#73 Tax Havens and the World's Rich
I am taking the issue of Tax Havens into our discussions at an early stage, as they are of crucial importance in understanding global political economy over the last 70 years.
As readers will know already, I consider a country’s banking structure as a key component of development. The nature and form of banks play a crucial role in everything that happens on a global or national level. For instance, a small ‘developing country’ without a development bank able to offer long term loans for local projects is immediately hammered in any development project.
The development of tax havens after 1945 represents a pivotal structure in the world’s economy. That they grew up after 1945 represented the following:
a. That the Western world created taxes on the rich for the first time on a grand scale after 1945.
b. That large international companies equally wish to avoid taxes on their domestic home front
c. That world leaders were willing to allow the tax haven banking structure to develop represented something very important.
That ‘something’ was the fact the world’s leaders were content to see large corporations and very wealthy individuals accumulate capital without hindrance from local governments. Western governments in the period of the previous 150 years had been content to see accumulation on a grand scale. In a world where tax would play an ever-growing part in government activity, tax havens were the mechanism where that serious accumulation would take place after 1945.
Tax Havens then were structures of the world economy that world leaders considered legitimate, free from any national controversy.
What are Tax Havens
Many of the small islands around the world that had once been colonised to be used as fueling stations for sailing ships, then later coaling stations and even later oil fueling stations, had no further colonial use after 1945. The European states had no colonies to defend. During the de-colonising years 1945 to 1962, many islands decided to reinvent themselves as tax-free global banking centres. Many decided not to free themselves from their colonial dependency, but instead to be financially self-sufficient yet still attached to their former colonial master.
What happened was simple enough. Financial centres free of tax were set up across the world with the agreement of the old Colonial masters. France set up these banking centres in Guadeloupe, & Matinique in the Caribean Reunion in the Indian ocean and a clutch of others in the Pacific. Spain did the same in the Canaries, in Northern Africa in Ceuta and Melilla, among others. The US had their islands in Guam American Samoa, Puerto Rico, and the Virgin Islands in the Caribean, Russia used the Baltic, Kaliningrad and the Kuril Islands north of Japan, While Britain used an array of Islands as banking centres, Jersey, Guernsey, the Isle of Man, Bermuda, the Cayman Islands, Singapore, Mauritius, Lichtenstein, Monaco, Panama, Cyprus, Hong Kong (before it was returned to China), the Cook Islands, Andorra, St Kitts and Nevis, and many others designated themselves as financial centres free of taxation.
A tax haven can be been defined as banks for rich individuals & global companies that are predatory tax structures that debilitates their national tax base. It is a territory that offers foreign individuals and businesses little or no tax liability in a politically and economically static environment. Tax havens historically have shared limited or no financial information with foreign tax authorities, except under duress. They do not require residency or business presence for individuals or businesses to benefit from their tax policies. Due to the globalisation of business operations, an increasing number of U.S. and European corporations, rich individuals, newly wealthy politicians, and corrupt individuals (trading in illicit drugs for instance) keep cash in offshore tax havens to minimize corporate taxes.
This huge enterprise had many benefits for the members of the New York, Amsterdam, Paris, Hong Kong, or Frankfurt & London banking communities. Money funnelled into a tax haven from anywhere in the world was able to be directed into one of the world's banking centres, and from there it was legitimate. The house markets of London and New York are instances of how tax haven money came to be used acceptably by the tax authorities of the country.
Over the years, major countries have been more and more concerned about Tax Havens as so much of the money entering their economies came from illegal sources. Restrictions have begun to appear and to affect all those responsible businesses that traded globally.
Here is how one researcher of this subject described these activities:
"Nobody disagrees that Britain sits spider-like at the centre of a vast international web of tax havens, hoovering up trillions of dollars worth of business and capital from around the globe and funnelling it up to the City of London"
Half of the world's trade is said to pass through the tax havens. Trillions of US dollars have managed to avoid tax. In some sense, crime and corruption have come to be accepted as normal business. There has been a significant public outcry at the existence of these havens, not least because the rich are not taxed in a fair and just manner. Whistle-blowers have managed to expose those using these tax havens, embarrassing wealthy firms and individuals.
At first sight, it might seem surprising that the centres of world power have not closed these havens of tax as they significantly reduce the tax take of major countries, by how much, it is difficult to know. Governments have certainly closed many loopholes, and many legitimate small businesses have been inundated with time-wasting questions from banks. That they have not been closed down must be because they benefit the major global powers in a multitude of ways.
Here is one of the instances where tax havens were directly used to channel money into Europe or the USA and thus legitimise it. During the Cold War and up to now, a number of the countries that appeared after the 1960s have been ruled by strong men, all of whom have had close alliances with the United States, as they were bulwarks against communism. The Gulf Sheikhdoms in Saudi Arabia, Mobutu in the Congo, Imelda and Ferdinand Marcos in the Philippines, and Suharto of Indonesia are a few examples. In each case, these leaders had direct access to their country’s treasuries and their own bank accounts. People were unable to distinguish their personal from their nation’s wealth. Very often, foreign aid would be deposited directly into personal accounts, according to the Corruption and Perceptions Index which surveys public corruption. A few cases have been made public. Tax havens were essential tools for these purposes in the years before the 21st century.
Both large global companies and wealthy private individuals have been using tax havens over the last 70 years, to the detriment of taxpayers across the world. Here is an example of how Standard Oil used tax havens to avoid paying tax almost anywhere and to pay the lowest royalties to the countries where their oil originated. Michael Hudson, a doyen of global banking, was being interviewed at Peking University in May 2018. Hudson had been employed by some of the largest banks and corporations in the USA, including Chase Manhattan and Standard Oil. He was talking to the treasurer of Standard Oil and asked him how they made a profit as he could not find it in the head office statistics.
The Standard Oil treasurer explained that they sold the raw material, oil, to Liberia or Panama where their economies only used US dollars and where they don't have any income tax: tax havens…
"He explained to me that that Standard Oil sold its oil at a very low price from the New East to Panama (and so on)... Then they would resell it at a very high price to their own refineries in Europe or America at such a high price that these downstream affiliates don't make any income. So there's no tax to pay because the oil accountants price is so high... They pay so little to Third World countries such as Saudi Arabia that they only get a royalty"
Michael Hudson talked to Peter Myers on debt and balance of payments in an interview at Peking University on 7th May 2018. The conference was on the 2nd world war conducted by Lau Kin Chi. See https://michael-hudson.com/2018/08/life-thought-an-autobiography/
The US companies thus paid no tax and made losses. All the profits remained in Liberia or Panama.
Conclusion
Tax Havens are here to stay. They benefit the individual rich, who create a wide variety of financial vehicles to hold their cash, which can then be placed in various tax havens.
They benefit global companies, as the example on Standard oil above illustrates. In practice, all multinational companies can manipulate their income to avoid taxes using the Havens. They benefit the corrupt who can use them to squirrel away money obtained illegally. They benefit the newly independent leaders of the countries of the South who obtain cash through various means of State.
Readers may think that Tax Havens are corrupt. They are certainly lacking in ethics.
For readers who wish to know more about Tax Havens, read the Tax Justice Network, which has a weekly report. You can learn a great deal more than I have been able to write about Tax Havens here. E.g. that global tax affairs have been controlled by the OECD (Organisation for Economic Co-operation and Development), an intergovernmental economic organisation with 38 member countries, founded in 1961 to stimulate economic progress and world trade. The OECD is a club of rich countries, where rule-making has sat for six decades, to a UN setting. There is at last a move to have the UN take over these responsibilities.
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The peoples of Western Europe had risen from one world of relative poverty and had learnt how to take the wealth from the Americas and transfer it to their own countries. This was slavery and latterly until 1920, indentureship. A whole set up of banks, shipping companies, and insurance companies had arisen to make these transfers possible. From the 1750s the European invaders turned their attention to Asia and systematically began the colonisation process anew. At the same time, as they attempted to colonise and extract the wealth of Asia, the colonising countries began the process we now recognise as industrialisation alongside the rapid growth of cities. The surplus resources extracted through colonisation were used to finance the growth of new industries.