Tax havens: natural – and inescapable – products of capitalism

Posted: April 9, 2016 by Admin in Banking and financial services, capitalist crisis, Capitalist ideology, Class Matters, Commodification, Cover ups, Economics, Imperialism and anti-imperialism, World economy

This article originally appeared on Redline in August 2103 (thus, for instance, the June referred to in the intro top is June 2013).  We’re running it again because it gives a good account of how, far from being an aberration, tax havens are integral to the operations of capital(ism) today:

Back in June, an article in the NZ Herald by Anna Leask and Jared Savage noted, “Many Kiwis with assets of more than $50m declared income of less than $70,000 in their tax returns”.  Furthermore, they reported, “Two-thirds of New Zealand’s richest people are not paying the top personal tax rate, with increasingly complex overseas schemes and bank accounts being used to evade the taxman.”  An extraordinary 6,800 tax-planning devices, including tax havens, were used by these super-rich to avoid tax.  In terms of what capitalists internationally are keeping away from the eyes of tax departments, University of Auckland tax specialist Michael Littlewood told the Herald that as much as $NZ36 trillion could be hiding in tax havens around the world.  The article below, from the US Marxist group Spark, looks at the rise and function of tax havens and how they are a natural product of capitalism.

20120723tax-havensWhen he finally admitted to having secretly stashed away a nest egg in a Swiss bank account, France’s former Budget Minister Jérôme Cahuzac put the question of tax havens onto the international stage. The same man who tried to make French workers buy into the government’s austerity policies, citing the “absolute necessity” to balance the state’s budget, had found a way of escaping the scrutiny of his own services. The taxman was also a tax cheat. His blatant cynicism was shocking to be sure, but it came as no surprise. In France, as in the U.S. and every other capitalist country, paying little tax or even no tax at all on the return on capital is one of the favourite sports of bourgeois people, big or small.

There is no shortage of choices for capital owners who want to avoid paying taxes. They do not have to set up complicated and risky plans to do so. A genuine army of lawyers and bankers have specialized in “wealth management” and know all about the better schemes: profitable non-taxable investments, “offshore” investments in fictitious companies that don’t manufacture anything, etc. A lot of wealth managing companies are based on islands in the middle of the Pacific (or Atlantic) ocean, in spots where their bourgeois clients will probably never go, and won’t need to go, since all transactions are mere entries into the company’s accounting records.

imagesHowever, the impact of tax havens on the global economy is far from being limited to their role as a safe where the wealthy can stash part of their fortune. The whole capitalist system is involved and deals with them. The really wealthy send millions of dollars or euros to Switzerland, the Cayman Islands, Singapore, Hong Kong, the Channel Islands (Jersey and Guernsey), and so on. But so does every multinational conglomerate and every world-class bank. They all make use of these zones where no state worthy of the name intervenes. They use these “zones” to escape the taxman, but also to shrug off the limitations – however small they may be – imposed on financial transactions in the big capitalist centres. In the mid-1990s, the International Monetary Fund (IMF) published a rare booklet, in which it acknowledged the fact that half the international financial flows went through tax havens. And the situation is said to be similar today, if not worse.

The Cayman Islands being mere dots on the map, they don’t owe their status as a global financial hub to their “state” power. Their status is simply based on the complacency of the big capitalist states. Those states hypocritically pretend to be fighting against tax havens. Admittedly, they would like to get back some of the tax money that regularly escapes and to have a better knowledge of the money flows going in and out of countless fictitious companies that proliferate in the so-called “offshore” centres. But the big capitalist states are fundamentally at the service of their own financiers. And financiers are very fond of these zones because they can use, misuse and abuse a situation in which there are practically no controls or regulations. They use these zones with the full knowledge that tax havens have become a pivotal part of the global financial instability.

The Bourgeoisie, Big and Small, Manages to Escape the Taxman

Before examining the tax evasion system of wealthy capital owners, let us say that the U.S. itself could justifiably be called a tax haven. Beyond the official tax rates (on high wages, on corporate profits, on a person’s property, etc.), there are many tax shelters which allow the wealthy to considerably alleviate the tax burden. The U.S. General Accounting Office has estimated that the state’s loss of income due to the existence of these “shelters” totalled some 180 billion dollars last year – just for the loopholes built into the individual income tax code, not counting corporate tax shelters.

This is done legally – though not always. The complexity of the tax exemption system is such that it is at times almost impossible to decide what is legal and what is not – not to mention the fact that there are fewer and fewer audits on upper income and corporate taxes.

But these domestic tax loopholes complement the offshore tax havens, with the wealthy getting the best of both worlds.

Investing one’s fortune in a foreign country to keep the tax administration away is nothing new. The anonymity of Swiss bank accounts goes back to the end of the 19th century. This feature of the Swiss banks became very profitable with the development of the income tax in the U.S. and other countries, and with the economic instability of the 1920s and 1930s. Switzerland attracted huge amounts of money from France, Italy, Austria, Germany, etc., and rapidly became an important financial centre. Its banking secrecy was reinforced by a 1934 law which decreed that circulating information concerning the bank’s clients, including foreign nationals, was a crime. This law was the first of its kind, but has often been imitated by various tax havens. Almost a century later, the Swiss expertise in wealth management is still recognized. Switzerland’s share of this global market is almost 30%! Then, there’s Singapore, which attracts wealthy Japanese, but, also, more and more European capital owners.

The list of the 300 biggest fortunes of Switzerland includes a high proportion of people who belong to Europe’s top bourgeois circles, like the Wertheimer family (owners of Chanel), Benjamin de Rothschild, the Peugeot family, the Bich family (owners of Bic), the heirs of Robert LouisDreyfus, etc. These people are euro-billionaires based only on their official bank deposits.

Tax evasion is not a monopoly of the very top layers of the bourgeois class. Hundreds or rather thousands of bourgeois people, whether rich or simply betteroff, want their share of the cake and more. All together, they are the breeding ground where the so-called “specialized” banks hope to develop their clientele. These banks all have a public relations department that specializes in the organization of social events. They rent concert halls or organize competitions like the UBS Golf Trophy. Then, they invite the “fashionable society” to attend. Or they rent boxes for prestigious tournaments like the French Tennis Open, offering box seats to their prospective clients and members of the “crème de la crème.” UBS’s Sports and Entertainment Group has a several-million-euro budget – just to attract clients interested in avoiding taxes.

Swiss banks are not the only ones to offer tax evasion schemes to their clients. If UBS has a branch in France, the French bank Crédit Agricole has a branch of its own in Switzerland. It has more branches in Hong Kong and Singapore, as we learned from the report that was recently published by OffshoreLeaks, an international consortium of investigative journalists. And a U.S. government report from 2008 found that JPMorgan Chase had established 50 subsidiaries in tax havens like Bermuda and the Bahamas to service its U.S. clients. At the same time, it established multiple schemes to attract clients from South America, along with their capital – bringing their holdings into the U.S. in schemes to evade the tax laws in their countries. And we shouldn’t forget the intricate role played by JPMorgan in the Enron affair.

Despite the thunderous declarations by heads of state vituperating against tax evasion, nothing serious has ever been done about it. The problems that regularly drive certain states to attack the banks that organize tax evasion are usually solved with the payment of a fine that corresponds to a share of the taxes that were not paid to the plaintiff state. The states never target the biggest tax evaders – on the contrary, they cover for them. The OffshoreLeaks report details how most of the prosecution in the U.S. has been against drug dealers, supposed “terrorists,” and a few of the most egregious con men – people like Bernard Madoff, who defrauded the wealthy in complicated Ponzi schemes.

Not only have the major capitalist states covered for the wealthy tax evaders, they cover for the tax havens, too! In 2009, the twenty biggest capitalist countries established their own list of tax havens. The G20 trimmed its so-called “black list,” limiting it to only four countries: Costa Rica, Malaysia, the Philippines and Uruguay. The “grey list” had also been shortened. Because of the pressures exerted by some G20 members, Hong Kong as well as Jersey and Guernsey were no longer on the list. The role played by tax havens in the global economy is much too important to allow states to launch anything but symbolic attacks on the system.

The Multinationals and Tax Optimization

Every big industrial and financial conglomerate is into what is called “tax optimization.” Optimizing is carried out quite simply: a subsidiary is set up in a country where the taxes on corporate profits are close to nil, and the bulk of the conglomerate’s overall profits are declared by its subsidiary in the tax haven. Almost every sizeable U.S. company has its own subsidiary. Tax havens harbour tens if not hundreds of such “subsidiaries” belonging to the banks, but also to industrial companies. Of the nation’s 100 top publicly traded companies, 83 have established shell corporations in tax havens, for no other purpose than to shift much of their profits out from underneath the U.S. tax system.

According to James S. Henry, chief economist for the McKinsey company, and a tax haven specialist, tax havens are currently “hiding” an estimated total of 2.1 to 3.2 trillion dollars from the tax authorities around the world. On average, more than one trillion dollars transit each month through the Cayman Islands. This amount of money transfers makes this small Caribbean archipelago, inhabited by only 44,000 people, the sixth largest financial hub in the world!

Tax optimizers have themselves become financial giants. The leaders of the sector, called the Big Four, are Deloitte Touch Tohmatsu, PriceWaterhouseCoopers, KPMG and Ernst & Young. They employ some 700,000 specialists in 150 countries and their 2011 turnover totalled $US100 billion. One of them ran an ad promising prospective clients that they could completely escape paying any taxes against a 30% commission on the money thus spared.

Their clients are global companies like Google, Starbucks, Apple, Amazon, eBay, Pfizer, Merck, Johnson & Johnson, Vodafone, Microsoft, CocaCola, Pepsi, etc. Officially, the Big Four have nothing to do with tax evasion. They are not tax bandits and have a good reputation. They simply know the tax havens inside and out. Thanks to Ernst & Young, Google was able to bring the tax rate on profits made outside the United States to less than 3%, via two Irish subsidiaries and a Dutch affiliate based in the Bermudas, where there are no corporate taxes. Of course, the Big Four don’t forget to apply their tax evasion recipes to themselves. KPMG for one is organized as a network of independent societies, whose parent company is based in the Swiss canton of Zug, which has one of the most favorable tax systems in Switzerland.

The French oil giant Total is a significant illustration of what has been happening. In 2011, Total, France’s biggest company, paid no income tax at all. As a justification, Total declared that most of its profits were made in foreign countries. In fact, Total’s operations “abroad” more often than not involve buying and selling to and from Total subsidiaries in tax havens. These “offshore” activities and the back and forth transfers of capital involved are completely opaque. A good deal end up being accounted for as “investments in foreign countries” or “from foreign countries” while they are in fact capital owned by Total and circulating inside the company, including its branches in tax havens. A 2009 survey by the state-owned Banque de France showed that if you include the back and forth transfers to and from tax havens, the biggest “foreign” investors in France are … the French multinationals through their branches in tax havens.

The big conglomerates are practically allowed to pay no taxes, with full impunity. In the U.S. , the top tax rate on corporate profits stands at 35%. But globally, the average rate paid by the Fortune 500 companies averaged only 12.6% in 2011, the lowest it has been since before World War I. And this is only an average, hiding the fact that many of the most profitable companies paid no taxes at all. Over four years time, from 2008 to 2011, 111 of the 280 largest companies paid an average 4.6%, 67 more averaged 0% over three years, and 26 averaged a minus 6.7%, that is, the government paid them at tax time. GE averaged a minus 17%!

Tax Havens in the Centre of the Economy’s Financialization – with the Connivance of State Authorities

Historically, the Cayman Islands were granted the privilege of owing no taxes to the crown of England in 1794. This decision was the English King’s way of thanking local fishermen for rescuing stranded British ships. But the Cayman Islands only very recently became a global financial hub.

For a number of decades, tax havens have been playing an ever increasing role in the global economy. This is due not only to the development of tax evasion and has far-reaching consequences. Tax havens have been around since the end of the 19th or the beginning of the 20th century. Each big capitalist state had its own haven or havens that allowed the big corporations and wealthy individuals to escape the taxman. In Europe, Luxembourg played that role for Switzerland, Delaware did the same for the United States. Since the 1950s, tax havens have developed tremendously, along with offshore finance, as an element of what economists have called the financialization of the economy.

One of the first manifestations of the global economy’s financialization was the Eurodollar market. According to the international monetary system set up at Bretton Woods in 1944, the U.S. dollar was the only currency that could be converted into gold. The value of all other currencies was defined in relation to the dollar. The U.S. dollar became the reference for international trade. As international exchanges developed, the quantity of dollars injected into the economy grew tremendously. More and more dollars were in the hands of corporate managers or foreign states outside the United States.

In 1957, London’s City (which had lost its pre-eminent role in the world’s financial circles to the growing domination by the U.S.) decided to put their financial knowhow to good use, creating the Eurodollar market. The Bank of England, that is, the British state, allowed financial transactions between non-residents to be carried out in London in a different currency than the British pound, without any control and any regulation by any official authority.

It was inside the framework of this market that all the big international banks developed the first speculative attacks on different currencies, buying without difficulty and without any limits all the dollars necessary to do it. At the same time, the international financial companies started using many islands of the ex-British Empire, exempt from any taxes, as a base for their headquarters or related work premises. New financial centers mushroomed in areas that were more or less remote from London but permanently connected to the City’s Eurodollar market.

In the mid1960s, big U.S. Banks like Citibank, Chase Manhattan and Bank of America developed an interest for the Eurodollar market. They realized that nothing compelled them to set up a London branch to engage in this market. Instead, they could be treated like any other bank by the City if they established themselves in former British colonies of the Caribbean – like the Bahamas, Bermudas or the Cayman Islands, which presented the advantage of being in the same time zone as the East Coast of the United States, or near to it.

Huge speculative profits were made. Every state, including the wealthiest of them all, the United States, submitted themselves to the interests of financial capital, even if by doing so they were helping to build a genuine time bomb. In the absence of any kind of state control, the general unbridled monetary speculation began to cause bankruptcies that threatened the rest of the economy. The United States was already printing out billions of dollars to finance its military expeditions and outright wars (beginning with the Viet Nam war). The Eurodollar market, escaping the control of the U.S. Central Bank, added its own dollars to what was already circulating.

The rest belongs to history. The speculation on currencies turned back against the dollar, and in 1971 the U.S. Government was obliged to suspend the dollar’s convertibility into gold. In 1973, the Bretton Woods system collapsed and every currency started “floating” – that is, had an exchange value which varied from currency to currency. The permanently changing exchange rates created ideal conditions for speculation without any limitations and a generalized monetary inflation. The capitalist economy entered a phase of deep recession, with the development of massive unemployment.

Over the years, financialization and tax havens have known a permanent and simultaneous development. State authorities accepted the fact and adapted their policies to this avatar of capitalism. They abandoned the traditional rules and controls that financiers themselves had set up decades ago to monitor the capitalist economy and help it recover after the Great Depression of 1929 and World War II. They did not fight against the establishment of tax havens; in fact, they tried to imitate them! They lowered the tax rates on profits, developed all kinds of tax shelters and suppressed what was left of yesterday’s anti-speculative regulations. Under the pretext of allowing capital to freely go anywhere, they opened new perspectives for speculation – and increased the risk of a global catastrophe.

For almost 50 years now, tax havens have played the role of an outpost for the world of finance. They have been used as a lever with which the world-class banks and their clients (in other words, the bourgeoisie as a whole) has brought pressure to bear on state authorities. The authorities in question said yes to every demand, pretending they were fighting the so-called “shadow banking.” The capitalists were using the tax havens to re-dispatch their capital and continue to make money without any constraints. But in so doing, they also aggravated the instability of their own system.

It was no accident that, during the financial crisis of 2008, the panic that swept global finance came from the big banks’ branches in the tax havens. Banks like Northern Rock, Bear Stearns and Lehman Brothers were dragged down into bankruptcy by their subsidiaries in the Isle of Jersey, the Cayman Islands or the British Virgin Islands. During the international conferences organized in the wake of the crisis, the heads of state tried to reassure the population, and they all agreed to sing the same antitax-haven hymn. And nothing else.

At the base of the capitalist economy is the search for the biggest profit possible. In the framework of this economy, no regulation passed in the name of the common good, even the good of the system itself, will be allowed to stand in the way of this appetite for profit.

Fundamentally, the fight against tax havens falls into the same category of wishful thinking as the fight for a “regulated” capitalism. It is a sweet daydream. Tax havens are at the heart of the financialization of capitalist economy. This financialization of the economy is simply how the system has been working for more than 40 years, constantly aggravated. Financialization developed because of the lack of sufficiently profitable productive investments starting especially in the 1970s. Searching for better returns for their money, the big companies and conglomerates aggravated financial speculation. This all-out speculation in turn smothered production, by aggravating the parasitic nature of the capitalist class as a whole. Capitalism is not the victim of an illness that could be cured by a proper international legislation for financial exchanges. Capitalism simply suffers from incurable senility.

Regulate the Banks? No, Seize Them!

For the workers, the problem is not to fight against the existence of tax havens. If, by some miracle, state authorities were capable of getting rid of them, this would not advance the cause of the exploited masses. The problems that arise between the bourgeois class and the state machines at their service are of no concern to the working class. The owners of capital may use tax havens to hide part of their wealth from the taxman. But the bourgeoisie has no need of tax havens to cover up all the ways and means it uses to get richer and richer. The opacity of the banks’ operations and commercial secrets are much more essential.

When the working class, through its mobilization and its consciousness of its own interests, finally takes the measure of what it must do to reorient society as a whole, the post office box addresses of the banks’ branches on one or another tropical island won’t be important. The workers will storm the headquarters. Behind the sprawling tentacles of the global financial system are a couple dozen humongous banks. And the centers of decision for these banks are all to be found in the big imperialist states. They are within the reach of the hundreds of thousands of bank employees and of the millions of workers exploited by the capital controlled by those banks. It is only by seizing those banks that the working class will have the means to render the entire economy transparent, and to control it. Tax havens would then disappear … but that would be something very secondary, maybe not even noticed.

The above article first appeared on the Spark site, here;  see also the Redline article, Understanding GST and tax policy

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