Havens or Financial Sinkholes?

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By James K. Boyce, who teaches economics at the University of Massachusetts, Amherst. He is co-author, with Léonce Ndikumana, of Africa’s Odious Debts: How Foreign Loans and Capital Flight Bled a Continent, to be published this year by Zed Books.

Tax havens have got 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.

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12 comments

  1. charles 2

    Corporation and Income taxes are an aberration.

    It is much better to have a VAT instead. It is impossible to dodge unless one wants to spend your life in a tiny island. Last time I checked, the 1% doesnt want that. It wants to live in vibrant places in developped countries.

    It is possible to make VAT progressive by selectively targeting goods and services that make most of the affluent people consumption basket (say, a pair of shoes costing more than 100%). It looks complex, but in reality, no more than maintaining a CPI index (which we already do anyway).

    1. attempter

      The VAT is one of the many things which sounded good in the ivory tower and good civics textbooks but which can only be a class war weapon in practice.

      Anyone who’s been paying attention to the operations of kleptocracy knows it’s not possible for a VAT (or any other tax) to be “progressive” in practice, because every policy of this government is radically, viciously regressive. That’s the intent and goal of everything they do.

      So in practice a VAT would simply be another weapon against the non-rich, to extract yet more of our quickly diminishing share of our own labor, to hand that money over to the banksters, to big corporations, to the super-rich.

      http://attempter.wordpress.com/2009/12/11/value-destroying-taxes/

      There’s no future in “progressivism”, and the sooner people purge themselves of such obsolete notions, the sooner we can begin serious work.

    2. Jessica6

      It’s relatively easy to dodge the VAT via cash transactions and while there isn’t really incentive for every day items there certainly is for the big ticket ones.

      For smaller consumer items the lower middle class is the hardest hit, the rich much less so, particularly when you look at the proportion of income taken up by basic living costs for those in the lower brackets.

      Sales tax is THE most regressive form of taxation bar none. Sure, some necessities are exempt but in practice, not many. I live in Ontario, Canada so I know.

      However taxing land and resource extraction would be much harder to get around and would affect primarily the most wealthy.

      http://en.wikipedia.org/wiki/Henry_George

  2. Ray Duray

    Re: “When the countries of the world joined together to eradicate smallpox a generation ago, they achieved a historic victory…”

    The irony of this suggestion, of course, is that the U.S. and Russian governments still maintain viable smallpox colonies on a “just in case” basis.

    Just in case of what is never specified. Though biowarfare is without a doubt the intent.

    How can we possibly hope that a government which refuses to eradicate smallpox would deign to eliminate tax gimmicks? Let’s not be naive about what we are up against here.

    Some will recall that former NYSE chair Dick Grasso paid himself a $140 Million bonus upon retiring. Then NY A.G. Eliot Spitzer thought the amount egregious and demanded a refund to the NYSE non-profit(sic) corporation. He lost that case in federal court, where Dick Grasso (a man who brought an estimated $600 Billion in laundered drug money into the stock market annually) was treated as royalty by the federal court system.

    Our world is too rotten to hope to have our bought-and-paid-for regulators do anything of consequence to change the tax haven system.

  3. jake chase

    “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.”

    Well, we can all rest easy, knowing BHO is on top of this.

  4. rps

    I prefer Robert Louis Stevenson’s 1883 novel Treasure Island as the primer of corporate offshore shenanigans. Stevenson’s villianous pirates Captain J. Flint, first mate Billy Bones, quartermaster John Silver, and first gunner Israel Hands resemble today’s global (cough) CEO’s minus one-eyed patches. The “timely” difference is we have the treasure maps/locations but the politicians have joined hands with the pirates of looting all Sovereign Nations treasures and protecting the Havens. The US Navy protects and defends the pirates stolen treasure. Ahoy Matey!

    Timeline from 1750 to 2011. Same game, albeit hornswaggled politically correct/captured discourse:

    Treasure Island -> Pirate Coves -> Tax Shelters -> Tax Havens
    Jolly Roger -> Corporate/Bank Logo flag
    Pirate Captain -> CEO
    Cockswain -> President
    Go on Account -> Politicians
    Parley -> Congress
    Landlubber -> citizens
    Shiver me Timbers -> I’m shocked I tell you!

  5. taxpayer

    A land value tax completely avoids the problem of “tax havens.” Corporations (and people) pay in proportion to the value of land they use (or collect rent from), regardless of their legal residence. There is no need for the government even to concern itself about who owns a particular parcel; if the tax is not paid then the the government takes the land and auctions it.

  6. Straßencafé Lebenskünstler


    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

    Of course they did, Dummy. What did you expect them to do? Drop their profits from a helicopter? Of course they spend half of profits on buying control of the tax code but other half on raising salaries of insiders with information. What did you expect?

    Look! Taxes don’t work for the destitute. They work only for the people inside the beltway. We need to eliminate all taxation, the IRS, the tax preparation industry, tax lawyers, and all other high rollers who live on the system that rapes the unsuspecting. It will be easy to support our spendthrift Congress by auctioning 99 year zero coupon treasuries. The 99′s will not collide with the shorter paper or warp shorter rates for those already stuck with them. With no tax money to blow, our senile legislators will spend less thus bid up the price less on things like doctor bills and nursing personnel feather-bed-er-s. Clunker cars will be cheaper and demolition derbies will be lot more fun than tractor-pull-s.

    Got the picture, Perfect?

    Get it
    !

  7. Glenn Condell

    When the US comes to it’s senses and finally rolls up some of the thousand plus military bases in order to save some dough, perhaps some of the firepower and logistics could be aimed at the Caymans and other havens? Surround them with destroyers, cut off their power and internet, send in a crack team of marines with FBI, CIA and SEC expertise and say Spitzer in charge, impound the lot, trawl thru the wreckage and send each prosecutable case to the relevant jurisdiction.

    I’ve read that up to a third of the world’s wealth, the vast bulk of it illicitly accumulated, is parked in these havens. Harvest that and you won’t need to raid Soc Sec or raise taxes or impose austerity or neuter the unions.

  8. readerOfTeaLeaves

    Glad to see this general topic highlighted; I expect a lot more heat and light in coming months.

    Anyone interested in this thread should try and get a copy of Shaxson’s “Treasure Island”.

  9. Ivan Karamazov

    “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.”"

    In the inimitable words of Madeline Albright: what’s the point of having this superb military we’re always talking about if we can’t use it for our own benefit? We’re pleased as punch undertaking purported philanthropy missions in North Africa. Let’s drop a few JDAMs in George Town’s financial district.

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