'Elites' Have $21 TRILLION in Hidden Wealth
Posted by Mike Tirone - Monday, July 23rd, 2012 http://www.wealthwire.com/news/economy/3550?r=1
“The problem here is that the assets of these countries are held by a small number of wealthy individuals while the debts are shouldered by the ordinary people of these countries through their governments.”
This sentence is describing the 0.001% of the world's population, and it comes from the report titled The Price of Offshore Revisited, by James Henry, an expert of tax havens and also former chief economist at consultancy McKinsey.
The report exposes the global super-rich elite have taken advantage of the tax havens available throughout the world. So much so that this exploitation of gaps in offshore tax rules has hid a massive £13 trillion ($21 trillion) of wealth from several nations.
That total figure is nearly as much as the Japanese and American GDPs combined.
The research was commissioned by the campaign group Tax Justice Network and the report – which shows that at least £13 trillion, but potentially up to £20 trillion ($31 trillion), has flooded out of many countries-- was released exclusively to the Observer.
Secretive jurisdictions such as Switzerland and the Cayman Islands are well-known tax havens that have plenty of help from private banks, which try to attract the assets of these “high net-worth individuals.”
Henry explains in the report that these individuals' wealth is, “protected by a highly paid, industrious bevy of professional enablers in the private banking, legal, accounting and investment industries taking advantage of the increasingly borderless, frictionless global economy."
The report does not bode well for the global private banking sector's already tarnished image, as the top 10 private banks managed more than $6 trillion in 2010 alone, a heavy rise from just $2.3 trillion from five years earlier. Of those ten banks were UBS, Credit Suisse in Switzerland, and U.S. investment bank Goldman Sachs.
The determent that developing countries have endured could have been severely lessened if this immensely large amount of wealth had not been flowing out of their respective countries, the report indicates.
From the Guardian,
“The detailed analysis in the report, compiled using data from a range of sources, including the Bank of International Settlements and the International Monetary Fund, suggests that for many developing countries the cumulative value of the capital that has flowed out of their economies since the 1970s would be more than enough to pay off their debts to the rest of the world.”
Countries with much of its wealth hailing from the oil-rich lands within their borders have especially been effected by these offshore havens. Thanks to those countries' internationally mobile elite --ones whom have financial ties and investments around the world-- have taken advantage of the oil-rich states by spreading their wealth over to offshore bank accounts instead of being invested domestically. The report shows that once the returns on investing the hidden assets is included, countries like Russia, Saudi Arabia and Nigeria have watched their economies stripped of billions of dollars.
Since the early 1990s, when Russia's economy opened up, almost $775 billion has disappeared from its economy. With Saudi Arabia, nearly $305 billion has vanished since the mid-1970s and $303 billion from Nigeria.
Henry's calculations show that $9.7 trillion of assets is owned by only 92,000 people, which make up the 0.001% of the world's population. According to the Guardian, this incredibly small class of the mega-wealthy seem to have more in common with each other than those at the bottom of the income scale in their own societies.He noted that "the sheer size of the cash pile sitting out of reach of tax authorities is so great that it suggests standard measures of inequality radically underestimate the true gap between rich and poor.”
Tax Justice Network's John Christensen says “These estimates reveal a staggering failure: inequality is much, much worse than official statistics show, but politicians are still relying on trickle-down to transfer wealth to poorer people. People on the street have no illusions about how unfair the situation has become.”
Now the question being asked is 'can we turn this large pile of cash into a beneficial rescue plan for the dire global economy? '
The United Kingdom's Trade Union Congress' general secretary, Brendan Barber explains that, “Closing down the tax loophole exploited by multinationals and the super-rich to avoid paying their fair share will reduce the deficit. This way the government can focus on stimulating the economy, rather than squeezing the life out of it with cuts and tax rises for the 99% of people who aren't rich enough to avoid paying their taxes.”
The possibilities of how that large pile of assets could be divvied up has grown to calculating that $21 million with an annual average 3% earning for its owners and then having the government tax that income at 30%. The total would generate nearly $187 billion in revenues, which is more than rich countries annually spend on aid to the developing world.
Within the entire community of tax avoiders, the key to all of this money's flow ties around one thing and Henry explains, “The very existence of the global offshore industry, and the tax-free status of the enormous sums invested by their wealthy clients, is predicated on secrecy.”
This economic inequality has continued to prove to be a societal issue, as the super-rich elite are accused of not caring about those in the majority, the lower class global citizens, but also that they do not want to pay for the amenities and benefits that government taxes within their home country provide.
But this secrecy and checks-and-balancing may be a step closer. This weekend the U.K. announced that this week the Treasury will enforce a crackdown on tax avoidance schemes. Promoters of aggressive tax avoidance schemes, like the one of comedian Jimmy Carr's 1% tax on his income (which stirred the issue), may be forced to disclose client lists to inspectors. It is said that the scheme operators will be “named and shamed” and under the reforms, a promoter who has been penalized for not complying with the rules will have to give additional information to the proper revenue and customs authorities on all of their schemes, not just for the one they were reprimanded for.
Tax avoiders may be 'named and shamed' by HMRC
Treasury's proposed crackdown comes in the wake of the row over comedian Jimmy Carr's tax affairs
Jimmy Carr found himself at the centre of criticism about K2, a legal tax scheme. Photograph: Ian West/PA
The Treasury will announce a crackdown on tax avoidance schemes on Monday in the wake of the row over the tax affairs of the comedian Jimmy Carr.
Promoters of aggressive tax avoidance schemes may be forced to disclose client lists to inspectors, according to David Gauke, the minister with responsibility for tax matters.
It follows revelations about the financial loopholes used by the rich and famous to legally sidestep large tax bills. In one scheme, Carr was paying 1% tax on his income.
The plan, which is going out to consultation, has been greeted with scepticism by Labour. One shadow minister said the Tories were so closely associated with tax avoiders they would not have the political will necessary to change the tax system.
Gauke will tell the Policy Exchange thinktank that scheme operators will be "named and shamed" for sharp practice.
Officials often hit a dead end when investigating schemes that are based offshore but, under the proposals, UK promoters will be made to hand over customer databases. That information will be used to formally warn clients about the deals they have signed up to and to work out how much the amount of tax they would owe if the scheme failed.
Under the reforms, a promoter who has been penalised for not complying with the rules will also have to provide extra information to HM Revenue & Customs (HMRC) on all of their schemes, not just the one they were reprimanded for.
Gauke will say: "We are building on the work we have already done to make life difficult for those who artificially and aggressively reduce their tax bill.
These schemes damage our ability to fund public services and provide support to those who need it. They harm businesses by distorting competition. They damage public confidence and they undermine the actions of the vast majority of taxpayers, who pay more in tax as a consequence of others enjoying a free ride."
HMRC is also looking at formally requiring individuals, as well as firms, to comply with the rules, which would help it when a firm is dissolved or moved offshore, or an individual promoter moves from firm to firm.
Last month, Carr found himself at the centre of criticism about K2, a legal scheme that allows its members to pay income tax of as little as 1%.
Carr, 39, reportedly used the scheme to shelter £3.3m a year, channelling money from DVD sales and television appearances into a company that gave him back "loans" which are not subject to tax. The comedian later apologised for his "terrible error of judgment" in using a tax avoidance scheme.
Gauke's announcement at Policy Exchange comes a day after one of the thinktank's trustees was disclosed to have been involved in an aggressive tax avoidance scheme. The Mail on Sunday reported that Conservative donor George Robinson had been ordered to pay back millions of pounds in tax after a judge ruled against the tax scheme.
Simon Danczuk, the Labour MP for Rochdale, said: "It tells you everything you need to know about this government that ministers have chosen to give a speech on tax avoidance at an organisation whose trustee, the Conservative donor George Robinson, has just been found to have used an offshore avoidance scheme and had to pay back millions of pounds.
"With billions of pounds estimated to be lost each year, this government is failing to tackle tax avoidance, while also giving a tax cut to millionaires. How can it be fair to cut taxes for the very richest while ordinary families, pensioners and businesses are feeling the brunt of this double-dip recession?" he said.
Tax avoidance represents nearly 14% of the UK tax gap, according to the Treasury.
TAX HAVENS CAUSE POVERTY
The Tax Justice Network promotes transparency in international finance and opposes secrecy. We support a level playing field on tax and we oppose loopholes and distortions in tax and regulation, and the abuses that flow from them. We promote tax compliance and we oppose tax evasion, tax avoidance, and all the mechanisms that enable owners and controllers of wealth to escape their responsibilities to the societies on which they and their wealth depend. Tax havens, or secrecy jurisdictions as we prefer to call them, lie at the centre of our concerns, and we oppose them.
Take a look at our core themes:
- We support sustainable finance for development
- We support international co-operation on tax, regulation and crime
- We oppose tax havens and offshore finance
- We support transparency and we oppose corruption
- We support a level playing field in competitive markets
- We support progressive and equitable taxation
- We support corporate responsibility and accountability
- We support tax compliance and a culture of responsbility
These issues affect rich and poor countries, and, like the fight against corruption, our approach does not fit easily into either of the old political categories of left and right. We do not argue generally for high or low taxes (that is for voters to decide) but we note the often better human development outcomes in higher-tax countries and oppose the demonisation of tax that is fashionable in some circles. What we do support is progressive and equitable taxation, which is what voters around the world have chosen. We wish to see nations’ sovereignty restored, so that electorates are given back the power to get the tax systems they vote for. To this end we advocate much stronger co-operation between states on tax and regulation. This will help us address the growing tension between global integration and a shortage of credible international governance.
For more details, see "Resources," to the left of this page.
Who are we?
The Tax Justice Network is led by economists, tax and financial professionals, accountants, lawyers, academics and writers, and we are driven by original research and ideas. We are supported by a growing community of individuals, economists, faith groups, non-governmental organisations, academics, lawyers, trade unions -- and many others. (Read more)
Why tax and tax havens?
Tax is the foundation of good government and a key to the wealth or poverty of nations. Yet it is under attack. These places allow big companies and wealthy individuals to benefit from the onshore benefits of tax – like good infrastructure, education and the rule of law – while using the offshore world to escape their responsibilities to pay for it. The rest of us shoulder the burden.
Tax havens offer not only low or zero taxes, but something broader. What they do is to provide facilities for people or entities to get around the rules, laws and regulations of other jurisdictions, using secrecy as their prime tool. We therefore often prefer the term "secrecy jurisdiction" instead of the more popular "tax haven."
The corrupted international infrastructure allowing élites to escape tax and regulation is also widely used by criminals and terrorists. As a result, tax havens are heightening inequality and poverty, corroding democracy, distorting markets, undermining financial and other regulation and curbing economic growth, accelerating capital flight from poor countries, and promoting corruption and crime around the world.
The offshore system is a blind spot in international economics and in our understanding of the world. The issues are multi-faceted, and tax havens are steeped in secrecy and complexity – which helps explain why so few people have woken up to the scandal of offshore, and why civil society has been almost silent on international taxation for so long. We seek to supply expertise and analysis to help open tax havens up to proper scrutiny at last, and to make the issues understandable by all.
The fight against tax havens is one of the great challenges of our age. Our approach challenges basic tenets of traditional economic theory and opens new fields of analysis on a diverse array of important issues such as foreign aid, capital flight, corruption, climate change, corporate responsibility, political governance, hedge funds, inequality, morality – and much more. (Read more in Part II of our Manifesto for Tax Justice)
How big is the problem, and what is its nature?
Assets held offshore, beyond the reach of effective taxation, are equal to about a third of total global assets. Over half of all world trade passes through tax havens. Developing countries lose revenues far greater than annual aid flows.We estimate that the amount of funds held offshore by individuals is about $11.5 trillion – with a resulting annual loss of tax revenue on the income from these assets of about 250 billion dollars. This is five times what the World Bank estimated in 2002 was needed to address the UN Millenium Development Goal of halving world poverty by 2015. This much money could also pay to transform the world’s energy infrastructure to tackle climate change. In 2007 the World Bank has endorsed estimates by Global Financial Integrity (GFI) that the cross-border flow of the global proceeds from criminal activities, corruption, and tax evasion at US$1-1.6 trillion per year, half from developing and transitional economies. In 2009 GFI's updated researchestimated that the annual cross-border flows from developing countries alone amounts to approximately US$850 billion - US$1.1 trillion per year.
Offshore finance is not only based in islands and small states: `offshore’ has become an insidious growth within the entire global system of finance. The largest financial centres such as London and New York, and countries like Switzerland and Singapore, offer secrecy and other special advantages to attract foreign capital flows. As corrupt dictators and other élites strip their countries’ financial assets and relocate them to these financial centres, developing countries’ economies are deprived of local investment capital and their governments are denied desperately needed tax revenues. This helps capital flow not from capital-rich countries to poor ones, as traditional economic theories might predict, but, perversely, in the other direction.
Countries that lose tax revenues become more dependent on foreign aid. Recent research has shown, for example, that sub-Saharan Africa is a net creditor to the rest of the world in the sense that external assets, measured by the stock of capital flight, exceed external liabilities, as measured by the stock of external debt. The difference is that while the assets are in private hands, the liabilities are the public debts of African governments and their people. (Read more)
Globalisation and international trade and finance have got a bad name of late. Each brings opportunities, and risks. We must now start to address seriously what may be the biggest risk of all: tax abuse, and tax havens and everything they stand for.
What can you do?
Our resources are small, yet the huge, well-funded public and private interests that oppose us have no answers to the agenda we are setting. Our message is starting to spread fast. Please join us, support us, and engage with the emerging debate.
OUR CORE THEMES
Our core themes are briefly outlined below. The Resourcessection to the left of this page has more details.
We support sustainable finance for development
Tax is the most sustainable source of finance for development. The long-term goal of poor countries must be to replace foreign aid dependency with tax self-sufficiency. Developing nations in Africa, Latin America and elsewhere are especially vulnerable to the offshore world. Action on tax has the potential to deliver gains to poor countries that are orders of magnitude greater than what can be achieved with aid. To meet the Millennium Development Goals, OECD countries have been urged to raise their levels of aid to 0.7 percent of Gross National Income – but this is as nothing when compared to potential tax revenues: in some rich countries, tax constitutes over 40 percent of GDP.
Tax is the link between state and citizen, and tax revenues are the lifeblood of the social contract. The very act of taxation has profoundly beneficial effects in fostering better and more accountable government. It is astonishing that so many members of the aid community have ignored tax for so long. Action on international taxation is, quite simply, the key to lifting hundreds of millions of people out of poverty. Read More
We support international co-operation on tax, regulation and crime
The tax policies of one country can seriously harm the citizens of another. In the 19th and 20th Centuries, rich nations agreed that a balance should be struck between corporations, governments and societies. Tax and regulation lay at the heart of these democratic contracts, and it was feasible to set up coherent systems under single nation states. But these grand bargains began to unravel in the 1920s, as multinational companies began to emerge as a force in world markets and exploit cross-border loopholes to reduce their taxes. This accelerated in the 1970s, as financial liberalisation increasingly allowed companies to shop around for jurisdictions to escape tax and regulation. Tax havens are now intensifying competition between jurisdictions on tax and regulation in a beggar-my-neighbour scramble to attract international capital, undermining already weak regulation of public companies and stock exchanges. International efforts to tackle this harmful “tax competition” are, to date, feeble, and the amount of wealth offshore is growing fast.
Insular, nationally-based approaches cannot do justice to these challenges. From the perspective of individual countries, it may be relatively easy to argue in favour of cracking down on outflows of money into tax havens, but it is far harder to challenge the inflows. Only a global approach will do: this means co-operation between nations on tax havens. Far from weakening state sovereignty, as is sometimes suggested, stronger tax cooperation is the best way to strengthen national tax systems in this age of globally mobile capital. Read More
We oppose tax havens and offshore finance
Tax havens and offshore financial centres have created an interface between the illicit and licit economies, corrupting national tax regimes and onshore regulation. The result is a shift of the tax burden away from capital and onto labour, and a dramatic rise in income and wealth inequality, as well as the corruption of democracies around the world as élites escape their responsibilities with impunity. Supporters of tax havens point to the wealth enjoyed by such tax havens as Switzerland or the Cayman Islands to bolster their arguments. This is like pointing to the wealth of a corrupt politician and arguing that corruption is therefore a good thing: tax havens effectively appropriate other countries' taxes for themselves.
We recognise that some small island economies depend heavily on hosting harmful tax practices, and may lose investment and economic growth from efforts to tackle the abuses. But the harm these activities cause are orders of magnitudes greater than any claimed benefits. We propose multilateral support for these countries to assist with re-structuring as part of efforts to clean up the tax haven scandal. In any case, the biggest culprits are the big financial centres such as in Britain, the United States and Switzerland. Read More
We support transparency and we oppose corruption
The Tax Justice Network supports transparency and opposes secrecy in international finance. We want companies to be made more open about their financial affairs and to publish data on every country where they operate. We want the finances of wealthy individuals to be visible to their tax authorities, so they pay their fair share of tax. Markets work better, and companies are more accountable, in an environment of transparency. Secrecy hinders criminal investigation and fosters criminality and corruption such as insider trading, market rigging, tax evasion, fraud, embezzlement, bribery, the illicit funding of political parties – and much more. We want to expand the commonly accepted definitions of corruption so that they no longer focus only on narrow aspects of the problem such as bribery. We must bring tax, tax avoidance and tax evasion decisively into the corruption debate.
Corruption, crime and corporate abuse have a demand side (such as the theft of public assets by a politician) and a supply side – the provision of corruption services, like the concealment of a politician’s stolen assets offshore. Tax havens and associated activities stimulate the demand side – so they are a central part of the corruption problem. Eva Joly, an investigating magistrate who broke open the “Elf Affair” in France (Europe’s biggest corruption investigation since the Second World War) was furious about how tax havens stonewalled her probes. She compared magistrates to sheriffs in the spaghetti westerns who watch the bandits celebrate on the other side of the Rio Grande. “They taunt us – and there is nothing we can do.” As she says, the fight against tax havens must be “Phase Two” in the international fight against corruption. Read More
We support a level playing field in competitive markets
We support simplicity and a level playing field on tax. Complexity and loopholes provide a windfall for a pinstripe infrastructure of lawyers, bankers and accountants and distort markets, undermining market competition, mis-directing investment, and rewarding economic free-riders. These distortions favour multinational companies over national ones; they promote big companies over small, and they hinder start-up companies in the face of established vested interests. New forms of finance that have become prominent recently, such as hedge funds and private equity companies, greatly benefit from lower tax rates, lack of transparency and minimal accountability which provide them with competitive advantages over their peers that have nothing to do with efficiency or innovation in the real world, or with the quality or price of what they offer. Companies wishing to act in an ethical manner find themselves at a competitive disadvantage vis à vis their more irresponsible competitors. Read More
We favour progressive and equitable taxation
We support progressive taxation, founded on the basic principle that tax should be based on ability to pay - that is, the wealthy should pay higher rates of tax. The principle of progressive taxation has been supported almost unanimously by democratic choices in countries around the world – and we support those choices. To advocate progressive taxation is to oppose regressive tax systems where the poorer sections of society pay a higher share of their income. Financing public goods, according to voters’ wishes and ability to pay, mitigates inequality, which is one of the greatest political challenges facing the world today.
Tax systems should also be comprehensive, containing layers of different taxes such as income tax, corporation tax, enviromental taxes, inheritance taxes, customs duties and so on. Different taxes have different functions, and tax systems should contain an appropriate mix of them all. Read More
We support corporate responsibility and accountability
Tax is the forgotten element in the corporate social responsibility debate – and probably the most important. We believe that corporate responsibility starts with paying tax.
We oppose a financial and legalistic approach to tax, which focuses exclusively on the boundary between what is legal (tax avoidance) and what is illegal (tax evasion.) Instead we favour an accountability-driven approach, differentiating between what is responsible, and what is not. A responsible approach sees tax not as a cost to a company to be avoided, but like a dividend: a distribution out of profits to all stakeholders. Companies do not make profit merely by using investors' capital. They also use the societies in which they operate -- whether the physical infrastructure provided by the state, the people the state has educated, or the legal infrastructure that allows companies to protect their rights. Tax is the return due on this investment by society from which companies benefit.
We suppport greater transparency in corporate reporting. We want to see corporate tax policies brought firmly and transparently into wider governance frameworks such as business principles and corporate values. We also support intervention to protect company directors who wish to behave in an ethical manner from being undermined by predatory actors who thrive on abuse. Read more
We favour tax compliance and a culture of responsbility
Tax compliance means paying the right tax in the right place at the right time. We want to see the restoration of a culture of tax compliance among individuals, corporations, tax professionals, and governments, and an ethical approach to tax. They should follow not only the letter of the law, but the spirit of the law, with respect to their tax affairs.
Both tax evasion and tax avoidance are anti-social and equally harmful. Tax avoidance may be the more so, because it is so insidious. Highly paid professionals spend their lives devising ingenious schemes to reduce or eliminate the tax liability of wealthy people, and they have set themselves up as the “experts” on international taxation, developing and propagating a world view that sees these kinds of abuses as acceptable. Huge, well-resourced vested interests support them and have skewered international efforts to address the problems. Politicians, economists and civil society groups, perhaps daunted by the complexity of the issues or unable to see or measure what is happening in the secret world of offshore, too rarely challenge this world view. Meanwhile, tax authorities rarely have the staff or time to combat the enormous resources and wiles of the tax avoidance industry. The resulting mouse-and-cat game – besides its effect on corrupting democracy – is enormously wasteful.
It is time for change. Our code of conduct on taxation outlines our approach. Civil society groups, economists, journalists, and ordinary people need to rouse themselves and make this one of the great political struggles of this young century.
Apprehensions for the current tax regime and structural challenges in the economy present a daunting task for tax policy reforms.
BalasHapustax specialist in the UK