Stashing the loot from the taxman

April 18, 2017

With the deadline for filing income taxes arriving today, Inside Higher Ed columnist Scott McLemee reviews a book that explains how the methods for the super-rich to hide their wealth away from the prying oversight of the tax collector are feeding an alternative global economy hiding in plain sight.

A MARCH in Washington calling for the release of Donald Trump's income tax returns took place on April 15--putting turnout somewhat at the mercy of potential participants' diligence about getting their own returns filed early. The demand is reasonable and has been called for by, at last report, 53 percent of voters, though that is no reason to expect the demonstration will have much effect. Whatever Trump needed to hide as a candidate obviously remains a vulnerability now that he is president.

His returns might yet enter the public record in the course of congressional (and other) investigations. But there is little chance of full disclosure even then, as Richard Murphy's ">Dirty Secrets: How Tax Havens Destroy the Economy has the indirect effect of reminding us. The available means for concealing assets--whether from tax agents, creditors or the lawyers of former spouses--are highly developed and amount to an alternative global economy in their own right.

Murphy, a professor of practice in International political economy at City, University of London, is both a chartered accountant and a co-founder of the Tax Justice Network, an international research and advocacy group. Of the five books he has published, this is the fourth on taxation; he mentions in passing that he wrote it in three months, almost certainly meaning last summer. (The endnotes tend to confirm this hunch: the latest articles and reports they cite are from August.) No discussion of taxation can be too short for the lay public, but Dirty Secrets puts muckraking and pedagogy in tandem to good effect.

Monaco: a major tax haven for the ultra-rich
Monaco: a major tax haven for the ultra-rich (Matthew Peoples | flickr)

THE EXPRESSION "tax haven" is still in general use, understood, Murphy writes, as "a place whose tax system provides an advantage to a person who is not resident in that place." It calls to mind the discreet, friendly, uninquisitive accountants of Switzerland or the Bahamas, hiding cash in your name in a vault somewhere far from the authorities back home. But the somewhat broader term "secrecy jurisdiction" proves much more suitable for conveying both the range and the mechanics of the offshore economy.

"All the tax haven does," Murphy explains, "is record the ownership of assets that are located in one place (which is not the tax haven) by a person who is themselves resident anywhere but the tax haven." The ownership may be by a company or fund rather than an individual; the assets may be "title to lands and buildings" or such tangible wealth as "art, yachts and the like," not just currency. "Nor," the author explains, "are these investments usually managed from the tax haven in which their ownership is recorded. The decisions on where, and in what, the funds are 'invested' will, in all likelihood, be made by fund managers or share owners who are themselves almost certainly located 'elsewhere.'"

For that matter, "very few banks [are] based in tax havens," which instead host branches of international institutions (Deutsche Bank, Lloyds Bank, the Bank of Cyprus, etc.). Murphy's own research into "the 60 secrecy jurisdictions studied as the basis of the first Tax Justice Network's Financial Secrecy Index" in 2010 found that more than two-thirds of them had local offices of at least two of the world's four leading accounting firms. (All four firms had offices in 33 of the countries studied.)

Determining how much wealth is involved--or the economic impact of the loss of tax revenue, especially in the poorest countries--requires great effort as well as considerable tolerance for wide margins in the final estimates. In 2011, Murphy's analysis of World Bank data "estimated the total cost of tax evasion in the world as a whole at $3.1 trillion, or about 5 percent of world GDP at the time."

A report released the following year by his colleagues in the Tax Justice Network used a number of methods to handle data from the International Monetary Fund, the World Bank and numerous other sources to make an estimate of between $21 trillion and $32 trillion "for global offshore financial assets as of 2010," with "estimated annual loss of revenue at between $190 billion and $280 billion." While not satisfied with the methodology of some researchers he cites, Murphy notes that they seem to converge on the figure of at least $200 billion a year of tax revenue lost to offshore concealment alone.

VERY LARGE numbers are easier to cite than to wrap the mind around, and they at best convey only a very general sense of the scale of the problem. The cumulative effect on public budgets around the world is obvious: Murphy treats the rise of secrecy jurisdictions as integral to the neoliberal agenda, with its ultimate ambition of ensuring that tax revenue is directed to funding police, prisons and the military while not a dime is spent for any other public purpose.

But Murphy also, surprisingly, regards tax havens as an affront to the power of the marketplace and their defeat as essential to saving capitalism from itself. I admit that this argument caught me off guard. Here is the author making it in brief:

If markets are to be efficient in the way that economists have described--and as those who suggest they provide optimal solutions profess to believe they operate--then there must be the highest-quality information available to all market participants so that they can act rationally, allocating resources to the person who is best able to use them to maximize return, and who exposes the provider of capital to the lowest risk in that process. Very obviously, tax havens undermine these principles. They are in fact designed to deny market participants the information they need to act rationally, allocate resources efficiently and minimize risk...If risk is increased, then the required rate of return within marketplaces also increases. This means that the number of projects that can be invested in is reduced, so that the amount of capital committed is diminished. As a consequence, productivity declines, and along with it growth, output, wages and profits.

The suite of reforms Murphy proposes amount to a program of robust data collection by the European Union and other international actors combined with legislation that would, bit by bit, make access to secrecy jurisdictions more difficult and less profitable. The alternative is even more staggering levels of inequality than have already become the norm. Murphy's trust in the possibility for reform would be easier to credit if the shadow economy were some kind of lamprey that had attached itself to an otherwise healthy organism; then it could be removed. But his book is too persuasive in its depiction of tax havens as tightly connected to banks, accounting firms and other established institutions. They seem to exist in a kind of symbiosis--which can't end well.

First published at Inside Higher Ed.

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