By LARRY SMITH
IN July, the Observer newspaper in Britain published an exhaustive study by the Tax Justice Network asserting that at least $21 trillion of unreported private financial wealth was hidden in secret tax havens by the global super-rich elite at the end of 2010 – a sum equal to the combined size of the American and Japanese economies.
The Price of Offshore Revisited is the most comprehensive study ever on the offshore economy. It was written by former McKinsey & Co chief economist James Henry, amid rising concerns about an enormous and growing gulf between the rich and poor in countries around the world.
Accompanying this research was another study by TJN, entitled Inequality: You Don’t Know the Half of It, which argues that all reports of economic inequality to date have failed to account properly for this hidden offshore wealth. It therefore concludes that inequality is much worse than we think.
Henry drew on data from the World Bank, the IMF, the United Nations, central banks, the Bank for International Settlements, and national treasuries. He compared this information against demand for reserve currencies and gold, as well as data from private banking studies by consulting firms and others.
The Tax Justice Network is an independent organisation launched in London a decade ago. It focuses on financial transparency and the impacts of tax evasion and tax havens. “Our objective is to encourage reform at the global and national levels,” the group says on its website. “We are not aligned to any political party.”
The $21 trillion figure represents about 10-15 per cent of global wealth, but all of these assets are held by fewer than 10 million people worldwide, the study says. And some $9.8 trillion of this offshore wealth belongs to less than 100,000 people, or 0.001 per cent of the world’s population. These are households with assets of over $30 million.
According to TJN, “If this unreported $21 trillion, conservatively estimated, earned a modest rate of return of just 3 per cent, and if that income was taxed at just 30 per cent, this would have generated income tax revenues of between $190-280 billion, roughly twice the amount OECD countries spend on all overseas development assistance. Inheritance, capital gains and other taxes would boost this figure considerably.”
More interestingly, for 139 mostly low-to-middle income countries, traditional data shows aggregate external debts of $4.1 trillion at the end of 2010. But if their foreign reserves and unrecorded offshore private wealth is taken into account, the picture reverses.
These countries had aggregate net debts of minus US$10.1-13.1 trillion. In other words, these countries are big net creditors, not debtors. But unfortunately, their assets are held by a few wealthy individuals, while their debts are shouldered by ordinary citizens through their governments.
“For example, Nigeria is supposedly a debtor country but when you look at all the unrecorded capital that has flowed out of Nigeria, it turns out that Nigeria is actually like many other developing countries – a net creditor of the richest countries in the world,” Henry said in a recent online interview. “So the debt problem is not really a debt problem, it’s a tax problem.
“We’re not suggesting that there may not be problems on the spending side, but it’s outrageous for the wealthiest people on the planet to pay zero taxes,” he explained. “What this does to developing countries in particular, because they can’t tax wealth, is that they end up taxing low and middle income people. So basically what you’re seeing is that globalisation is driving a big hole through the nation state system that was designed to raise tax revenue.”
The TJN study found that private banks are deeply involved in running tax havens, with 50 of the biggest managing some $12.5 trillion in offshore assets. The two most active of these were UBS and Credit Suisse. Other top players were Pictet and Barclays.
All of these banks have long been represented in the Bahamas, where the offshore sector accounts for about 15 per cent of GDP. And most of the banks listed by TJN were deeply implicated in the financial crisis, and have been big recipients of taxpayer bailouts.
Henry sees all this as a vital concern for the future of democracy. “If you can’t have fair taxes you end up having representation without taxation, and the poorest countries are forced to rely on regressive taxes to pay their bills.”
These themes were amplified recently by British journalist Nicholas Shaxson (in his book, Treasure Islands), “tax havens are much, much bigger and much more important than almost anybody realises,” he said in an online interview. “Most people see them as a kind of exotic sideshow…but they have grown so fast in the era of globalisation that they are now right at the heart of the global economy. Half of world trade is processed in one way or another through tax havens.”
Both Henry and Shaxson confirm that the biggest tax havens today are not places like the Bahamas or the Cayman Islands, but rich countries like the US, the UK and Switzerland. They define tax havens as financial centres that offer zero or low taxes to people from elsewhere, as well as secrecy and escape routes from financial regulation or criminal laws.
In between the two poles of tax evasion and avoidance, Shaxson says, is a huge grey area where accountants, lawyers and bankers act as intermediaries to help people do what they want to do with their money, in return for huge profits. Offshore tax evasion is estimated to cost the US $100 billion a year, but the true scope of the problem is greater than most people realise.
“When the tax charge on mobile capital falls that means somebody else has to pay for those taxes that aren’t being paid by wealthy people and corporations, so you get a kind of compression of the tax system with ordinary people having to pay more. This is a dynamic that is inherent to the offshore system,” Shaxson says.
According to the TJN’s companion report on inequality, although this has reached extreme proportions in many countries the problem is far worse than we have understood until now. This is because previous studies have massively underestimated the enormous assets held offshore in opaque and anonymous financial structures by the world’s wealthiest individuals.
With the bottom half of the world’s population together possessing only 1 per cent of global wealth while the top 10 per cent owns 84 per cent, economic inequality is widely recognised as a problem in its own right. And it is well documented that societies that are more unequal don’t do as well and are less stable.
Nobel economist Joseph Stiglitz’s recent book, The Price of Inequality, pointed out that in 2010 the top 1 per cent of individuals took 93 per cent of the gain in US national income. And much of this gain was from rent-seeking – not creating new wealth but taking it from others. In Stiglitz’s view, rent-seekers include top-flight lawyers, monopolists, financiers and many of those supposed to be regulating the system.
“What is clear is that the share of the top 1 per cent has almost tripled since 1980,” Stiglitz said in a recent interview. “America has the least equality of opportunity of any of the advanced industrial economies. In short, the status you’re born into — whether rich or poor — is more likely to be the status of your adult life in America versus any other advanced economy, including ‘Old Europe’.”
According to Phillip Blond, of the influential British think tank ResPublica, over the last 30 years western governments of whatever stripe – right wing or left – have effectively produced the same outcome: namely, oligarchy. Blond is by training a theologian, and was a policy advisor to Prime Minister David Cameron.
“While the left has tended to embrace the state as the agent of equality,” Blond wrote, “the right invariably looks to the market as the agent of prosperity. And yet the left has not solved the problem of poverty through state redistribution, and the right has not delivered mass prosperity through the market. Instead, both the left and the right have presided over rapid and rising inequality, and the seizure of wealth and opportunity by those at the very top of society.”
However, it is social mobility that truly characterises a fair society, rather than a particular level of income inequality. Inequalities become injustices when they are passed on, generation to generation. But researchers at the London School of Economics have compared social mobility in eight advanced countries, and their data shows that the more equal countries have higher social mobility.
In other words, “the American Dream is more likely to remain a dream for Americans than it is for people living in Canada or Scandinavia, because greater inequality in the US makes it easier for rich parents to pass on their advantages – particularly as it relates to education.” As Stiglitz points out: just 8 per cent of students at America’s elite universities come from households in the bottom half of income, even though admission isn’t based on ability to pay.
And we should all be concerned about the unintended social consequences of widening income gaps. They include more violence, falling educational performance, higher prison populations, rising teenage birth rates, higher child mortality and increased drug abuse, mental illness and obesity. We can see these consequences playing out before our eyes in the Bahamas.
The level of inequality that is acceptable in a given society boils down to a political choice. We may have different views on the overall balance, or how to achieve it, but we should at least be sure that the extent of inequality is not hidden. In this context, the TJN study can be seen as fortuitous.
It could be argued that the world has now located a huge pile of wealth that can help solve our most pressing global problems. “We have an opportunity to think not only about how to prevent some of the abuses that have led to it,” Henry argued, “but also to think about how best to make use of the untaxed earnings that it generates.”
Exactly what that would mean for the Bahamian financial sector is quite another matter, and a subject for another day. But there is a broad consensus that the best way to address poverty and fairness in our society is through a radical overhaul of our failing education system. This is what the term “empowering Bahamians” is really all about.
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