Sunday, May 15, 2011

Tax havens and the rise of new oligarchies

One of the major bastions of the new financial and corporate oligarchies that have emerged and entrenched themselves the past four or five decades is an international financial system that has usurped many of the powers of the sovereign nation state. Ironically, many nation states are in fact mere tools in the hands of these new oligarchies. These nation states function as tax havens, and there is an interesting new book on the subject, Treasure Islands: Tax Havens and the Men who Stole the World by Nicholas Shaxson. It has been reviewed by David Runciman in the London Review of Books.

The essence of offshore is the need to keep up a solid appearance of respectability, while allowing money in and out with as little fuss as possible. Tax avoidance (unlike tax evasion) is not a clandestine activity, and tax havens don’t exist just to enable people to squirrel their money away from the authorities. The money needs to be accessible, and it needs to be liquid. For that reason, people prefer tax havens where they can conduct their business relatively openly, and the most successful offshore jurisdictions are the ones that ask no questions but also tell no lies. Shaxson’s memorable phrase for this is ‘theatre of probity’. The Swiss have always been the masters, with their formal manners and careful paperwork. But it turns out that the other champions of this way of doing business are the British. Shaxson’s book explains how and why London became the centre of what he calls a ‘spider’s web’ of offshore activities (and in the process such a comfortable home for the likes of Saif Gaddafi). It is because offshore is the offshoot of an empire in decline. It perfectly suited a country with the appearance of grandeur and traditionally high standards, but underneath it all a reek of desperation and the pressing need for more cash.
Here the reviewer - and Shaxson, if the reviewer is accurately relating what Shaxson has written - are not just completely wrong, but dangerously misleading. The British have been an offshore finance haven ever since the slave trade and most especially the days of the open opium trade that decimated India and China both. Many of the leading financial firms in the City and the Empire are traced directly back to the opium trade. The foremost example is HSBC Corp., formerly the Hong Kong and Shanghai Bank. It is important to keep this in mind: what we really have with British offshore tax havens, and the City of London being the largest financial center in the world (yes, larger than New York City), is an old oligarchy shaping the world financial system is such a way as to facilitate the rise of new oligarchies. I.e., oligarchical self-perpetuation.
As Shaxson shows, many of the world’s most successful tax havens are former or current British imperial outposts. These include Hong Kong, the Channel Islands and remaining overseas territories like the Cayman Islands. What such places offer are limited or non-existent tax regimes, extremely lax regulation, weak local politics, but plenty of the trappings of respectability and democratic accountability. Depositors are happiest putting their money in locations that have the feel of a major jurisdiction like Britain without actually being subject to British rules and regulations (or British tax rates). The Caymans, or Jersey, make full use of their British connections to reassure people that their money is safe (the Cayman national anthem is still ‘God Save the Queen’), but when anyone complains to the authorities back in London that these places are being used by criminals and dictators to launder their assets, they are told that it is no longer Britain’s role to tell its dependencies how to run their own affairs. . . .

The other thing most of these places have in common is that they are islands. Islands make good tax havens, and not simply because they can cut themselves off from the demands of mainland politics. It is also because they are often tight-knit communities, in which everyone knows what’s going on but no one wants to speak out for fear of ostracism. These ‘goldfish bowls’, as Shaxson calls them, suit the offshore mindset, because they are seemingly transparent: you can see all the way through – it’s just that when you look there’s nothing there. Jersey is the template: a nice, genteel place, with a strong sense of civic responsibility and plenty of opportunities for public participation, including elections to all manner of public offices (senators, deputies, parish constables), but weak political parties, staggered ‘general’ elections, and never a meaningful change of government. ‘If you don’t like it, you can leave’ is the basic refrain of Jersey politics. Dissent is not obviously suppressed, as it might be under a dictatorship (which is why dictatorships make bad tax havens: you never know when the whole thing is going to blow up). Instead, dissent is simply allowed to wither away. The same thing happens on the Cayman Islands, with its tiny population (around 55,000), its elected legislature and its governor-general appointed from London, who takes all the difficult decisions but allows the locals to have their say.
How the City of London emerged from World War Two, and shifted overseas investments out of the collapsing pound sterling and into dollars is next explained. "Because the trade was happening in dollars, the British saw no need to tax or regulate it; because it was happening in London, the Americans had no means to tax or regulate it." The rise of the euro-dollar market is one of the first key developments that enabled the post-war financialization of the U.S. and other economies - a fact that is little appreciated today.
The Bank of England was happy: London was once again a lynchpin of international finance. The American authorities, unsurprisingly, were not so happy: they feared a balance of payments crisis. But when in 1963 President Kennedy tried to stem currency outflows by taxing the interest on foreign securities, in an effort to reduce the incentive to export dollars to more lucrative overseas markets, it had the opposite effect, and produced what Shaxson calls ‘a stampede for the unregulated London offshore market, free of tax and regulations’. US policy-makers were now in a dilemma. They could try to face down the threat of offshore, either with higher domestic interest rates, or with tighter controls on currency outflows and a tougher regulatory regime requiring US banks to share information about their overseas activities. Or they could copy London by creating an offshore world of their own closer to home: in other words, if you can’t beat them, join them. The second was the path of least resistance. . ..
Left unsaid was "especially after the elimination of the American President." This is another fact that needs to be more widely appreciated and understood today: President Kennedy was engaged in a vicious and cut-throat fight with American business and financial elites over the course and control of the American economy. See the excerpts I posted from Donald Gibson's 1994 book, Battling Wall Street: The Kennedy Presidency: Battling Wall Street: The Kennedy Presidency, Part 1, and Battling Wall Street: The Kennedy Presidency, Part 2.

What eventually happened is that the United States itself turned into a tax haven, with Delaware leading a race of the states to the bottom.
When officials from Delaware toured the globe in the late 1980s advertising their services (and hoping, among other things, to provide a haven for all the hot money that was expected to flow out of Hong Kong in the run-up to the handover to China), they did so under the slogan ‘Delaware can protect you from politics.’
Runciman then introduces a nice twist by asking some impolite questions:
What, though, about Washington, where the shift to an offshore mindset at the national level might be expected to run up against some serious political opposition? What happened to the representatives of all those people who don’t have lots of money to move around, who can’t relocate even if they wanted to, and who have an interest in a fair, open and broadly progressive tax system? Didn’t they notice what was going on?
Runciman answers these questions by next reviewing Jacob Hacker and Paul Pierson's Winner-Take-All Politics: How Washington Made the Rich Richer – and Turned Its Back on the Middle Class. Basically, this book is a guide to how the new American corporate and financial oligarchies were created, and how they emerged and assumed ever more political power. And as I have been arguing all along, the existence of corporate and financial oligarchies are, by nature, an insult and danger to the American system of governance as a democratic republic.

Read the entire review.

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