Tax havens ‘serve no useful economic purpose’

Several of this blog’s commentators have signed the letter calling for an end to tax havens, details of the letter itself, and the full list of signatories, are here.

I’d welcome commenters’ thoughts on the issue of tax havens (not just in an Irish context, of course).

Comments

comments

Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

41 thoughts on “Tax havens ‘serve no useful economic purpose’”

  1. Stephen,
    In advance of the deluge on this topic likely to come from a frequent commenter, I would like to draw your attention to the following from the European Code of Professional Conduct in PR (Code of Lisbon).

    Clause 4
    PR activities must be carried out openly: they must be readily identifiable, bear a clear indication of their origin, and must not tend to mislead third parties.

  2. A welcome initiative. Tax havens are inimical to economic growth which is the whole point of the system.
    So is QE btw
    The accountancy profession has drenched itself in ignominy again.

  3. Their abolition would be of universal benefit to society as a whole, as everyone knows. Not a snow balls…

    1. Trump has begun the heavy lifting of breaking the link between party voters and 1% lobbyists. Even if he goes on to shaft the voters the Pandora box is open. Very interesting decade ahead.

  4. It’s very difficult to secure any understanding of what exercises such as this actually achieve. I suspect any ordinary citizens who might become aware of it would struggle to get beyond the Mandy Rice-Davies response. I’m sure there are many, many more economists who benefit directly and indirectly from the activities of the firms and high net worth individuals (HNWIs) that organise tax haven arrangements and benefit from them, but who know on what side their bread is buttered and stay shtum. And governing politicians are adept at spewing out the BS about how seriously they take these issues and about the wonderful international initiatives that are being pursued – while doing everything they can to stymie any effective action.

    However, the composition and international distribution of the signatories to this letter are interesting. Almost 90% of the signatories come from 12 countries. Six of the G7 are represented (Japan is the only absentee). India is the only non-OECD country in this “Top 12”. It shares joint fifth with Ireland on 13 signatories. The other OECD countries in the Top 12 are Spain, Australia, Switzerland and Denmark.

    Italy has more than 36% of signatories and it together with Spain and Ireland contributes more than 50%. The UK and the US contribute fewer than 25%.

    It is interesting that so many economists in Italy, Spain and Ireland where rent-seeking and collusive corruption are institutionalised and pervasive are so concerned about off-shore tax havens. It smacks a bit of drawing attention to the speck in one’s brother’s eye to distract attention from the beam in one’s own.

    I would also venture the contention that most of these Italian, Spanish and Irish signatories entertain warm feelings about the omniscience and omnipotence of the state (and correspondingly dark thoughts about competitive market forces) and believe that the taxation system is the most effective, if not the only, means of achieving more equitable economic outcomes for the greatest number. Conversely, I suspect many of the US and UK signatories would consider the damage being done by the use of tax havens to effective and efficient competitive market forces as bseing similar to if not greater than the direct damage to national exchequers of the tax evasion they facilitate.

      1. An inability to impute motives to the signatories? Don’t economists do that to firms and individuals all of the time?

    1. Actually, the beam in our own eye on this issue is not that big; unless one equates having a low level of corporation tax as being such. Of course, the inventiveness shown by foreign corporations in making more than defensible use of it is another matter.
      https://www.gov.uk/government/topical-events/anti-corruption-summit-london-2016
      The references to both tax evasion and avoidance may be noted.
      Putting so many of the national eggs into the low corporation tax basket is a risky policy. However, the countries that do not attempt to entice FDI by this and other means can be counted on the fingers of no hand. The issue for Ireland has been, therefore, and remains, to avoid needlessly getting ahead of the pack. At least until there is a radical change in national policy, of which there is no sign.

      1. @DOCM,

        I fear you misunderstood me. The “beam” is the institutionalised and pervasive rent-seeking and collusive corruption. In contrast, now that scams like the “Double Irish” and the “Dutch Sandwich” and the ability to incorporate companies in Ireland whose revenue is not taxable in any jurisdiction are being phased out or outlawed – and Ireland is “playing along” with the OECD’s BEPS project, Ireland can present an image of being “squeaky clean” in the international tax stakes.

        The Irish Times, alone among Irish media organs, has access to some or all of the “Panama Papers” that relate to Ireland. It is interesting that its journalists have uncovered so few Irish firms and individuals availing of the “services” provided in Panama. It suggests that the rip-offs and scams legitiately available in Ireland (coupled with a low corporate tax rate – and ruses to lower it further) are so lucrative that there is very little need to avail of these offshore “services”. I expect something similar applies to those in Italy and Spain whom one would expect would provide a significant demand for these offshore “services”.

          1. In my view it all comes under the rubric of “rent-seeking” – is seeking to secure rewards and returns in excess of those generated by competitive market processes – and being willing to spend almost as much as is generated by these excess returns to secure them. This is the double whammy in terms of economic costs that rent-seeking imposes – and can cripple economies. The pervasiveness and malign impacts of rent-seeking are contributing to the “secular stagnation” of the advanced economies.

            But everyone, individuals and firms, is in the business of rent-seeking. There is nothing per se wrong with rent-seeking. It is the main driver of the capitalist system. The trick is to ensure that competition – ensuring rents are captured only on a temporary basis because there are no barriers to their being competed away – and economic regulation – preventing rent capture in the absence of competition – are sufficiently robust and effective.

            Not surprisingly firms and individuals have huge incentives to seek to distort and suppress competition and regulation – and to retain the “Pinstripe Mafia” and to suborn poiticians, respectively, to effect their rent-seeking and to legitimise and protect their rent-seeking. The resulting sustained corrupt rent capture falls in to two categories – collusive corruption and extortive corruption. Advanced economies are characterised by the former; developing economies – in particular those with significant natural resource endowments – are characterised by the latter. Outfits such as TI focus on the latter which makes the advanced economies look far better than they are.

            Politicians in the advanced economies are very quick to highlight extortive corruption in developing countries as a means to distract attention from the collusive corruption in their own. The irony is that the feeble legal systems in many of these countries that permit and encurage this extortive corruption are legacies of the colonial systems that authorised the exploitation of the indigenous people and the expropriation of natural resources. Post-independence native elites simply modified this system.

            But collusive corruption is endemic and pervasive in every sector of the advanced economies. The banking and financial sector is particularly notorious, but other sectors are as bad. The ability of the dominant firms and individuals in these sectors – with their retained army of lawyers, accountants, advisers, consultants, tame academics, PR operatives and pliant media lackeys – to browbeat compedtition bodies and regulators and to suborn governing politicians is both awesome and frightening. It is nothing less than collusive corruption of the most blatant type.

            And while the incidence of extrotive corruption is almost negligible in Ireland, it has its own variant of this collusive corruption that is endemic, pervasive and seriously damaging.

  5. “Tax havens ‘serve no useful economic purpose …'”

    Perhaps no useful economic purpose, but they sure do serve a most useful political role. And that’s all that matters in a globalized, financialized world.

    1. World trade is on the decrease. Globalisation too. Exciting innovative stuff happening closer to home . Nobody talks about BRIC.

  6. ‘serve no useful economic purpose’

    Generally, yes, and their purpose is often worse than useless.

    But…

    What about a state applying tax rates much higher than most economists would think appropriate, and thereby damaging that country’s economic and social outlook.

    Or a country with a government having arbitrary, confiscatory tendencies which most economists would agree is damaging to that country’s economic and social outlook.

    Does the service provided by tax havens limit the capacity of such regimes to continue those policies? Would that be a useful purpose?

    1. Only if they were available to everyone. Tax avoidance for the rich is one way to accelerate income Inequality which eventually brings the system crashing down.

      1. The question raised was of “useful purpose”, not fair access to the services of tax havens. That would be a different argument.

        1. They don’t facilitate productive investment which is the 1%’s achilles heel and why the Janet bubble is doomed. SnP 500 cos have had flat revenues for 5 years

    2. “Does the service provided by tax havens limit the capacity of such regimes to continue those policies? Would that be a useful purpose?”

      ‘Such regimes’ could have a wide definition, in the mind of a reluctant taxpayer.
      It is a fair bet the majority of funds in tax havens originate in democratic polities.

      1. I wasn’t suggesting that only funds from states with property rights shortcomings or very high tax rates find their way to tax havens.

        Where you draw the line is an entirely different question to the principle that under certain circumstances tax havens may have a “useful purpose”.

        Do the signatories deny this could or does ever happen? this is an ‘academic’ question is it not.

    3. In Greece people who did not shelter their wealth are being punished as they cannot withdraw their wealth from the local banks. Can you blame a Greek businessman for moving their wealth from Greece to somewhere else? Would Greece or the world in general be better or worse off if Greeks had financial wealth outside of Greece? Is it inconsistent to complain about tax havens when the EU central bank did not back up the deposits of Greek banks? Did non Greek businesses like German auto companies keep the wealth generated in Greece in the Greek banking system? If non Greek businesses have a safe place to keep their wealth doesn’t that put Greece businesses at an insurmountable disadvantage? Wouldn’t eliminating tax havens just create a worse situation where people put their wealth into hidden caches of gold bars or whatever?

      I am not buying into the notion that tax havens serve no useful purpose, they could be a risk reduction technique rather than a form of robbery and tax havens might lead to a more optimal distribution of wealth.

      As a quibble, “tax haven” and “useful purpose” are not defined.

  7. I am looking forward to the next action. 300 economists sign to say the Big 4 accountancy firms serve no economic purpose.

  8. Hmmm. Whilst agreeing with the spirit of this, and think action and speaking out is always a good thing, I’m intrigued more by the absence of certain signatories than the presence of others. I wonder which Tier 1 Irish economists were asked, and if they refused, why?

      1. Perhaps. But I doubt we’ll ever find out. As is always the case in Ireland, their silence speaks volumes. And, remember, they have no obligation to break their silence. And even if they were to the inevitably gnomic and deliberately evasive utterance would resemble the immortal words scripted for the late, lamented Frank Kelly as Father Jack: “That would be an ecumenical matter.”

  9. hee hee.

    Not a chance, though I’d say you’re the only one that figures on the list 😉

  10. Tax havens ‘serve no useful economic purpose’?

    But they do! They serve the economic purpose of reducing the taxes paid by wealthy people, and corporations, below that of ordinary tax payers. Does that qualify as an ‘economic purpose’. They serve the accretion of wealth to the wealthy, by tax avoidance and tax evasion, to the detriment of the societies where the wealth originates. That is an economic purpose, albeit not a very laudable one, is it not?

    It is not just tax havens that do this, the low corporate tax rates, that generally benefit the wealthy in society, is probably a more serious long term problem than tax havens.

    Not to mention the resistance of the elite financial sector to an FTT, with Ireland inexplicably in the vanguard of defence of the financial sector.

    1. Joseph Ryan is on to something. They also serve to “starve the beast” (aka, the state) of resources, ensuring that desperate wage slaves remain eager for work at any price while reinforcing the view that the (starved) state is utterly incapable of doing much of anything for anyone. Only tech companies in their benevolent munificence can do anything for the great unwashed (cf. Gosplan 2.0).

      1. Tech is completely overrated. And it is monopoly capital in its purest form.
        The Forbes billionaires issue features rent seekers from Facebook, Snapchat, Uber, Microsoft and Twitter

  11. Surely there must be a useful economic benefit for the haven, even if overall they are useless if not damaging. Otherwise why would these policies be put in place? I agree overall they are not a good thing, but it may be foolish to ignore the incentives to become a haven. Policies don’t come about without winners.

    Ireland has managed to divert foreign capital from other European countries and this has fed through to employment and GDP figures. Historically the UK used to be the place that US companies used as a HQ for Europe or EMEA, as its rate was lower than other European countries. This changed almost overnight when the Irish dropped the main rate, and Ireland via Bermuda became the place where you established your holding companies for entering the European market.

    Looking at the article many of the problems seem to also come from other aspects of havens, such as lack of financial regulation, lack of transparency/information sharing. Allowing corrupt assets to remain in your banking system is surely a slightly different issue, as you don’t seem to have this same problem in Ireland.

  12. Tax havens (as defined by the OECD to include mainly small jurisdictions including British Crown Dependencies) and OECD members that engage in tax haven activities — the US (mainly Delaware; former Senator Carl Levin has said that it’s easier to establish a company with hidden ownership in the US than to get a library card), Netherlands, Switzerland, Ireland and Luxembourg — may have some positives but they are pernicious structures which legitimise looting on a grand scale.

    The facilitation of rich people to evade or avoid taxes on a massive scale is one important factor. Tax havens are also crucial to sustaining criminal organisations.

    The European Parliament reported in 2014 that according to estimates by the United Nations Office on Drugs and Crime (UNODOC), based on a meta-analysis, US$2.1 trillion was laundered in 2009, equal to 3.6% of global GDP.

    Keep in mind that in respect of corporates, large ones with expensive lawyers, can get away with practices that could result in directors of small firms being disqualified and imprisoned.

    In the UK in recent times Sir Philip Green, owner of a number of top retail brands, has been in the news following the collapse of BHS.

    In 2005 the Arcadia fashion business paid a £1.2bn dividend. The record-breaking payment went to Green’s wife who lived in Monaco and was the direct owner of Arcadia. Because of this arrangement no UK income tax was due on the gain.

    In 2010 UK Uncut a group of mainly women activists began protesting within Green-owned stores in response to news of the tax-free payment and that led on to a focus on other big consumer companies such as Google, Starbucks and Amazon.

    It was almost taboo in Ireland to highlight corporate tax avoidance and the related impact on national accounts even though the Revenue relentlessly pursued (including public naming) domestic personal/ corporate tax evaders including users of tax havens during a quarter-century long campaign.

    It was foreign outlets that carried major reports on investigations of the Irish system in 2004-2010 — Tax Notes in 2004 on US affiliates in Ireland doubling profits to become the most profitable in the world in 1999-2002; The Wall Street Journal in 2005 on Microsoft’s tax avoidance arrangements in Ireland and in 2010 Bloomberg News on Google’s — and in January 2013 Enda Kenny at Davos declared that the effective tax rate was 11% compared with the headline corporate tax rate of 12.5%.

    There was apparently little for the status quo to worry about.

    Then in May 2013 a US Senate Subcommittee dropped a bombshell when it disclosed how Ireland helped Apple to achieve a 1.9% foreign tax rate.

    The Establishment closed ranks including The Irish Times. This is from an editorial of May 21 2013:

    The charges made now need to be countered, speedily and effectively, by both political and diplomatic means. First, by Government setting out a clear narrative on corporate tax that can be easily understood — at home and abroad – and that rebuts some of the erroneous claims made. Second, through a major diplomatic initiative in the US to ensure there is a better understanding of the Irish position on corporate taxation.

    As the Taoiseach has pointed out, claims that Ireland is a tax haven are unjustified. The OECD, the international arbiter on the issue, has already decided that Ireland meets none of the criteria of a tax haven [ ] the scapegoating of Ireland, for a problem partly of the US’s own making, is unfair and hypocritical. The failure of the US over many years to lower its high (35 per cent) rate of tax on corporate profits, and thereby encourage multinationals, like Apple and Google, to repatriate some of their huge global profits to the benefit of the American taxpayer, is something its own politicians might well first choose to explain.

    http://www.irishtimes.com/business/economy/ireland/tax-policy-under-the-spotlight-1.1403091

    This was the common mindset just 3 years ago: “We are the victims!”

    Few US companies pay taxes close to the headline rate — the effective rate for all companies was 12.6% in 2010 and in 2014 General Electric had a 17% total effective rate (excluding losses from its finance unit) compared with a 27% rate for Siemens, its German rival.

    Read my second comment here on how an Irish company can become unlimited, to shield their financial from public view, with directors then able to limit their liabilities through the use of tax haven shell companies.

    http://www.irishtimes.com/opinion/fintan-o-toole-the-state-should-refuse-to-deal-with-offshore-companies-1.2606821

  13. “Keep in mind that in respect of corporates, large ones with expensive lawyers, can get away with practices that could result in directors of small firms being disqualified and imprisoned.”

    This statement is extreme and isn’t backed up by the examples stated.

    “In 2005 the Arcadia fashion business paid a £1.2bn dividend. The record-breaking payment went to Green’s wife who lived in Monaco and was the direct owner of Arcadia. Because of this arrangement no UK income tax was due on the gain.”

    This would be the case for non-resident individuals receiving a dividend from a smaller corporate. No UK income tax would be paid, as the individual is no longer UK resident. UK corporation tax would be paid on the profits of the corporate.

    This is the same for smaller businesses, and individuals. If you own UK shares and live in Ireland, you will only pay Irish income tax on this amount. Really it’s pretty vanilla stuff.

    If anything the amount of regulations etc surrounding directors for large corporates gives them a larger legal exposure than directors of smaller companies.

    I’m not sure there is this large legal asymmetry in regards to the amount of criminal activity that can be undertaken by directors of larger corporates. Given the amount of approval required to undertake decisions, and how much they get audited, I would say it would be far harder for large corporates to engage in tax evasion/illegal activities than smaller businesses. That’s why they need the lawyers to ensure that everything is above board.

    The avoidance schemes for large corporates wouldn’t be relevant to smaller businesses, as they are really expensive to run. Directors of smaller companies could structure their activities in a similar manner, but it would be a significant net cost, and totally counterproductive to their business.

    Bear in mind that directors are under a fiduciary duty to serve the interest of the shareholders, and there have been instances of US directors being sued by shareholders for not availing of tax avoidance structures to minimise a business’s costs.

    I agree with your take on the debate, but statements like that above can’t be thrown around without some justification.

    1. For those of us who haven’t a pony in the race and are not naive, we apply common sense and we know that a tax inspector is likely to take a jaundiced view of a structure where an Irish domestic company books fake invoice charges from letter box/ shell companies in places like Bermuda — in the old days, technology licensing was a fertile area for evasion as it was difficult to verify (I used be an accountant).

      We also were sceptical of the ministerial mantra on the Irish tax system: “no special deals,” “rules based,” “transparent” and so on. Then in 2014 the Dept of Finance provided documentation to the EC detailing a special deal with Apple — maybe of course it wasn’t special as other FDI investors availed of similar treatment!

      “We comply with all laws” is a popular mantra but not all law is codified by statute and tax administrators have discretion in applying many rules — the soft touch for big companies may well be a long-term custom. We do know from several countries that preferential treatment has been given to big international companies e.g. Luxembourg gave one civil servant, known as “Monsieur Ruling” authority to approve or reject tax proposals, which gave US affiliates an effective rate as low as 0.4% compared with the headline Lux rate of 29%.

      There is also a potential conflict of interest where a senior tax inspector may be offered a job by banks, and both big law and accounting firms.

      This is what John Kay, business professor and FT columnist, wrote in the newspaper in 2013:

      In the main, however, tax authorities have preferred to cut deals with big corporations rather than pursue costly legal action. They will not do the same for you and me. It makes no sense for a small company to pay an accountant to do anything but calculate the amount of tax that is properly due, or to incur legal fees resisting a challenge. The unacceptable outcome is an entirely correct perception that there is one law for the little guy and another for the big battalions. The potential effect of that perception on tax compliance is one that it is well worth spending millions of pounds to avoid.

      A serious reform agenda would involve a principled reappraisal of the basis for taxing corporations both nationally and globally, and a strategy for effective enforcement of existing rules. Such a strategy would make clear that executives of companies which present accounts to tax authorities that are essentially false, and the accountants who support them, will in future run serious risks. The door they hear closing behind them might be the door of a prison cell rather than the door of 10 Downing Street.

      You make it seem a routine thing in Europe that a business chief like Mr Green :mrgreen: could get away with paying a dividend of over £1 billion tax-free to his wife.

      https://www.theguardian.com/business/nils-pratley-on-finance/2016/may/09/pensions-regulator-bhs-deficit-

      France forced Monaco to apply French taxes to its nationals, resident there. It’s an anomaly that it provides a refuge from taxes to rich others in Europe — a minimum cash deposit in a bank of €500,000 is needed to get residency there.

      France blockaded the principality in the early 1960s and a tax agreement was signed in 1963. In 2001 French nationals were also forced to pay a wealth tax to France.

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