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<div class="header reader-header reader-show-element"> <font
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href="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/">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/</a></font>
<h1 class="reader-title">Tax Havens and Other Tricks Let U.S.
Firms Steal $180 Billion From the Rest of the World Every Year<br>
</h1>
<div class="credits reader-credits">Jon Schwarz - October 26,
2018</div>
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<p><u>Are tax havens</u> 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?</p>
<p>The startling findings of a new <a
href="http://gabriel-zucman.eu/files/WrightZucman2018.pdf">academic
study</a> 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, “<a
href="https://theintercept.com/2016/04/05/heres-the-price-countries-pay-for-tax-evasion-exposed-in-panama-papers/">The
Hidden Wealth of Nations</a>.”</p>
<p>Tax havens — the most significant include Ireland,
Singapore, Switzerland, the Netherlands, Luxembourg,
Hong Kong, and Bermuda — serve two purposes.</p>
<p>The first is tax <em>evasion </em>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.</p>
<p>The second is tax <em>avoidance </em>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 <a
href="https://www.nytimes.com/2013/05/21/business/apple-avoided-billions-in-taxes-congressional-panel-says.html?module=inline">all
made in Ireland</a>, 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.)</p>
<p>Zucman conservatively estimated <a
href="https://theintercept.com/2016/04/05/heres-the-price-countries-pay-for-tax-evasion-exposed-in-panama-papers/">in
his book</a> 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.</p>
<p>The Zucman and Wright paper addresses the multinational
corporation part of the equation. Among their
conclusions:</p>
<p>• 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.</p>
<p>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.</p>
<p>• 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.</p>
<p>• 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.</p>
<p>• 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.</p>
<h3>U.S. Global Power</h3>
<p>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.</p>
<p>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 <em>into </em>the U.S.</p>
<p>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.</p>
<p>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.</p>
<p>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.)</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<h3>Taxes Versus Smallpox and Golf</h3>
<p>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?</p>
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<p>Almost 100 years ago, the acerbic misanthrope H.L.
Mencken wrote <a
href="http://www.tinyrevolution.com/mt/archives/002672.html">an
essay</a> 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.</p>
<p>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.</p>
<p>We’re lucky that Zucman & Co. have ignored these
incentives. “Some people in economics feel,” Zucman<a
href="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"> said</a>,
“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.</p>
<p class="caption">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.</p>
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