Tax Havens, Evils of our Time

Since the.mid-1970s, much more than US$5 trillion have illegally exited poor countries. In the second half of the 1990s, funds amounting to almost one third of the GDP of the Sub-Saharan African nations were sent overseas. Likewise, 50% of the net worth of Latin America’s wealthiest has been fleeing annually. Three percent of those capital flights originates in political corruption; one third, comes from organized crime, while 60% to 65% of that wealth is derived from illegal schemes orchestrated by individuals and large corporations: the rich send to tax havens twice as much money as politicians and organized crime together.In 1960, Business Week coined the expression tax haven to denote a hideout place (as in pirates’ haven). Some time later, the French borrowed the concept but called it paradis fiscal. And that is how it was translated into Spanish, Portuguese, German, among other languages. The well-intentioned believe that such haven-heaven confusion was the product of an innocent mistake. I do not think this was the case. Firstly, because correcting the mistake would have been easier than perpetuating it. Secondly, because this happened when neoliberalism and financial deregulation, in addition to the largest capitalistic profits in history and tax havens, were starting to boom. And thirdly, because no few Anglo-Saxons immediately sought to have tax haven replaced by tax heaven, to no avail. Clearly, the attempt was worth the while. Language is a means for communicating but also for constructing reality. And the opposite of heaven is hell, while the opposite of a haven is an open, transparent place. For some reason, though, the word haven continues to be mistranslated.

What exactly is a tax haven? It is a jurisdiction outside a taxpayer’s territory of residence where his/her non-declared funds are transferred. What are the most common sources of such funds? One of them is tax avoidance via schemes that do not violate the letter of the law but do infringe its spirit. Another one is pure and simple tax evasion, which is obviously an offense. Then, there are criminal activities of all sorts: laundering of money obtained from drug trafficking, fraud, theft, bribery, etc.

A haven, as it is only proper, is part of a large realm of secrecy that not everyone can access. This secrecy, however, is cloaked with all the possible appearances of respectability, so that their consciousnesses are not bothered. Extreme caution is used to keep a façade of legality, an art at which both the Swiss and the British excel (almost 60% of the 72 havens known to-date are located in the United Kingdom or have somewhat been linked to it). A distinguished, anonymous cast are the leading actors in a true “theater of probity” (as Nicholas Shaxson calls it in his book Treasure Islands: Tax Havens and the Men who Stole the World), staged in refined, lavish locations. It is understandable. According to different estimations, tax havens hide nothing less than one fourth of all private funds circulating worldwide.

In the last four decades, these shelters have had an impressive growth, due to the crisis of the so-called Welfare States, and the ever more regressive domestic income redistributions. Suffice to mention the US example. Since 1974, 0.1% of its wealthiest population has gone from receiving 2.7% of the domestic income to a jaw-dropping 12.3%. Another example: the net worth of that country’s wealthiest individuals equals the aggregate gross domestic product of 47 sovereign nations.

This is also a period of awesome predominance of transnational corporations: today, 60% of the world’s trade takes place between subsidiaries of the same companies, a situation that makes it easy to manipulate costs and prices, as it may best suit corporate interests. The annals of history will certainly keep record of a US firm that paid US$972.98 for each plastic bucket it imported from the Czech Republic; of another US firm that exported rocket launchers to Israel for as little as US$52.03 each, and of one kilo of bathroom cleaning gloves that was invoiced at US$4,121.81, according to data provided by John Christensen (who had worked in tax havens) and published by the London Review of Books. Not only is there enormous tax evasion, but also local firms lose competitiveness as they lack such transfer mechanisms. Under these circumstances, I suspect that David Ricardo would not have dared to formulate his theory of comparative advantages.

For this reason, it is striking to note that contemporary economists have paid such little attention to tax havens and, what is even worse, that they are prone to justify them. Since the.mid-1970s, much more than US$5 trillion have illegally exited poor countries, far exceeding the amount of foreign aid they have received. In the second half of the 1990s, for instance, funds amounting to almost one third of the GDP of the Sub-Saharan African nations were sent overseas. (The much-publicized Millennium Project of the UN has estimated that, to cut in half the indigence rates of poor countries by 2015, these nations should be granted subsidies that, on average, do not exceed 15% of their GDP.) Likewise, 50% of the net worth of Latin America’s wealthiest has been fleeing annually.

The World Bank (known for its bearish propensities) estimates ill-gotten money circulating worldwide to stand at between US$1 and US$1.6 trillion, half of which, I insist, originates in developing countries. After studying 23 countries (Argentina, among them) Raymond Baker duplicates these figures and concludes that only 3% of the total is attributable to police corruption —which is no minor problem, particularly from a qualitative point of view— and one third comes from organized crime, while 60% to 65% of that wealth is derived from illegal schemes orchestrated by individuals and large corporations. Let me emphasize this: the rich send to tax havens twice as much money as politicians and organized crime together. In most parts of the business world, the distinction between legality and illegality has been erased. The despicable venality of a band of public officials or the infamous trade of drug dealers is recurrently used as a smoke screen to distract public opinion’s attention and hide the outrageous tax evasion committed by the powerful ones.

What about Argentina? According to estimates for the year 2000, consolidated tax evasion (measured against potential tax revenue) was 40%, that is, it accounted for 12 to 13% of that year’s GDP. At the worst moments of the 2001-2002 depression, it may have hit a record 60%, according to Jorge Gaggero and Federico Grasso. Pursuant to the estimates of two prestigious specialists, Gómez Sabaini and Rossignolo, today only 50% of income tax is paid. In the light of any international comparison, these figures are alarming: in OECD countries, tax evasion stands, on average, at 10% (in some cases it has been kept in the order of 5%), while in middle-income countries it fluctuates between 20% and 30%.

To make these figures less abstract, let us say that the uncollected revenue of US$20 billion from income tax and VAT could be used to build 8,000 new primary schools annually or to provide six times more coverage in the Asignación Universal por Hijo, a conditional cash transfer program tied to children’s school attendance and vaccination (even when extended to 4,500,000 beneficiaries). Suffice to say, the 1947 Marshall Plan, devoted to the reconstruction of 16 European countries, consisted in a five-year program of grants and loans for a total US$13 billion, which translates today into around US$150 billion. It turns out that in each one of the past decades, an entire Marshall Plan has left the country.

What reasons are given to justify the unjustifiable? Above all, political uncertainty. Note that this easy argument has been used in different places and times. The first tax haven established in the US coined a logo that managed to hit the mainstream, “Delaware can protect you from politics”. More bluntly put, let the risks, if any, be borne by the least-haves. Because public spending must be financed somehow and, unless it becomes indebted or its companies make a lot of money, the government must resort for that to the taxes paid by registered workers or to high, regressive taxes such as the VAT. Not to mention the fact that investments are seriously affected, thus fueling inflation every time there is a sustained increase in demand.

The prevalence of individual interest over the theoretical principles invoked is worth noting. Because for neoclassical economists the absence of information (such as that resulting from capital flight) disturbs markets and renders them inefficient. Moreover, it has even been claimed that such flight is a relief to the Central Bank, as it puts the brakes on exchange rate appreciation. It is as though a thief told his victim to be grateful because he is delivering him/her from any worries.

What should be done? Stop talking about heavens and become aware of the enormous damage tax havens are causing us. Then, embark on a far-reaching public debate intended to pave the way for a comprehensive, progressive tax reform, which has been postponed for too long already. And always keep in mind what the great US economist J.K. Galbraith wrote almost twenty years ago, “Nothing contributes more to social tranquility than the cries of the rich when they feel pressured by the tax office”.

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