[News] Tax Havens and Other Tricks Let U.S. Firms Steal $180 Billion

[Anti-Imperialist News]

https://theintercept.com/2018/10/26/tax-havens-and-other-dirty-tricks-let-u-s-corporations-steal-180-billion-from-the-rest-of-the-world-every-year/ 



  Tax Havens and Other Tricks Let U.S. Firms Steal $180 Billion From the
  Rest of the World Every Year

Jon Schwarz - October 26, 2018
------------------------------------------------------------------------

_Are tax havens_ an enraging but tangential subject? Or do they have a 
powerful effect on how the U.S. economy functions and should therefore 
be a part of every political debate?

The startling findings of a new academic study 
<http://gabriel-zucman.eu/files/WrightZucman2018.pdf> indicate that it’s 
the latter. Titled “The Exorbitant Tax Privilege,” the paper is 
co-written by Thomas Wright and University of California, Berkeley 
economist Gabriel Zucman, one of the world’s top authorities on tax 
havens and author of the best layperson’s introduction to the subject, 
“The Hidden Wealth of Nations 
<https://theintercept.com/2016/04/05/heres-the-price-countries-pay-for-tax-evasion-exposed-in-panama-papers/>.”

Tax havens — the most significant include Ireland, Singapore, 
Switzerland, the Netherlands, Luxembourg, Hong Kong, and Bermuda — serve 
two purposes.

The first is tax /evasion /by individuals, which is illegal. Think of 
Russian or Nigerian plutocrats transferring their assets to small 
Caribbean nations with strict banking secrecy laws, freeing them from 
the dreary necessity of paying taxes in their home countries.

The second is tax /avoidance /by huge multinational corporations, which 
— as long as the lawyers are doing their jobs — is perfectly legal. Here 
imagine Apple using various forms of accounting chicanery to claim that 
tens of billions of its profits generated in countries with normal 
corporate tax rates were actually all made in Ireland 
<https://www.nytimes.com/2013/05/21/business/apple-avoided-billions-in-taxes-congressional-panel-says.html?module=inline>, 
where Apple had negotiated a special 2 percent tax rate for itself. 
(Apple has on occasion gone even further, asserting that some of its 
profits were made, for the purposes of taxation, in no country at all.)

Zucman conservatively estimated in his book 
<https://theintercept.com/2016/04/05/heres-the-price-countries-pay-for-tax-evasion-exposed-in-panama-papers/> that 
tax avoidance and evasion translate into hundreds of billions of dollars 
in unpaid taxes every year — money that, for the most part, ends up in 
the pockets of the world’s wealthiest people.

The Zucman and Wright paper addresses the multinational corporation part 
of the equation. Among their conclusions:

• As of 1970, American multinationals claimed that under 10 percent of 
their profits were generated in tax havens; that number is now, 
preposterously enough, almost 50 percent. In other words, U.S. companies 
want us to believe that nearly half their economic activity is occurring 
in places like the Cayman Islands. Goldman Sachs, for instance, has 511 
subsidiaries there, yet zero offices.

By contrast, European multinationals generally say under 20 percent of 
their profits were made in tax havens. U.S. multinationals engage in 
this white shoe, three-card monte for obvious reasons: They pay 
effective tax rates of 27 percent on profits generated in non-tax 
havens, the paper finds, and 7 percent in tax havens.

• The sheer fraudulence of tax havens has reached breathtaking levels. 
One clear measure of whether a multinational corporation is engaging in 
genuine economic activity in a country is the ratio of its reported 
profits to wages paid: The higher the ratio, the clearer it is that 
profits are being illegitimately claimed in that country because of its 
low tax rate. In non-tax haven countries, the average ratio is 36 
percent — that is, corporations report 36 cents in pre-tax profits for 
every $1 they paid in wages. By contrast, the ratio has been as high as 
800 percent for foreign multinationals in Ireland and an eye-popping 
1,625 percent in Puerto Rico.

• For decades, thanks in part to tax havens, both the statutory and 
effective tax rates for multinationals have been steadily ratcheted down 
around the world. Since the early 1990s, the rate paid by U.S. non-oil 
multinationals on foreign profits has fallen from 35 percent to 20 percent.

• Similarly, the tax rate paid by U.S. oil companies to foreign 
governments plummeted from an average of 70 percent before the 1991 Gulf 
War to 45 percent since — a peculiar phenomenon which, Zucman and Wright 
say, may reflect “a return on military protection granted by the United 
States to oil-producing States.” (Tax rates for oil multinationals are 
higher than for other corporations because hydrocarbon states have 
greater leverage — for example, Ivanka Trump can transfer the production 
of her shoe line from Bangladesh to Ethiopia, but Exxon can’t threaten 
to move an oil extraction project from the United Arab Emirates to 
Belgium.) U.S. oil multinationals are also astonishingly profitable: 
 From 1966 to 2010, their pre-tax foreign profits accounted for over a 
third of all the foreign profits of U.S.-based multinationals.


      U.S. Global Power

Taken together, this all suggests that tax havens play a measurable role 
in bolstering U.S. global power. The U.S. has for decades bought much 
more from other countries than it has sold them, and its accumulated 
foreign debt is now far larger than that of any other country — about $8 
trillion, or more than 40 percent of the U.S. gross domestic product. 
This $8 trillion is the difference between $35 trillion in foreign 
investments in U.S. assets and $27 trillion in U.S. investments in 
foreign assets.

Under normal economic logic, this should mean huge amounts of money 
would drain out of the U.S. economy each year, as foreigners collect 
returns on their American assets. Yet somehow America’s returns on our 
foreign assets are so much higher than foreign returns on their U.S. 
assets that the opposite happens — money keeps flowing /into /the U.S.

Zucman and Wright estimate that almost half of the difference between 
U.S. returns and foreign returns can be attributed to abnormally low tax 
rates for U.S. multinationals, which in turn are thanks to U.S. power 
and tax havens. If their conclusions are correct, this exorbitant tax 
privilege translates into about $180 billion per year, or almost 1 
percent of U.S. GDP. (If 1 percent doesn’t sound like a lot to you, 
remember that for the past decade the U.S. economy has usually grown 
between just 1.5 percent and 2.5 percent per year.) In a fairer world 
economy, this money would largely be collected by non-tax haven foreign 
governments in taxes. Instead, it flows to U.S. multinationals and their 
shareholders.

This is a blizzard of statistics, of course. But they have many 
intriguing implications — ones that go beyond what Zucman and 
Wright’s report says — which suggest that the effects of tax havens will 
show up in numerous political issues to which they seem unconnected.

First, if U.S. elites were intelligent enough to understand the 
implications of tax havens — by no means a foregone conclusion — they 
would likely squelch any serious effort to eliminate them. This is not 
just because the wealthy disproportionately own U.S. stock and directly 
benefit from tax avoidance by U.S. multinationals. It’s also because 
shutting down tax havens could lower the returns on our foreign assets. 
This in turn would force the U.S. to submit to the normal laws of 
economic gravity and cause the dollar to weaken. This would be good for 
many normal Americans because it would boost U.S. manufacturing. But 
this would be quite unpalatable to U.S. elites because a weaker dollar 
makes the U.S. relatively poorer compared to the rest of the world and 
thus, reduces our might on the global stage. (Closing tax havens should 
also reduce inequality in the U.S. by reducing corporate profits.)

Then there’s the fact that the fall in corporate tax rates over the past 
decades isn’t over. Prior to the passage of the GOP tax bill last year, 
corporations theoretically were required to pay U.S. tax rates on 
profits booked in foreign countries when they repatriated the profits 
back to the U.S. (In practice, they just never brought the money home.) 
But the 2017 bill changed the rules. Now any money that corporations 
claim they made in a foreign country will only be liable for that 
country’s taxes. Thus, companies will have even more incentive to 
bogusly shift profits to tax havens.

The bill also slashed the U.S. statutory corporate tax rate from 35 
percent to 21 percent, purportedly because America had to be 
“competitive” with other countries with lower rates. This will now put 
pressure on those countries to further lower their corporate tax rates 
to compete with us. Once they do, multinationals will use that to demand 
lower corporate tax rates in the U.S. And so on.

There’s also the issue of who has what power in the U.S.-Saudi 
relationship in the wake of the murder of Jamal Khashoggi. Pundits have 
confidently proclaimed that because the Saudis now produce a smaller 
proportion of world oil than in the past, we now need them less. But 
U.S. elites don’t just care about Saudi influence on the price of oil, 
they care about U.S. involvement in the extraction and refining of all 
the Persian Gulf’s hydrocarbons. If the U.S. truly broke with the 
Riyadh, the Saudis and their similarly oil-rich Gulf allies might 
attempt to punish U.S. oil multinationals by turning to the oil 
multinationals of Russia or China.

And take the issue of statehood for Puerto Rico, something which would 
likely increase the power of the Democratic Party in Congress. Puerto 
Rico has been a tax haven for the pharmaceutical industry for decades 
and more recently, has been trying to market itself as a tax haven for 
superwealthy individuals. If Puerto Rico became a state, both 
corporations and a lot of hedge fund expatriates would find themselves 
paying U.S. tax rates, and hence, they both can be counted on to lobby 
extremely hard against it ever happening.


      Taxes Versus Smallpox and Golf

All in all, the continuing metastasizing of tax havens around the world 
should be a central preoccupation of economists beyond outliers like 
Zucman — as well as front-page news and fascinating to everyone. Yet 
it’s not. Why?

Almost 100 years ago, the acerbic misanthrope H.L. Mencken wrote an 
essay <http://www.tinyrevolution.com/mt/archives/002672.html> about 
academic economists. The subject of taxation, Mencken said, “is 
eternally lively; it concerns nine-tenths of us more directly than 
either smallpox or golf, and has just as much drama in it.” Yet somehow, 
Mencken wrote, economists have made taxes and economics in general seem 
mind-crushingly boring.

This happens, Mencken explained, because there are many academic 
subjects — math, archeology, Latin grammar — about which the superrich 
don’t care. But economics “hits the employers of the professors where 
they live. … It is, in brief, the science of the ways and means whereby 
they have come to such estate, and maintain themselves in such estate, 
that they are able to hire and boss professors. … over practically every 
[economist] there stands a board of trustees with its legs in the 
stock-market and its eyes on the established order, and that board is 
ever alert for heresy in the science of its being.” Economists therefore 
have every incentive to be extremely orthodox, extremely dull, and never 
communicate “the violet of human interest” to the rest of the world.

We’re lucky that Zucman & Co. have ignored these incentives. “Some 
people in economics feel,” Zucman said 
<https://www.icrict.com/icrict-in-thenews/2018/6/4/some-people-in-economics-feel-that-talking-about-inequality-is-not-what-economists-should-be-doing>, 
“that economics should be only about efficiency, and that talking about 
distributional issues and inequality is not what economists should be 
doing.” He’s even been accused of engaging in “French economics,” 
whatever that means. Fortunately, he and his colleagues continue to 
focus on what truly matters and have the talent to inform the rest of us.

Top photo: An evening view of the city of Geneva, Switzerland, on Aug. 
11, 2018. Switzerland is one of the world’s best-known tax havens.

-- 
Freedom Archives 522 Valencia Street San Francisco, CA 94110 415 
863.9977 https://freedomarchives.org/
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