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

OVERVIEW

The book was primarily written in response to 2016’s Panama Papers scandal – the biggest leak on offshore accounts and people involved with them – but its scope has proven to be much wider. Murphy’s work not only redefines tax havens as "secrecy jurisdictions" to demonstrate their true impact but also identifies the threat tax havens pose to our tax revenues, our markets, and therefore our economy and well-being – and ultimately to our democracies. Nevertheless, the tone of the book is more optimistic than pessimistic, as it proposes viable reforms that could shake tax havens to their foundations.

ABOUT THE AUTHOR

Richard Murphy is a political economist from Britain, known for his works on tax evasion and tax avoidance. He is also an advisor of Trades Union Congress, the technical director of the Fair Tax Mark and a member of Tax Justice Network.

FOUR TAKEAWAYS

The following are the key takeaways from the book:

• TAX HAVENS: MEANING, FUNCTIONS, And PRODUCTS

Tax havens and the term “offshore” (industry) are often used interchangeably. However, the truth is that both the terms have “distinct” meanings and interpretations. While offshore can be translated into “elsewhere” in the context of tax evasion/avoidance, this “elsewhere” does not consist of any physical geography. It simply means that the contractual parties do not belong to the same jurisdiction (or place) as the one in which transaction was recorded. On the other hand, “tax havens are real places that we can identify”. In other words, tax havens can be described as real, physical places whose “tax system provides an advantage to a person who is not resident in that place” (p. 31).

The clarification between offshore and tax havens is necessary to lay the claim that tax havens often lead to a much broader range of problems than the offshore industry. Murphy believes that “tax havens have three fundamental purposes”:

1. They tend to undermine the laws in order to benefit the “elite” of our society.
2. They prevent legally elected governments from delivering what they promised in their mandate to their electorate or what “their electorates might expect of them” (p. 7).
3. They lead to an increase in “concentration of both income and wealth around the world” (p. 7).

All three of these functions produce problems that are so “layered” that the current policy tools designed by organizations like OECD have failed to tackle them. One of the reasons for this is that these layers are constantly strengthened via the set of products and services employed by tax havens. Products, such as trusts, foundations and companies, backed by “politicians... lawyers, accountants, bankers and so-called wealth-management professionals” transform into “an integrated web that facilitates the offshore world where tax abuse takes place, as a result of the operations of the world’s secrecy jurisdictions” (p. 45).

• TAX HAVENS OR SECRECY JURISDICTIONS?

Speaking of “secrecy jurisdictions”, the term has been offered as an accurate alternative for tax havens. In Murphy’s words: "The real problem of tax havens is not tax abuse itself, important though that is, but the secrecy that permits that abuse and many others. It is this opacity that suggests tax havens might be better understood as secrecy jurisdictions" (p. 20).

The emphasis on secrecy rather than just tax abuse is justified because what tax havens today offer is “something much more pernicious”. They provide an asylum from “a much broader range of regulation, permitting the user to escape their obligations not just to tax authorities but to other regulators, as well as to their competitors, creditors and shareholders, and (not least) their spouses and children”. It is, thus, fundamentally wrong to limit the role of tax havens to tax evasion or tax avoidance and to assume that “tax was the only reason someone might choose to record an activity in such a place” (p. 17)

• HOW TAX HAVENS DESTROY THE ECONOMY

As mentioned earlier, tax havens (or secrecy jurisdictions) pose an enormous threat to global economy. Some of their key repercussions are mentioned below.

• Developing nations’ aid dependence: Tax abuse in the form of tax evasion by the elites has left “too many developing countries dependent upon aid” (p. 7). While developed nations have the liberty and resources to “compensate for any losses to tax havens – and as a result suffer little absolute loss in terms of direct economic outcomes – this is not true for developing countries” (p.60). Low earning, combined with tax evasion, causes developing and third world nations to look for high-interest loans which they would never have to “if they collected the tax that is rightfully theirs” (p. 7).
• Lack of transparency in markets: Most of the economies in the world today operate under the market system. In order to achieve optimal results under this system, economists believe, “perfect knowledge” is required. This means as much information as possible should be supplied to market participants “so that decision-makers – whether they be businesses, investors, employees, regulators, governments or others – can make the best possible decisions on how resources are used” (p. 8). Tax havens often hide this information about some of the key market players and disturb the market equilibrium.
• Lack of fair competition and growth: Another important condition required for markets to succeed is equal opportunities for all. Equal opportunities include “equal access to capital, so that those with good ideas can bring them to market” (p. 8). However, once again, by intentionally creating “opacity” and concentrating the wealth into few hands, tax havens inhibit both fair competition and economic growth.
• Cost to democracy: To elect any democratic government, it is important that the people voting have complete and thorough knowledge about the candidates standing. Needless to state, tax havens “prevent this information being available to citizens” and allow “perpetrators to walk away from their actions” (p. 26).
• Tax competition: By definition, tax competition is a process used by various governments across the globe to attract capital and labor by offering lower tax rates and other similar incentives. In actual, however, this is a “deliberate attempt by one state to deny to another state the resources that are its rightful property” (p. 26) and is, thus, nothing short of a tax war. This tax war often results in misallocation of resources and incurs more loss than profit for all parties involved.

• POLICY REFORMS TO TACKLE TAX HAVENS

Over the past 20 years, several governments and international organizations (OECD, EU and IMF) have come up with solutions to this problem. All of them, however, have failed in one way or the other. In most of these cases, it appears that the policies had “failure built into them from the start” (p. 65). Below are listed some of developments on these previous reforms alongside some new policy objectives, from the book, to tackle the same problem.

• Country-by-country reporting of world’s major companies: One of the ways tax abuse can be minimized is by making the actions of multinational corporations transparent, as pointed out by OECD in the 90s. Given that most of the offshore accounts are handled by these corporations, it has become rather necessary to introduce legislations barring them from doing so. Under this policy reform, these companies “will need to supply just seven pieces of data for each jurisdiction in which they trade including sales, profits earned before tax, tax paid in each country, scale of the company’s operations, number of people employed, and total value of the investment” (p.66). This summarized data will highlight what each “corporation’s business consists of, and what it contributes to each country in which it operates” (p.69) and ultimately increase transparency.
• Change in corporate tax: At present, shareholders are taxed in place of companies. This has led to severe tax evasion in the form of offshore accounts. A reform in the current corporate tax will not only resolve this tax abuse but also ease the process of tax collection. Two major benefits emanating from such a reform include efficiency and certainty. In the author’s words: "There are two other reasons for taxing companies. One is that it is efficient to do so: in many cases it is much easier to tax a company than all of its shareholders, even if you could locate them. This has the second advantage of ensuring that at least some tax is paid in the place where the company trades, rather than in the tax haven where its shares may be registered" (p. 73).
• Generating political will: It is almost impossible to achieve the reforms stated above if politicians or people in the government are unwilling. Hence, there is a great need to generate political will. One way of doing this is by making politicians realize that the only way they can “re-connect effectively with their electorates... is by tackling tax havens” (p. 8). Since incidents like Panama leaks have left people more aware, earning votes without enacting “measures that will shatter the secrecy” (p. 8) created by tax havens seems difficult.

CONCLUSION 

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.

LINKS AND RESOURCES TO READ MORE ABOUT THE ROLE OF TAX HAVENS IN DESTROYING ECONOMY

• The Economic and Social Consequences of Tax Havens in the World.
• Why tax havens must go!
• Tax havens: Is the tide turning?