The other two Ts at the G8

Tax and transparency are the other two subjects about which G8 ministers will waffle meaninglessly next week. It’s a pity, because  progress in these areas would be among the best ways of helping the developing world.

Tax havens are wrong for three reasons: they drain the tax base of developed countries, making it harder for them to maintain aid and social spending; they suck ill-gotten spoils from developing countries; and they destabilise the global economy.

Tax avoidance in rich countries is currently in the headlines. Using techniques with names almost too exotic  to mention — anyone for a “Dutch Sandwich”? How about a “Double Irish”? — Google funneled payments to tax havens via low-tax countries like Holland and Ireland to minimise tax on its £11.5 billion in UK revenues between 2006 and 2011, paying only £10 million to the UK Treasury. Some have worked out that Google’s overseas tax rate is 2.4%, compared with the 28% it should be paying in Britain.

Apple, Marks and Spencer, Boots, Tesco, HSBC, Lloyds Halifax, Amazon, Starbucks, Vodafone — of course they’re going to minimise their costs. They’re profit-making enterprises. It’s no good berating them about their naughtiness; the only way to tackle these companies is to close down the havens where they hide their earnings. But no single rich country can address the problem alone because if Bermuda closes for business a company will just send its money to the Cayman islands. Action has to be taken in concert, which is why a multi-country group like the G8 is one of the only hopes for progress.

Developing country governments have had it even worse — having been denied billions of dollars in sorely-needed revenues as money is syphoned overseas. Liberia is an example of a poor nation that’s been ravaged by the iniquities of global tax-dodging, as a succession of kleptocrats stashed diamond wealth in hidden Swiss accounts. Switzerland’s at fault, not Liberians, who have a fragile democracy and a history of nasty dictators.

Nicholas Shaxson in his brilliant book Treasure Islands suggests that Transparency International‘s corruption perceptions index has things the wrong way round: we should rank countries on banking secrecy, not graft. The real economic issue is that nations harbour the spoils of corruption, not that Charles Taylor foists himself on Liberia.

Shaxson points out that  tax havens, or what he calls secrecy jurisdictions, have played a starring and hitherto misunderstood role in the untrammelled economic liberalisation of the last few decades, in effect allowing cash to skitter freely around the planet. The market in shares, currencies and bonds is international and therefore difficult to tax — but the profits must eventually end up somewhere. Secrecy juridictions were purposefully set up as places for traders to hide their loot.

Most people ignored the euromarket for years after its birth in the mid-1950s, partly in the hope that it’d go away and partly because the UK and American authorities didn’t want to draw attention to the vast acreages of cash being made by their financial elites.

By the time we’d noticed, it was too late. Banks were among the prime users of tax havens, which played a key role in the credit boom of the 1990s and 2000s. Michael Lewis in The Big Short even argues that the creation of the financial weapons of mass destruction that caused the crisis wouldn’t have been possible without the likes of Cayman and Bermuda.

Some have argued that some of the low-income secrecy jurisdictions benefit so much from their offshore status that it’d be wrong to dismantle them. I worked for two years in Vanuatu, one of Britain’s former colonial havens in the South Pacific. London’s intention when the country gained independence in 1979 was to establish a tax haven which opened for business toward the end of the working day in Hong Kong, four hours west.

All kinds of nefarious activity found its way to Vanuatu. An Indian businessman convinced the government to accept a fake diamond ruby as security for a loan (the last time I saw it, the  ‘diamond’ ruby, actually a lump of rock, was acting as a toilet-paper holder in the Department of Customs bathroom). The director of a local bank was jailed in the US for his involvement in an international lottery scam. A tax cheat was arrested on Vanuatu soil by the Australian Federal Police and last year jailed for eight years over a A$5 million fraud.  I remember him telling me he was a big fan of free trade. Little did I realise at the time quite what he meant.

The damage to Vanuatu’s reputation is huge. Foreigners often think of the country as a bit mickey-mouse, and as a result serious investment is severely curtailed. The absence of income tax creates appalling inequalities. Vanuatu has a Gini coefficient of 58, placing it among the 10 most unequal countries in the world.  None of this is worth the 10% that the financial industry is estimated to contribute to GDP.

Not only are tax havens harmful to their own people, but allowing companies the freedom to shift their cash offshore makes no sense for the global economy. During an economic downturn governments can’t easily spend more to stimulate demand if they are being held to ransom by the financial industry. Central banks can’t easily cut interest rates if commercial banks immediately just shift their cash elsewhere in search of higher returns. Today’s angst about the cost of financing government debt, as seen in the financial  travails of Portugal, Ireland, Italy, Greece and Spain, is exactly what the economist Keynes feared; it’s why he recommended controls on the movement of capital where necessary, and it’s why they were so prevalent until the 1970s. It’s also why he wanted a much stronger role for the International Monetary Fund and World Bank, which he hoped would help prohibit hot money flows and prevent a global race to the bottom in which countries tried to out-compete each other on tax.

The current financial system is constructed. It isn’t, as most theorists of globalisation suggest, the result of an inevitable and faceless century-long trend toward liberalisation. Britain built its network of secrecy jurisdictions on purpose, with the idea of putting London at the centre of global financial industry after the decline of the British empire. The United States leapt on to the wagon, and today a number of US states are in effect tax havens, notably Delaware, Nevada and Wyoming. These havens came into existence as part of a conscious strategy, not through an inexorable or uncontrollable process. The United States and Britain opposed a co-operative, controlled, post-war economic system because they stood to gain from financial deregulation.

Because the system was constructed in the first place, it can also be dismantled. The chances of this happening next week — or in the next few years — are limited because the world’s corporations and financial industries, literally, have so much invested in it. But it shouldn’t stop campaigners from bringing the issue to attention or enlightened politicians from discussing it at international talking shops. Tax havens make no economic sense, they helped cause the crash and they perpetuate inequality. They should be shut down.