Kenneth P. Thomas is Professor of Political Science and Fellow in the Center for International Studies at the University of Missouri-St. Louis. He is the author of "Competing for Capital: Europe and North America in a Global Era" and "Investment Incentives and the Global Competition for Capital." He blogs at Middle Class Political Economist.
The 2012 election gave us a bumper crop of stories about tax havens due to Mitt Romney’s putting funds in Switzerland, the Cayman Islands, Bermuda, and Luxembourg. The Obama campaign gave us a handy map showing their locations (plus, inexplicably, Australia and Germany, which are not tax havens).
Tax havens are a big business. According to the most recent estimate from the Tax Justice Network, the amount of money stashed in secrecy jurisdictions is anywhere from $21 trillion to $32 trillion, or as much as twice U.S. gross domestic product (GDP). James Henry, former Chief Economist of McKinsey & Company, wrote the report, and estimated very conservatively that this costs governments $189 billion in taxes every year, using the lower figure and just a 3 percent rate of return and a 30 percent tax rate.
Using the higher $32 trillion figure and a 6 percent rate of return would give you an estimate of $576 billion per year. This is not small change.
For every dollar in lost taxation due to evasion, there has to be a corresponding increase in someone else’s taxation, reduced government services, or increased government deficits. The dynamic is precisely the same as occurs in response to the use of business subsidies.
However, the tide is starting to turn on tax havens. When I first became interested in the issue about 10 years ago, almost all tax expertise was held by the tax haven enablers, the bankers, accountants and tax attorneys who concoct the various tax shelters and dodges of varying degrees of legality. By contrast, in the non-corporate sector, you would see an occasional report by British non-governmental organizations like Oxfam or Christian Aid with relatively low levels of sophistication about tax evasion and tax avoidance.
Now, though, there has been sustained study by various academics, journalists, and a few renegade accountants, leveling the expertise playing field to some extent. One of the biggest developments on the information front has been a gigantic investigation by the International Consortium of Investigative Journalists (ICIJ), which includes reporters from the Guardian, the Washington Post, the BBC, the Canadian Broadcasting Corporation, and scores of other media organizations around the world.
ICIJ’s efforts have now seen their first fruits, with a series of articles exposing the names of beneficial owners of over 100,000 offshore companies and trusts. Keep an eye on the ICIJ’s site, as new articles are being posted daily.
In addition, there have been pathbreaking government investigations: the Germans paying an informant for the names of bank clients in Liechtenstein and U.S. criminal indictments of Swiss banks UBS and Wegelin, among others, leading to breaches in Swiss bank secrecy. Moreover, under the Foreign Account Tax Compliance Act (FATCA), it appears that the U.S. has cracked Luxembourg’s bank secrecy as well.
But for all the U.S. efforts to stamp out bank secrecy and tax evasion, U.S. states make possible some of the worst kinds of abuses out there. Nicholas Shaxson (via TPM) wrote about how Romney’s Bain Capital set up business structures that let foreigners use the United States as a tax haven. Australian political scientist Jason Sharman (h/t Robert Kudrle) was able to set up completely anonymous corporations in the U.S. and even get anonymous bank accounts, meaning that they could never be traced back to him because the state and the banks did not require any positive identification.
Nevada, Delaware, and Wyoming in particular were very lax, although Wyoming tightened its laws in the period he was trying to purchase a limited liability corporation with an associated bank account. But he was able to incorporate and get an anonymous bank account in Nevada.
So the United States is certainly right to be putting pressure on tax havens like Switzerland and Luxembourg, but it leaves itself open to charges of hypocrisy as long as renegade states can make even more brazen tax evasion possible. It’s time to clean house here as well as abroad.