“We don’t pay taxes. Only the little people pay taxes.” Leona Helmsley
The motto of the ineffable billionairess came to mind with the publication of the Panama Papers. This huge set of files leaked from a Panamanian law firm, Mossack Fonseca, documented the tax haven dealings of the world’s richer denizens. While the law firm’s name sounds like a toxic cocktail, the information revealed in its files has also been toxic for Iceland’s Prime Minister Gunnlaugsson, who had to resign. So far, there have been no other scalps, but there have been sleepless nights for many and plenty of work for their PR companies.
I would venture to predict that there will be no more casualties from the revelations. Although there will doubtless be more expressions of anger from those who believe an influx of previously elusive tax revenues into the national pot might cushion the iron heel of austerity, this elaborate tax haven-offshore network is entrenched in a capitalist system that most critics do not venture to criticise.
Avoidance and evasion
There is an important distinction, of which many people are unaware, between tax ‘avoidance’ and tax ‘evasion’. Tax avoidance is legal; it just means you arrange your affairs in a way that lowers how much tax you have to pay. However, that also includes putting money in a tax haven, having your revenues accounted for there, and paying their lower tax levels. Evasion, on the other hand, is illegal. It involves not paying the taxes due to the authority in the relevant jurisdiction, for example, not declaring that you have an income to the government and so not paying the tax on it. The distinction between avoidance and evasion can be complicated. Making sure you have the correct set up involves expensive advice, afforded only by the rich, and this is a source of income for tax lawyers like Mossack Fonseca. But this is not the only rationale for the existence of tax havens.
Tax havens rose to prominence largely in the post-1945 period, when income taxes in major countries were often very high for the rich. Havens offered lower rates of tax and, as a result, a flood of rich people from around the world began to park their financial assets, and the income flowing to them, in these welcoming climes, even if they did not move there themselves. This was often done by setting up shell companies that owned the assets. Directors of the shell companies may have been residents of the particular haven, but they were usually acting on instructions from the real owners of the assets and recipients of the income. It was not long before capitalist corporations began to see how they could also play the game, for example, by channelling revenues from the rest of the group that appeared as their ‘costs’ paid into a special company set up in a haven where little or no tax is paid. The subsidiaries doing the channelling could then argue that their ‘costs’ meant they earned little or no profit in the higher-taxed countries in which they were based.
These havens were not necessarily islands or ‘offshore’. Although many were islands, since this was a way for a one-dimensional economy to branch out, when it was otherwise dependent upon seasonal tourism or a single crop or mineral, there was also Monaco, Andorra and Luxembourg in the heart of Europe, plus Ireland and others, including Delaware in the US. In Switzerland, for example, the tiny lakeside canton of Zug is reputed to host 27,000 companies, about one for every four inhabitants! No, Swiss people do not have an unusually high degree of entrepreneurial spirit; this was many foreign people and companies taking advantage of local tax laws. The havens get important revenues – from financial fees paid to the local government, as money paid in the employment of locals who would be ‘directors’ of these companies, and in other ways, including the business generated by a rich elite who might like to go shopping, sail in a yacht or stay in a nice hotel.
Rich people, but powerful companies
Essentially, tax havens are a commonly used release valve for the burden on the revenues of rich people, and companies, from the costs of maintaining the state and public services financed from taxation. In more recent decades, especially from the 1980s as international financial flows became less regulated by the key powers, these offshore and other centres grew dramatically in size, attracting vast volumes of funds. In 2004, when the US Congress passed a Homeland Investment Act that gave corporations a tax break if they repatriated funds held overseas, nearly a thousand US companies later repatriated more than $300bn of cash! This is one indication that the individuals named in the Panama papers are really a side issue: big corporations are the main holders of the international funds.
Ironically, Panama, at the centre of the latest revelations is a relatively small-scale offshore centre. A good measure of size is given by the volume of funds going into and out from these centres. Panama, with $106bn of funds outstanding in 2015, is less than a twentieth of the size of the largest one, the Cayman Islands, which has $2,610bn of liabilities plus claims. This stupendous sum for the Caymans is made up from roughly $1,300bn coming in as liabilities (or deposits and other lending from overseas) and $1,300bn going out as claims (or loans and other investments outside the Caymans). This reflects the fact that the money is doing more or less nothing in the Caymans itself – apart from the hotel and shopping bills and paying some fees to the government and a small proportion of the population of less than 60,000 people. As you might expect, the locals do not actually own the $800bn or so of US equities and bonds that are registered in the name of Cayman Island corporate entities.
Another interesting detail of the Cayman Islands is that this is the main offshore location to which the UK banking system sends a net volume of funds, amounting to $53bn at the end of 2015. While the UK-based banking system obtains around a net $100bn from its own local offshore islands – Jersey and Guernsey, especially – it also plays a big part in redirecting funds to other locations. A theme song of the movie Cabaret, ‘Money makes the world go around’, very much applies to the role that tax havens/offshore centres play in the global capitalist system. The UK-based banking system is at the core of this international network and, not surprisingly, the UK economy accrues big revenues from doing the in/out deals involved.
God Save the Queen
The location of the Cayman Islands in the Caribbean Sea might make one think that they have little or nothing to do with far away Britain. Nevertheless, at official occasions they sing ‘God Save the Queen’, although, as far as I am aware, it is not a widely downloaded itunes song and has never won any music awards. The reason is that the Caymans, while not technically being part of UK territory, are given a special status by the UK authorities as a British Overseas Territory. Similarly, other offshore islands are members of the British Commonwealth (the Bahamas) or are British Crown Dependencies.
UK officials do not like to talk about them very much and, at most, only propose measures that would have little effect on the tax avoidance/evasion taking place, such as calling for a ‘central register’ of who owns the more than two million companies and partnerships registered in these havens. The proposal is not expected to make much difference. The UK has been heavily involved in establishing this financial network. UK-linked havens, particularly the Cayman Islands, the Bahamas, Jersey, Guernsey and the Isle of Man, not only sing the same national anthem, if added together they would rank as the sixth largest international banking centre, just behind Germany, despite their minuscule populations. Why should the UK bother to do anything about this, when the US and many other European countries are also involved in the same kinds of deals, and when all the capitalists benefit?
All offshore centres are closely linked to the interests of the major capitalist powers. Britain has the closest links with the largest number. My experience of working for London-based banks included several business trips to Jersey, and some contact with other centres. When it comes to hanging out as a member of the rich elite, Jersey has some way to go in competing with the ‘offshore’ centres in the Caribbean and Central America. Nevertheless, like other centres, it plays an important role in allowing the capitalist class to do what it likes. Such is the exercise of their freedom. They have been free to exploit the working class worldwide. Surely they should also be free to do what they want with the proceeds?
Who are you?
Another feature of these havens is that the identity of who owns the funds is usually hidden. Interestingly, that is not necessarily to avoid tax. For example, one of the individuals cited in the Panama Papers is King Salman of Saudi Arabia. Presumably, he has no reason to avoid taxes set by the rules of the government he controls. The rationale here was instead to use the offshore accounts as a means of hiding the fact that a Saudi-owned company was doing a particular investment. So ABC Corp registered in Offshore Island X, but owned by the ruling Saudi family, would be a shareholder in a major US, European, or Asian, etc, corporation, but nobody would be any the wiser.
The publication of the Panama Papers has been amusing for the embarrassment they have caused to usurpers of wealth, in particular to those whose hypocrisy is shown by their former public pose. But little or nothing should be expected to change in society if people are critical only of individual excesses, and not of the more systematic crushing of the life chances of those oppressed by capitalism, in which tax dodging is a relatively minor issue.
Tony Norfield, 4 May 2016
* This article puts in a broader context some points made previously on this blog. A copy of this article first appeared in the New York journal, BrooklynRail, in the Fieldnotes section. Further details of the role of tax havens in the international financial system are given in my new book, The City: London and the Global Power of Finance.