International Monetary Fund: Tackling Tax Havens

The billions attracted by tax havens do harm to sending and receiving nations alike

Until the 2008 financial crisis, tax havens were generally seen as exotic sideshows to the global economy, Caribbean islands or Alpine financial fortresses frequented by celebrities, gangsters, and wealthy aristocrats. Since then, the world has woken up to two sobering facts: first, the phenomenon is far bigger and more central to the global economy than nearly anyone had imagined; and second, the biggest havens aren’t where we thought they were.

Tax havens collectively cost governments between $500 billion and $600 billion a year in lost corporate tax revenue, depending on the estimate (Crivelli, de Mooij, and Keen 2015; Cobham and Janský 2018), through legal and not-so-legal means. Of that lost revenue, low-income economies account for some $200 billion—a larger hit as a percentage of GDP than advanced economies and more than the $150 billion or so they receive each year in foreign development assistance. American Fortune 500 companies alone held an estimated $2.6 trillion offshore in 2017, though a small portion of that has been repatriated following US tax reforms in 2018.

Corporations aren’t the only beneficiaries. Individuals have stashed $8.7 trillion in tax havens, estimates Gabriel Zucman (2017), an economist at the University of California at Berkeley. Economist and lawyer James S. Henry’s (2016) more comprehensive estimates yield an astonishing total of up to $36 trillion. Both, assuming very different rates of return, put global individual income tax losses at around $200 billion a year, which must be added to the corporate total.

These highly uncertain estimates vary widely because of financial secrecy and patchy official data and because there’s no generally accepted definition of a tax haven. Mine boils down to two words: “escape” and “elsewhere.” To escape rules you don’t like, you take your money elsewhere, offshore, across borders. I prefer such a broad definition because these havens affect far more than tax: they provide an escape route from financial regulations, disclosure, criminal liability, and more. Because the main corporate users of tax havens are large financial institutions and other multinationals, the system tilts the playing field against small and medium enterprises, boosting monopolization.

Political damage, while unquantifiable, must be added to the charge sheet: most centrally, tax havens provide hiding places for the illicit activities of elites who use them, at the expense of the less powerful majority. Tax havens defend themselves as “tax neutral” conduits helping international finance and investment flow smoothly. But while the benefits for the private players involved are evident, the same may not be true for the world as a whole; it is now widely accepted that in addition to tax losses, allowing capital to flow freely across borders carries risks, including the danger of financial instability in emerging market economies.

As a general rule, the wealthier the individual and the larger the multinational corporation—some have hundreds of subsidiaries offshore—the more deeply they are embedded in the offshore system and the more vigorously they defend it. Powerful governments also have a stake; most major havens are located in advanced economies or their territories. The Tax Justice Network’s Corporate Tax Haven Index ranks the top three as the British Virgin Islands, Bermuda, and the Cayman Islands—all British overseas territories. The organization’s Financial Secrecy Index ranks Switzerland, the United States, and the Cayman Islands as the top three jurisdictions for private wealth.

To grasp why rich jurisdictions top the lists, ponder how many rich Nigerians might stash secret assets in Geneva or London—then consider how many rich Swiss or Britons would hide assets in Lagos. Offshore capital tends to drain from poor countries to rich ones.

And the offshore system is growing. When one jurisdiction crafts a new tax loophole or secrecy facility that successfully attracts mobile money, others copy or outdo it in a race to the bottom. That has contributed to a dramatic decline in average corporate tax rates, which have decreased by half, from 49 percent in 1985 to 24 percent today. For US multinationals, corporate profit shifting into tax havens has risen from an estimated 5 percent to 10 percent of gross profits in the 1990s to about 25 to 30 percent today (Cobham and Janský 2017).

The principles of the international corporate tax system were laid down under the League of Nations almost a century ago. They treat multinational enterprises as loosely connected “separate entities.” This is a fiction: multinationals in fact draw great strength from their unitary nature, reaping market power and economies of scale. If the whole is worth more than the sum of its (geographically diverse) parts, which countries get to tax that extra value? It is rarely lower-income countries, since the system tends to give preference to the place where multinationals have their headquarters, usually rich countries.

What is more, multinationals can manipulate the so-called transfer prices of transactions between these affiliates to shift profits from high- to low-tax jurisdictions. For example, a firm’s affiliate may hold a patent in a low-tax haven and charge exorbitant brand royalties to affiliates in high-tax countries, thus maximizing profits in the low-tax jurisdiction. In theory, transfer prices are meant to reflect market prices that would prevail in arm’s length transactions between two unrelated parties. But such prices often cannot readily be established: try valuing a unique widget for a jet engine that isn’t sold on the open market, or a drug patent. In practice, the value is often what the company’s accountants say it is.

The main alternative to “arm’s length, separate entity” is something called “unitary tax with formulary apportionment.” This system considers a multinational to be a single entity and apportions profits geographically according to a formula reflecting real economic activity, which could be a mix of sales, employment, and tangible assets. In theory, this method cuts out tax havens: if a firm has a one-person office in Bermuda, the formula allocates a minuscule portion of its global profits there, so it hardly matters whether Bermuda taxes its portion at a zero rate. In practice, this system also suffers technical difficulties, and the choice of formula is highly political—but it is simpler, fairer, and more rational than the current system.

Indeed, many US states, Canadian provinces, and Swiss cantons have for some time used limited versions of the system for subnational taxes, even though it is not yet used internationally. A move is already underway to require multinationals to break down and even publish financial and accounting information on a country-by-country basis, which could provide relevant data for an international allocation formula. Many other incremental stepping-stones toward the alternative are possible, so change can be evolutionary rather than revolutionary.

Until a decade or so ago, there were few political brakes on the expansion of tax havens. After the 2008 crisis, however, governments came under pressure to close large budget deficits and to placate voters furious about taxpayer-funded bank bailouts, widening inequality, and the ability of multinationals and the wealthy to escape tax. The Panama Papers and Luxembourg Leaks revealed the use of tax havens for often nefarious purposes and reinforced the pressure to do something. So the Organisation for Economic Co-operation and Development (OECD), the rich-country group that is the main standard-setter for international tax matters, launched two big projects.

One is the Common Reporting Standard (CRS), a regime to exchange financial information automatically across borders so as to help tax authorities track the offshore holdings of their taxpayers. But the CRS contains many loopholes; for example, it allows people with the right passport to claim residence in a tax haven, rather than in the country where they live. The United States constitutes an even bigger, geographic loophole: under the Foreign Account Tax Compliance Act, it collects information from overseas on its own taxpayers, but it shares little information the other way, so nonresidents can hold assets in the country in conditions of great secrecy, making the United States a major tax haven.

Still, the CRS brought some results. The OECD estimated in July 2019 that 90 countries had shared information on 47 million accounts worth €4.9 trillion; that bank deposits in tax havens had been reduced by 20 to 25 percent; and that voluntary disclosures ahead of implementation had generated €95 billion in additional tax revenue for members of the OECD and the Group of 20, which includes major emerging market economies.

The other big initiative was the base erosion and profit shifting (BEPS) project, aimed at multinational corporations. This was the OECD’s effort to “realign taxation with economic substance” without disrupting the long-held international consensus supporting the arm’s length principle, which was bolstered by tax-escaping multinationals and their allies. While BEPS did improve transparency for multinationals, it was ultimately seen as something of a failure by the OECD, especially for the digitalized economy.

The United States also belatedly recognized that, with a consumption-heavy economy, it made sense to shift taxing rights toward the place where sales occur. And emerging market economies, including Colombia, Ghana, and India, which gained more clout starting in 2016, have pushed for new approaches. The OECD began considering sales-only formulas, but some lower-income countries favor a formula that includes employees and tangible assets, which would give them greater taxing rights. These shifts away from arm’s length orthodoxy represent a step toward tax campaigners’ demands for formula apportionment.

In January 2019 the dam began to break. For the first time, the OECD conceded publicly a need for “solutions that go beyond the arm’s length principle.” In March, Christine Lagarde, then managing director of the IMF, called the method “outdated” and “especially harmful to low-income countries.” She urged a “fundamental rethink” with moves toward formula-based approaches to allocating income. In May, the OECD published a “road map” proposing reforms based on two pillars: first, determining where tax should be paid and on what basis, and what portion of profits should be taxed on that basis; and second, getting multinationals to pay a minimum level of tax. Professor Reuven Avi-Yonah, of the University of Michigan Law School, said the plan was “extraordinarily radical” and would have been “almost inconceivable” even five years ago.

We are now at the start of the most significant period of change to the international corporate tax system in a century. Progress will hinge on power struggles: between countries, rich and poor, and within countries, between ordinary taxpayers and those that profit from the current system. But radical change is feasible. The Tax Justice Network, which I have worked with, now sees its four core demands, initially dismissed as utopian, gaining global traction: automatic exchange of financial information across borders, public registers of beneficial ownership of financial assets, country-by-country reporting, and now unitary tax with formula apportionment.

But corporate tax is just a start. To understand the broader issues, we must consider the forces that make the offshore system tick. Switzerland’s example is illustrative. In past decades, politicians in Germany, the United States, and elsewhere have clashed with Switzerland over banking secrecy, with little success. In 2008, however, after discovering that Swiss bankers had helped US clients evade tax, the Department of Justice took a different tack: it targeted not the country, but its bankers and banks. In response, the embattled private players became major lobbyists for reform, and Switzerland soon made major concessions on banking secrecy for the first time. The lesson: any effective international response must include strong sanctions against the private enablers, including accountants and lawyers—especially when they facilitate criminal activity such as tax evasion.

On a deeper level, consider this. The engine of the offshore system is competition among jurisdictions to provide the best ways to avoid taxes, disclosure, and financial regulation. Traditionally, such a race to the bottom is framed as a collective action problem requiring collaborative, multilateral solutions. But cooperative approaches have flaws. Some jurisdictions feel inclined to cheat as they seek to attract mobile capital, so collective action can be like herding squirrels on a trampoline. Moreover, it is tough to mobilize voters in support of complex cross-border collaboration, especially when the goal is to help foreigners or low-income countries.

There is a radically different, more powerful, approach. The relevant question is, Do the financial flows attracted by tax havens help the receiving countries? They certainly help interest groups there—typically in the banking, accounting, legal, and real estate professions—but do they benefit the jurisdiction as a whole?

Chart. Too much finance?

A new and growing strand of research by the IMF, the Bank for International Settlements, and others suggests that the answer is no. This “too much finance” literature argues that financial sector growth is beneficial up to an optimal point, after which it starts to harm economic growth (see chart, previous page). Most advanced economies, including the United States, the United Kingdom, and other major tax havens, passed that point long ago. For them, shrinking the financial sector to remove harmful financial activities should boost prosperity.

Alongside this research, John Christensen, a former economic advisor to the British tax haven Jersey, and I have developed the concept of a finance curse, which afflicts jurisdictions with an oversize financial sector and is analogous to the resource curse that vexes some countries dependent on commodities such as oil. This “paradox of poverty in the midst of plenty” has multiple causes: a brain drain of skilled people from government, industry, and civil society into the high-paying dominant sector; rising and growth-sapping inequality between the dominant and the other sectors; an increase in local prices that renders other tradables sectors less competitive with imports; recurrent booms and busts in prices of commodities and financial assets; and an increase in rent seeking and loss of entrepreneurship at the expense of productive, wealth-creating activities as easy money flows in. Some scholars also decry “financialization,” or a shift from wealth-creating activities toward more predatory, wealth-extracting activities such as monopolization, too-big-to-fail banking, and the use of tax havens.

Financial flows seeking secrecy or fleeing corporate taxes seem likely to be exactly the kind that exacerbate the finance curse, worsening inequality, increasing vulnerability to crises, and dealing unquantifiable political damage as secrecy-shrouded capital infiltrates Western political systems. And as financial capital flows from poorer countries to rich-world tax havens, labor migration will follow.

As ever, more research is needed here. Yet it seems that for many economies hosting an offshore financial center is a lose-lose proposition: it not only transmits harm outward to other countries, but inward, to the host. Countries that recognize this danger can act unilaterally to rein in their offshore financial centers, simply stepping out of the race to the bottom and curbing tax haven activity while also improving their own citizens’ well-being. This is a powerful, winning formula. SOURCE

The Billionaires Are Getting Nervous

Bill Gates and others warn that higher taxes would lead to lower growth. They have their facts backward.

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The editorial board is a group of opinion journalists whose views are informed by expertise, research, debate and certain longstanding values. It is separate from the newsroom.

Bill Gates in New York on Wednesday.
Credit…Calla Kessler/The New York Times

When Bill Gates founded Microsoft in 1975, the top marginal tax rate on personal income was 70 percent, tax rates on capital gains and corporate income were significantly higher than at present, and the estate tax was a much more formidable levy. None of that dissuaded Mr. Gates from pouring himself into his business, nor discouraged his investors from pouring in their money.

Yet he is now the latest affluent American to warn that Senator Elizabeth Warren’s plan for much higher taxes on the rich would be bad not just for the wealthy but for the rest of America, too.

Mr. Gates, the co-founder of Microsoft, suggested on Wednesday that a big tax increase would result in less economic growth. “I do think if you tax too much you do risk the capital formation, innovation, U.S. as the desirable place to do innovative companies — I do think you risk that,” he said.

Other perturbed plutocrats have made the same point with less finesse. The billionaire investor Leon Cooperman was downright crude when he declared that Ms. Warren was wrecking the American dream. Jamie Dimon, the chief executive of JPMorgan Chase, complained on CNBC that Ms. Warren “uses some pretty harsh words” about the rich. He added, “Some would say vilifies successful people.”

Let’s get a few things straight.

The wealthiest Americans are paying a much smaller share of income in taxes than they did a half-century ago. In 1961, Americans with the highest incomes paid an average of 51.5 percent of that income in federal, state and local taxes. In 2011, Americans with the highest incomes paid just 33.2 percent of their income in taxes, according to a study by Thomas Piketty, Emmanuel Saez and Gabriel Zucman published last year. Data for the last few years is not yet available but would most likely show a relatively similar tax burden.

The federal government needs a lot more money. Decades of episodic tax cuts have left the government deeply in debt: The Treasury is on pace to borrow more than $1 trillion during the current fiscal year to meet its obligations. The government will need still more money for critical investments in infrastructure, education and the social safety net.

This is not an endorsement of the particulars of Ms. Warren’s tax plan. There is plenty of room to debate how much money the government needs, and how best to raise that money. The specific proposals by Ms. Warren and one of her rivals, Senator Bernie Sanders, to impose a new federal tax on wealth are innovations that require careful consideration.

But a necessary part of the solution is to collect more from those Americans who have the most.

And there is little evidence to justify Mr. Gates’s concern that tax increases of the magnitude proposed by Ms. Warren and other candidates for the Democratic presidential nomination would meaningfully discourage innovation, investment or economic growth.

The available evidence strongly suggests that taxation exerts a minor influence on innovation. Experts have an imperfect understanding of what drives innovation, but taxation isn’t in the same weight class as factors including education, research and a consistent legal system.

Congress has slashed taxation three times in the past four decades, each time for the stated purpose of spurring innovation, investment and growth. Each time, the purported benefits failed to materialize. President Trump initiated the most recent experiment in 2017. The International Monetary Fund concluded this year that it had not worked.

Moreover, while higher tax rates may weigh modestly against innovation and investment, that calculus is incomplete. It ignores the question of what the government does with the additional money. It also ignores the possibility that higher taxes could result in more innovation.

A study of American patent holders found that innovators tend to come from wealthy families, to grow up in communities of innovators and to receive high-quality educations in math and science. Mr. Gates, one of the most successful entrepreneurs in American history, fits the profile: He grew up in an affluent family and received the best education money could buy.

The implication of that study, and related research, is that public investment, funded by taxation, could give more kids the kinds of advantages enjoyed by the young Mr. Gates.

There is no doubt that it is theoretically possible to raise taxes to prohibitive heights: If people had to pay a tax of 100 percent of the next dollar they earned, they would be likely to call it a day.

But the alarm bells are out of all proportion with Ms. Warren’s plan. Describing his concerns on Wednesday, Mr. Gates at one point suggested he might be asked to pay $100 billion.

The Warren campaign calculates that under Ms. Warren’s plan, Mr. Gates would owe $6.379 billion in taxes next year. Notably, that is less than Mr. Gates earned from his investments last year. Even under Ms. Warren’s plan, there’s a good chance Mr. Gates would get richer.

To his credit, Mr. Gates has said that he thinks the wealthy should pay higher taxes. But that’s not how he behaved on Wednesday. He can demonstrate that he’s serious about tax increases by setting aside the hyperbole and engaging in principled and factual debate about the details. SOURCE

 

IMF climate report calls for massive carbon tax in just 10 years to limit global warming

Image result for global climate tax

A global agreement to implement a substantial carbon tax would be the most efficient way of tackling climate change, according to a new study by the International Monetary Fund, the Washington Post reports. An international tax of $75 per ton by the year 2030 could limit warming to 2C, the IMF concludes, although its deputy director of fiscal affairs Paolo Mauro describes this as a “quantum leap” from today’s average of $2 per ton. Bloomberg describes the IMF’s reference to a climate “crisis” as its “most emphatic statement on climate change yet”. It says that according to the fund’s analysis, the Paris pledges that have been made so far by nations “fall well short” of their goal of limiting temperature rise. While Time reports comments from Mauro that the organisation is “not religious about any particular type of measure”, it also notes their conclusion that a carbon tax is the “single, most powerful and efficient tool” to drive a reduction in emissions. The magazine also mentions some of the critiques levelled at carbon taxes as well as the solutions suggested by the IMF, such as tax breaks so that poor people are not hit hardest.

A piece in the Guardian reports comments by Australian treasurer and deputy Liberal leader Josh Frydenberg in which he rejects the IMF’s warning that Australia will fail to meet its Paris target even with a carbon price of US$75 a ton. According to the Australian Financial Review, the IMF says the nation’s economy is still too heavily reliant on coal power for even such a dramatic tax to have the desired effect. MORE

Canada’s fossil fuel subsidies amount to $1,650 per Canadian. It’s got to stop.

Prime Minister Justin Trudeau’s vow to phase out ‘inefficient’ subsidies for coal, oil and gas still hasn’t happened — despite the escalating costs of the climate emergency

Alberta's oilsands North of Fort McMurray.

According to a new International Monetary Fund (IMF) report, Canada subsidized the fossil fuel industry to the tune of almost $60 billion in 2015 — approximately $1,650 per Canadian.

Yet subsidizing one of the world’s wealthiest industries is folly.

Such subsidies not only hurt Canadian taxpayers and the economy — they also exacerbate the climate emergency.

Indeed, the G20 countries have already agreed that subsidizing fossil fuels is irrational in a warming world — and have called for action to eliminate inefficient fossil fuel subsidies that distort markets.

The problem is that subsidies encourage the production and wasteful consumption of fossil fuels all while impeding the shift to cleaner renewables.

For these reasons, during the last election campaign Justin Trudeau sensibly committed to “phase out inefficient fossil fuel subsidies.”

The problem is that government has not yet delivered on this promise.

A new 2019 report by Canada’s Auditor General reveals government’s review of such subsidies is “incomplete and not rigorous,” is “not based on all relevant and reliable information” and “did not consider economic, social and environmental sustainability over the long term.”

Canada continues to subsidize the fossil fuel industry in myriad ways. First, it provides tax breaks under the federal Income Tax Act. For example, in 2015 the federal government introduced a new accelerated depreciation rate for equipment used in LNG facilities, which was a change proposed by the Canadian Association of Petroleum Producers.

Encana gas wellA natural gas well pad with numerous wells for fracking near Farmington, B.C. The LNG industry in British Columbia is the recipient of numerous tax breaks and exemptions. Photo: Garth Lenz / The Narwhal

Second, government provides funding to the fossil fuel industry at favourable rates through direct financing and loan guarantees. A recent example is Export Development Canada’s administration of a nearly $5 billion loan to support the government’s controversial purchase and operation of the Trans Mountain pipeline.

Ottawa has no plan to recoup that principal cost from industry — and is also subsidizing half the interest expense with taxpayer dollars.

Third, Canada provides direct funding to the fossil fuel industry through research, development and other services provided by federal agencies.

For example, the federal government is paying $1.5 billion for the Oceans Protection Plan, an initiative to safeguard bitumen transport through the Port of Vancouver. This plan was necessitated by new oil tanker traffic — and should be paid for by oil shippers.

Justin Trudeau Trans Mountain Oceans Protection PlanPrime Minister Justin Trudeau visited Victoria in April of 2018 to reiterate the federal government’s support for the Trans Mountain pipeline and commitment to the Oceans Protection Plan. Photo: Carol Linnitt / The Narwhal

Finally, there is the $60 billion subsidy that the IMF focused on — the “social costs” of carbon that governments pay, instead of fuel producers.

Lacking adequate carbon taxes, governments continue to pick up the tab for the impacts of climate change — for example, repairing damage from extreme weather events, building new levees, sea walls and storm sewers and paying for wildfire control and increased health costs.  MORE

 

Vast subsidies keeping the fossil fuel industry afloat should be put to better use

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(MENAFN – The Conversation) Capitalism has often been identified as the underlying cause of theclimate crisis . A leading voice on the subject is Naomi Klein, one of the climate movements most influential thinkers, whose seminal book onclimate changewas subtitled Capitalism vs. the Climate. She is one of many voices identifying capitalism as the cause of climate change.

Often central within the capitalism versus the climate framing is the idea that the heart of capitalist ideology – free market fundamentalism – has fuelled the climate crisis. But this line of argument often glosses over the fact that energy markets are not free from government intervention. In fact, the fossil fuel industry is deeply and increasingly reliant on government support to survive.

Ina forthcoming book chapter , I detail case studies from the world’s worst climate polluting countries. I show that the fossil fuel industry depends on an egregious amount of government support, which makes the public foot the bill for a harmful – and increasingly uncompetitive – industry.

Polluters market

In my chapter, I show that governments the world over favour fossil fuel interests throughpublic financing ,financial subsidies , andbailouts . In addition, the fossil fuel industry is helped bycorrupt governance systems . Together this forms what I call a system of fossil fuel welfare and protectionism.

To hide this reality, the fossil fuel industry has invested ina massive public relationsscheme (read: propaganda campaign) to paint itself as the defender of the free market. In the US, the fossil fuel industry has even,quite successfully , duped Evangelicals into associating the fossil fuel industry with free markets, and free markets with God’s will. Thus, attacks on the fossil fuel industry become attacks on God’s will. But if God’s will was really aligned with the free market, then the fossil fuel industry would be doing the devil’s work.

Take South Africa, for example, the biggest carbon polluter on the African continent. It used to be home to the world’sfastest growing renewable energy sector , but government intervention to protect polluting coal interests set back these advances. Under President Cyril Ramaphosa the government is now taking steps to allowsmall amountsof new renewable energy into the market. But government actions continue to slowthe immense potentialSouth Africa has for a low-cost, renewable energy revolution.

Arecent studyreported that South Africa subsidises coal by R56,6 billion per year – propping up a polluting industry with taxpayer money. South Africa continues to subsidise coal despite studies showing that renewable energy was helpingto prevent energy blackouts , wassaving South Africa billions on energyand that a renewable energy future is the country’slowest costenergy pathway.

On the other side of the Atlantic, a recent International Monetary Fund (IMF) study showed that the US, the world’s largest historic greenhouse gas emitter, givesten times more to fossil fuel subsidies than it does to education . Without such subsidies half of future oil production in the USwould be unprofitable .

As for coal, even the Wall Street Journal admits that US coalsimply can’t compete on a level playing field , and is losing out despite its major subsidies.Studies revealthat without regulation to shield them from market forces, about half of the coal plants in the US would be going bankrupt.

The fossil fuel industry is increasingly relying on the heavy hand of the government to protect fossil fuels from competition. Subsidies and protective policies shield fossil fuels from the reality that renewable energy has become the cheapest energy sourceworldwide.

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