These Days, All Nations Are Tax Havens

12/04/2016 10:40

The term "tax haven" suggests that low or no-tax countries are the exception. It conjures up the image of a handful of exotic small island states like the Cayman Islands. But today, just about all nations are tax havens. To the extent that they all seek to keep their national tax regimes 'internationally competitive' - that is, relatively attractive to international investors and multinational corporations, which of course includes criminals and tax evaders - all nations are tax havens to some degree. "It does not surprise anyone when I tell them that the most important tax haven in the world is an island", says Marshall J. Langer." They are surprised, however, when I tell them that the name of the island is Manhattan. Moreover, the second most-important tax haven in the world is located on an island. It is a city called London in the United Kingdom."

What's really worrying is that governments have little choice about this. In a world of free-moving capital where the rich, the criminal and the multi-national corporations can move their money easily across national borders, governments find themselves in a highly conflicted position. They may want to crack down on tax havens, including their own, but knowing that business and investment generally flow to wherever taxes are lowest and regulations lightest, no government can act decisively for fear of business going elsewhere. The only solution would be a world-wide agreement on tax, coupled with robust global enforcement measures. But knowing that's highly unlikely, governments would rather keep business flowing to their own tax havens or to their own country rather than to someone else's. Tighten regulations or increase transparency too much and you end up a loser.

Tax havens are really just the sharp end of a much broader edifice. The blunt end is known simply as "tax competition". This, as the Tax Justice Network point out, should "more accurately be known as Tax Wars. [This] is the process by which countries, states or even cities use tax breaks and subsidies to attract investment or hot money. In response to 'competitive' pressures they cut taxes on wealthy individuals, or on corporations - then make up the difference by hiking taxes on poorer sections of society. Inequality rises. At a global level, this process is a race to the bottom - and it has no redeeming features. It is always harmful, particularly for larger economies. As well as boosting inequality it erodes democracy, subsidises unproductive rent-seeking, kills jobs by subsidising capital at the expense of labour, and reduces productivity and economic growth. Tax wars bite all countries - but it hurts developing countries particularly hard." Is it any wonder the gap between rich and poor keeps on widening regardless of which country we're in, or which party may be in power?

The sad reality is that this is a systemic problem - a classic example of what economists call a "collective action problem" or a "Prisoner's Dilemma." It's not that governments don't want to crack down on tax avoidance and evasion, it's that they can't. "The problem", as senior lecturer in politics at London's Goldsmith's University Will Davies explains, "is that the production and enforcement of rules is now internal to the game." It's this Prisoner's Dilemma itself that should be the real focus of our attention.

But rather than focus on that, we're too apt to be distracted by personalities like Vladimir Putin, David Cameron or the Icelandic Prime Minister - now resigned - Sigmundur Davíð Gunnlaugsson. Of course it's right these high-profile politicians should be brought to book. But once the questions have been answered and the heads have rolled, what will remain? The global web of tax havens along with the world's 200-odd nations all competing destructively with each other to attract footloose global investors. And to think that getting politicians to publish their tax returns will help is another joke. As if any tax avoidance or evasion would be likely to show up there!

Moreover, this Prisoner's Dilemma underlies not just tax avoidance/evasion but many other global problems too. Take climate change. One wonders what hope there is of nations meeting their commitments under last year's Paris agreement when any government that moves decisively to rein in its carbon emissions will only increase its businesses costs, so risking jobs and investment being lost to other countries - and probably a lost election too.

This dilemma is the inevitable outcome of a global economy absent any robust global governance. Capital moves freely and globally but governance stops at national borders. Without widespread international cooperation this rotten system will only continue. We cannot rely on Wikileaks and other whistle-blowers to keep the world just. Once all the hype has died down the problem will only get worse. It's time we all realised that international cooperation is the only solution. The only question: How?

For many, the United Nations seems like the go-to organisation, but sadly it has no authority over its member-nations and so has little chance to bring about the necessary cooperation. And citizens have no binding influence over the UN anyway. But there's another alternative that's gaining increasing attention: the International Simultaneous Policy Organisation (Simpol). This bottom-up, citizen-controlled organisation encourages citizens around the world to use their votes in their national elections in a completely new way to drive politicians, parties and eventually governments towards cooperation.

This might sound like the tallest possible order. But in the UK in the run-up to the General Election in 2015, campaign supporters succeeded in getting over 600 candidates from all the main parties to sign its pledge to implement a robust global justice agenda alongside other governments. Of them, 29 became MPs. In the recent Irish General Election, 14 MPs followed suit. A number of MEPs have also signed the Pledge and the campaign is spreading quickly to other countries.

Could Simpol offer citizens around the world a solution to the global Prisoner's Dilemma? Who knows. But with governments stuck in their conflicted position and the UN unable to help, do we have anything to lose by supporting it?