Treasure Islands

Uncovering the Damage of Offshore Banking and Tax Havens, Nicholas Shaxson, Palgrave Macmillan.

Tax havens and offshore banking are contributing to the ever-deepening economic divide. Not only that, they are a central cause of the world’s ongoing economic crisis. Those are the principal arguments Nicholas Shaxson makes in his eye-opening book “Treasure Islands,” which explains how and why wealthy individuals and corporations use tax havens to escape taxes and regulations. “Because of tax havens (aka offshore jurisdictions), we have one set of rules for the rich and powerful and another set of rules and laws for the rest of us,” laments Shaxson, a journalist, author, and fellow at the Royal Institute of International Affairs in London.

Shaxson begins by answering the question, “What is a tax haven?” Simply put, “it’s a place that seeks to attract money by offering politically stable facilities to help people or entities get around the rules, laws, and regulations of jurisdictions elsewhere.” According to the author, a tax haven is characterized by: Low (or zero) taxes; local politics captured by financial interests from elsewhere; and secrecy and denial. Secrecy jurisdictions also tend to have large financial service industries compared to the size of the local economy, and to make pronouncements like: “We are a transparent, well regulated, and cooperative jurisdiction.” That’s code for: We are a tax haven.

According to Shaxson, the world already contains upwards of sixty tax havens, including the Cayman Islands, the Virgin Islands, Bermuda, Panama, Luxembourg and the Netherlands. “The offshore system is in robust health—and growing fast,” he says. Most readers will be surprised to learn, however, that he considers the small island of Manhattan to be the most important tax haven in the world. That’s because the United States has been offering tax incentives to lure money from overseas. In fact, attracting foreign funds has become “<i>central</i> to the U.S. government’s global strategies for financing its deficits,” writes Shaxson.

At the same time, the U.S. economy is losing an estimated $100 billion annually from offshore tax abuses, mostly due to “transfer pricing.” By adjusting internal profits a multinational can shift profits offshore, where it pays little or no tax, and shift costs onshore, where they are deducted against taxes. Another common tactic is known as “deferral,” in which companies legally defer their taxes by holding profits offshore, untaxed, indefinitely. That means “U.S. companies are only taxed on the income they bring back to the United States, usually in order to pay dividends to shareholders,” notes Shaxson.

In the book’s conclusion, Shaxson makes a wide array of recommendations designed to “reclaim our culture,” noting that “changes to domestic banking regulations matter but will never suffice.” Among other things, he recommends that we pursue transparency by requiring multinationals to break down their financial information by country and disclose what they do in each place. “Country-by-country reporting needs to be expanded to all businesses—especially banks,” he says. He also argues that we should tax multinationals as a single unit, then apportion its taxable income to the jurisdictions where it operates under a formula based on sales, payrolls, and assets in each place. And critically, he urges that we stop engaging in a race to the bottom. In other words, respond to cries of “Don’t crack down on that loophole or we will go elsewhere!” by allowing those complainers to go elsewhere, which will tend to drive out the harmful parts of the financial industry.

Of course, part of the challenge going forward will be educating policymakers and journalists about how tax havens have contributed to the latest financial crisis. Reading “Treasure Islands” would be a good place to start. But it’s clear that it’s going to take a certain amount of leadership and unilateral action to make a dent in this problem. Without significant change the system will continue to provide our richest citizens and corporations with escape routes from tax and regulation, and ordinary people will continue to absorb the costs.