Dirty Secrets: How Tax Havens Destroy the Economy by Richard Murphy

    Richard Murphy is a political economist from the U.K. who is known for studying and writing about the moral and legal consequences of tax havens and offshore tax havens. He helps the Trades Union Congress and is part of the Tax Justice Network. Additionally, he oversees technological operations at Fair Tax Mark.

    The book was written because of the 2016 Panama Papers scandal. This was when many offshore accounts and the people connected to them were revealed. However, the book has become popular for more than just this topic. Murphy renamed tax havens as “secrecy jurisdictions” to show how harmful they are. He says tax havens are bad for our economy, stock markets, how we live, and our democracy. The book is hopeful and suggests ways to stop tax havens.

    First of all, the author explains what are tax havens and their functions. According to the author, people often use the words “tax haven” and “offshore (industry)” to mean the same thing. These two words have different meanings and interpretations. “Offshore” means “somewhere else” when talking about avoiding something during a flight, but it doesn’t mean a specific place. The people making the deal are not in the same place. Tax havens are places that exist and can be studied. Tax havens are places where people who are not citizens can legally avoid paying taxes.

    To prove that tax havens lead to a broader variety of earnings than offshore businesses, it is necessary to distinguish between the two. Murphy identifies the following three primary functions for tax havens:
  1. First, they routinely break the law to further the interests of the “elite” in our society.
  2. Second, they prevent democratically elected governments from fulfilling the expectations of their constituents and carrying out the policies they campaigned on.
  3. Third, they contribute to the global concentration of income and wealth.
    The intricate nature of the issues arising from these three activities makes the existing policy mechanisms crafted by organizations such as the OECD inadequate. Tax havens employ a wide range of products and services to strengthen their protective barriers. The offshore world of tax abuse is facilitated by an intricate web of trusts, foundations, and companies supported by a network of politicians, lawyers, accountants, bankers, and wealth-management professionals. These entities operate within the world’s secrecy jurisdictions, allowing for the transformation of financial products and the concealment of illicit activities.

    After explaining the term tax haven and its functions, the author proceeds to expound upon the term “secrecy jurisdiction”. The term “secrecy jurisdiction” has been suggested as a more precise alternative to the term “tax haven.” According to Murphy, the issue with tax havens goes beyond tax abuse and encompasses the secrecy that enables such abuse to occur. This aspect is equally significant and cannot be overlooked. This opaque nature of tax havens provides support for the idea that they are, at heart, secrecy countries.

    The modern incentive offered by tax havens is far more harmful than tax evasion, hence the focus on secrecy is warranted. These entities provide a secure refuge not only from tax authorities but also from other regulatory bodies, competitors, creditors, stockholders, and, to a lesser extent, family members. It is incorrect and fundamentally flawed to assume that individuals only opt to document their actions in a tax haven solely for tax purposes.

    After defining the term “secrecy jurisdiction,” Murphy goes into great length on the numerous socio-economic crises that tax havens might cause for a country.

    According to Murphy, tax haven can lead to aid dependence of developing nations. Too many third-world nations rely on foreign help because of tax abuse, primarily in the form of tax evasion by the wealthy elite. In terms of direct economic effects, tax havens have less of an impact on industrialized countries because of their ability to compensate for losses using other means. Because of tax avoidance and insufficient revenue, emerging and third-world governments are often forced to borrow money at exorbitant interest rates.

    Furthermore, tax havens can lead to lack of transparency in markets. These days, the market system is the basis for the vast majority of the world’s economies. Economists generally agree that perfect knowledge is essential to succeeding under this system. This means that businesses, investors, employees, regulators, governments, and others with a stake in the allocation of resources should have access to as much relevant data as feasible. Tax havens typically conceal this information about major market participants, which disrupts market equilibrium.

    Additionally, tax havens can result in lack of fair competition and growth. Equal opportunity for everyone is yet another necessary and essential requirement for the successful operation of markets. Equal access to money ensures that individuals who are able to come up with innovative products are able to bring those products to market. The concentration of a large amount of wealth in a small number of hands is another way in which tax havens are harmful to both fair competition and economic growth.

    Finally, tax havens can cost too dearly to democracy. It is essential for the electorate of any democratic government to have full and comprehensive knowledge of the candidates running for office in order to make an informed choice. It should go without saying that tax havens prevent citizens from gaining access to this information. This is due to the fact that the majority of candidates belonging to the higher echelons of society own an enormous amount of money that was accumulated through such dishonest tactics. Therefore, in this sense, tax havens give criminals the opportunity to get away with their deeds.

    Following a thorough examination of the detrimental effects of tax havens, the author proceeds to expound upon the concept of tax competition and its adverse consequences. As per Murphy’s analysis, tax competition is a widely used strategy by governments worldwide to lure capital and labour through the provision of lowered tax rates and similar incentives. Tax competition is the formal term used to describe this practice. In reality, what we are witnessing is a deliberate effort by one state to withhold resources that rightfully belong to another state. This can be seen as nothing less than a tax war between the two states. The ongoing conflict over taxes often leads to a misdirection of resources, ultimately resulting in a net financial loss for all parties involved, rather than a gain.

    Murphy says refers to the OECD’s stance regarding the scourge of tax evasion. In the 1990s, the OECD said that if we can see more about what big companies do, it might stop them from cheating on taxes. Big companies have a lot of offshore accounts. We need to make laws to stop them from doing that. To follow the new rules, companies must share seven types of information for each country they work in. These include: how much money they make from sales, how much money they make before taxes, how much tax they pay in each country, what they do in that country, how many people work for them there, and how much money they have invested there. This data will help more people understand what the company does and how it benefits each country where it operates.

    Suffice to say, places called “tax havens” allow non-citizens to legitimately evade taxation. Murphy claims that the confidentiality afforded by tax havens is the root of the problem, not tax abuse per se. Because of tax misuse, especially tax evasion by the wealthy elite, too many poor countries are dependent on aid from others. New regulations aim to curb this threat by requiring companies to disclose only seven types of data for each country in which they do business: sales, earnings before tax, tax paid in each country, operational scope, number of employees, and total value of assets. A further aspect in which tax havens are detrimental to free and open markets and economic growth is that they facilitate the consolidation of wealth among a small elite. This is an absurdly dangerous and opprobrious activity that must be dealt with appropriately.

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