Posts Tagged ‘tax havens’

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The premise and promise of the Republican tax cuts—officially, the Tax Cuts and Jobs Act—are that lower corporate taxes would lead to increased investment and thus more jobs and higher wages for American workers.

We all knew at the time that the logic was a sham. As I explained last August, one of the likely outcomes of the kind of corporate tax cuts Donald Trump and his fellow Republicans supported—and, as we saw, eventually rammed through—would be an increase in inequality. That’s because, since corporations aren’t facing any kind constraint in profits or their ability to borrow beyond their current profits, we likely wouldn’t see more investment, but instead some combination of more mergers and acquisitions, more payouts to shareholders, and more distributions of the surplus to CEOS.

More recently, I explained that inequality would also increase because corporations would likely use a portion of their higher profits to engage in stock buybacks, leading to an increase in stock prices. And stock ownership in the United States is already grotesquely unequal. Therefore, the rise in equity prices would disproportionately benefit the small group at the top of the wealth pyramid. And that’s exactly what is happening.

And that supposed increase in workers’ wages? Well, as it turns out, as Jeff Stein and Andrew Van Dam have shown, the hourly wages of regular (i.e., production and nonsupervisory) workers have actually fallen over the course of the past year. For those workers, average “real wages”—taking into account inflation—fell from $22.62 in May 2017 to $22.59 in May 2018.

As if that’s not enough to debunk the ludicrous claims of Trump, his economic advisers, and the Republicans who voted en masse for the tax cuts, there’s now an additional reason to cast doubt on the jobs and wages part of the selling of the tax cuts: close to 40 percent of multinational corporate profits are artificially booked in tax havens each year.*

That’s the conclusion of recent research by Thomas Tørsløv, Ludvig Wier, and Gabriel Zucman. And U.S. companies are among the most aggressive users of profit-shifting techniques, which often relocate paper profits without bringing jobs and wages. The research suggests the global trend toward lower corporate tax rates in major countries—including the recent U.S. reduction to 21 percent from 35 percent—won’t cause companies to alter their tax-avoidance moves. U.S. companies can still lower their tax bills significantly by shifting profits to places with effective tax rates between zero and 10 percent.**

It also means that cutting corporate tax rates, as the United States did at the end of 2017, is not likely to generate the positive effects on jobs and wages that the Republicans and the textbook economic models suggest. As Tørsløv et al. explain,

For wages to rise, productive capital needs to increase, which can happen fast if capital flows from abroad, much less so if paper profits—not productive capital—is what moves across countries. Second, profit shifting raises new challenges for tax policy. It reduces the effective rates paid by multinationals corporations compared to what local firms pay.

The fact is, the U.S. corporate tax cuts are a gigantic tax giveaway—to large corporations and the super rich—with no benefit to workers, even according to the trickledown logic of Trumpian economics.***

Clearly, the tax cuts are not about making America or American workers great again. In both design and implementation, they’ll only benefit employers and the tiny group of already-obscenely wealthy individuals at the top.

 

*”Multinational profits” include all the profits made by, say, Apple in France, Germany, Ireland, Jersey, and so on, but not by Apple in the United States (where its headquarters are located).

**Another implication of profit-shifting is that headline economic indicators—including Gross Domestic Product, corporate profits, trade balances, and corporate labor and capital shares—are significantly distorted. That’s because the flip side of the high profits recorded in tax havens is that output, net exports, and profits recorded in non-haven countries are too low.

***The Congressional Budget Office has concluded that, although the 2017 tax act includes a number of provisions that discourage profit shifting, it may encourage some additional profit shifting by exempting foreign dividends from U.S. taxation. On net, it projects the changes in tax law may reduce profit shifting by roughly $65 billion per year, on average, over the next 11 years. The CBO does note that “the effect of the tax act’s international provisions on profit shifting by multinational corporations is particularly uncertain”—because of the provisions’ complexity and because foreign governments might change their tax rules in response to the act. They should also have noted that any increase in booking profits in the United States rather than abroad represents a transfer of paper profits, not financial or productive capital.

 

 

US-2

According to the Tax Justice Network, the United States ranks second in the 2018 Financial Secrecy Index. This is based on a secrecy score of 59.8, which is practically unchanged from 2015. The only country ahead of the United States is Switzerland, with a secrecy score of 76. The rise of the United States continues a long-term trend, as the country was one of the few to increase their secrecy score in the 2015 index.

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The continued rise of the United States in the 2018 index comes on the back of a significant change in the U.S. share of the global market for offshore financial services. Between 2015 and 2018, the United States increased its market share by 14 percent. In total, the United States accounts for 22.3 percent of the global market in offshore financial services.

So, actually, we’re #1!

History

The United States has long been a secrecy jurisdiction or tax haven at the federal level. For example, the 1921 Revenue Act exempted interest income on bank deposits owned by non-US residents, and this was explicitly justified at the time as a measure to a attract (tax-evading) foreign capital to the United States.

Another factor influencing policy makers later on was the Vietnam War, which opened up growing external balance of payments deficits—after a long history of surpluses. The United States increasingly needed foreign loans to finance these deficits and it did so, in significant part, by a attracting the proceeds of tax evasion and other illicit foreign money. Foreigners invested in the United States for many reasons, not least the fact of the U.S. dollar being the global reserve currency—but secrecy and tax-free treatment were also key attractions.

Alongside this history of U.S. federal-level secrecy, individual U.S. states have been hosting the formation of secretive shell companies—especially as several states (such as Delaware, Wyoming, and Nevada) have engaged in a race to the bottom to outbid one other in offering ever more egregious secrecy facilities.

Here is how it works. A wealthy Ukrainian, say, sets up a Delaware shell company using a local company forma on agent. That Delaware agent will provide nominee officers and directors (typically lawyers) to serve as fronts for the real owners, and their details and photocopies of their passports can be made public but that gets you no closer to who the genuine Ukrainian owner of that company is: if the nominees are lawyers they are bound by attorney-client privilege not to reveal the information (if they even have it: the owner of that shell company may be another secretive shell company or trust somewhere else). The company can run millions through its bank account but nobody—whether domestic or foreign law enforcement—can crack through that form of secrecy in any efficient or effective way.

 

Tax Reform

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profits abroad

Thanks to the release of the so-called Paradise Papers, and the additional research conducted by Gabriel Zucman, Thomas Tørsløv, and Ludvig Wier, we know that a large share of the surplus captured by corporations is artificially shifted to tax havens all over the world. This, of course, is on top of the conspicuous tax evasion practiced by the individual holders of a large portion of the world’s wealth.

Thus, for example, U.S. multinational corporations now claim to generate 63 percent of all their foreign profits in six tax havens, the most prominent being the Netherlands, Bermuda and the Caribbean, and Ireland. This is 20 points more than in 2006.*

What this means is that, in the tax havens themselves, low tax rates can generate large tax revenues relative to the size of the economies. But it also means large multinational corporations can play off one tax have against others, and shift their profits to those with the most generous laws and regulations—as Apple has recently done, by relocating tens of billions of dollars from Ireland to the small island of Jersey (which typically does not tax corporate income and is largely exempt from European Union tax regulations).

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It also means that the putative home countries of the multinational corporations lose potential tax revenues, which means a larger tax burden is imposed on others, especially individuals and small businesses.

In the case of the United States, Zucman and his colleagues estimate that the United States loses almost 60 billion euros to tax havens (about three quarters from European Union tax havens and the rest from tax havens elsewhere), which amounts to about 25 percent of the corporate tax revenue it currently collects.

As Zucman explains,

Tax havens are a key driver of global inequality, because the main beneficiaries are the shareholders of the companies that use them to dodge taxes.

Clearly, the existing rules are such that large multinational corporations win twice: first, by capturing more and more surplus from their workers, whose wages have barely budged in recent decades; and second, by using tax havens to avoid paying taxes on a large portion of that surplus, thus shifting the tax burden onto workers at home.

 

*I created the charts in this post based on data that have been made publicly available by Zucman, Tørsløv, and Wier.

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paradisepapers

The release of the so-called Paradise Papers confirms, with additional names and more salacious details, what we already knew from the Panama Papers and other sources: the world’s wealthy increasingly use offshore tax havens to engage in conspicuous tax evasion.

That’s on top of their participation in conspicuous consumption, conspicuous philanthropy, and conspicuous productivity.

According to Annette Alstadsæter, Niels Johannesen, and Gabriel Zucman, in a study published before the release of the Paradise Papers, the equivalent of 10 percent of world GDP is held in tax havens globally—and that’s only counting bank deposits, not the portfolios of equities, bonds, and mutual fund shares that wealthy individuals entrust to offshore banks.

And, as it turns out, offshore wealth is extremely concentrated: the top 0.1 percent of richest households own about 80 percent of it, while the top 0.01 percent own about 50 percent of offshore wealth.

So, how does it work? There is a great deal of evidence that the vast majority of offshore wealth, both legal and illegal, is not reported on tax returns. That’s because offshore wealth is done “by combining trusts, foundations, and holding companies, so as to disconnect assets from their beneficial owners.” Thus, tax authorities won’t be able to observe or collect taxes on either the wealth or investment income earned or reported offshore, except in rare circumstances (e.g., a taxable and properly declared inter-generational transfer of assets).

That means the tax burden is shifted onto the rest of us who don’t hold offshore wealth and aren’t able to—or choose not to—engage in conspicuous tax evasion.

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Not surprisingly, accounting for offshore assets increases the top 0.01 percent wealth share substantially. However, the magnitude of the effect varies a lot across countries.

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In Scandinavia (Norway, Sweden, and Denmark, the blue lines in the charts above), which does not use tax havens extensively, the top 0.01 percent wealth share rises from about 4 percent to around 5 percent. Offshore holdings have a much larger effect on wealth inequality in Europe (the United Kingdom, France, and Spain, the red lines), where by the estimates of Alstadsæter et al. 30-40 percent of the wealth of the 0.01 percent of richest households is held abroad.

In the United States (the green lines in the charts), offshore wealth also increases inequality but the effect is much more muted than in Europe. That’s only because the U.S. top wealth share is already very high—9.9 percent, without offshore wealth in 2010, compared to 11.1 percent when offshore wealth is included.

Clearly, the world’s wealthiest individuals—including those who call Scandinavia, Europe, and the United States home—have plenty of opportunities via their offshore paradises to engage in conspicuous tax evasion.