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TAX HAVENS CAUSE POVERTY

The Tax Justice Network promotes transparency in international finance and opposes secrecy. We support a level playing field on tax and we oppose loopholes and distortions in tax and regulation, and the abuses that flow from them. We promote tax compliance and we oppose tax evasion, tax avoidance, and all the mechanisms that enable owners and controllers of wealth to escape their responsibilities to the societies on which they and their wealth depend. Tax havens lie at the centre of our concerns, and we oppose them.

Take a look at our core themes:

These issues affect rich and poor countries, and, like the fight against corruption, our approach does not fit easily into either of the old political categories of left and right. We do not argue generally for high or low taxes (that is for voters to decide) but we note the often better human development outcomes in higher-tax countries and oppose the demonisation of tax that is fashionable in some circles. What we do support is progressive and equitable taxation, which is what voters around the world have chosen. We wish to see nations’ sovereignty restored, so that electorates are given back the power to get the tax systems they vote for. To this end we advocate much stronger co-operation between states on tax and regulation.

For more details, see "Resources," to the left of this page.

Who are we?

The Tax Justice Network is led by economists, tax and financial professionals, accountants, lawyers, academics and writers, and we are driven by original research and ideas. We are supported by a growing community of individuals, economists, faith groups, non-governmental organisations, academics, lawyers, trade unions -- and many others. (Read more)

Why tax and tax havens?

Tax is the foundation of good government and a key to the wealth or poverty of nations. Yet it is under attack. Tax havens allow big companies and wealthy individuals to benefit from the onshore benefits of tax – like good infrastructure, education and the rule of law – while using the offshore world to escape their responsibilities to pay for it. The rest of us shoulder the burden. This corrupted international infrastructure allowing élites to escape tax and regulation is also widely used by criminals and terrorists. As a result, tax havens are heightening inequality and poverty, corroding democracy, distorting markets, undermining regulation and curbing economic growth, accelerating capital flight from poor countries, and promoting corruption and crime around the world.

The offshore system is a blind spot in international economics and in our understanding of the world. The issues are multi-faceted, and tax havens are steeped in secrecy and complexity – which helps explain why so few people have woken up to the scandal of offshore, and why civil society has been almost silent on international taxation for so long. We seek to supply expertise and analysis to help open tax havens up to proper scrutiny at last, and to make the issues understandable by all.

The fight against tax havens is one of the great challenges of our age. Our approach challenges basic tenets of traditional economic theory and opens new fields of analysis on a diverse array of important issues such as foreign aid, capital flight, corruption, climate change, corporate responsibility, political governance, hedge funds, inequality, morality – and much more. (Read more in Part II of our Manifesto for Tax Justice)

How big is the problem, and what is its nature?

Assets held offshore, beyond the reach of effective taxation, are equal to about a third of total global assets. Over half of all world trade passes through tax havens. Developing countries lose revenues far greater than annual aid flows. We estimate that the amount of funds held offshore by individuals is about $11.5 trillion – with a resulting annual loss of tax revenue on the income from these assets of about 250 billion dollars. This is five times what the World Bank estimated in 2002 was needed to address the UN Millenium Development Goal of halving world poverty by 2015. This much money could also pay to transform the world’s energy infrastructure to tackle climate change. The World Bank has reported the cross-border flow of the global proceeds from criminal activities, corruption, and tax
evasion at $1-1.6 trillion per year, half from developing and transitional economies (full report here).

Offshore finance is not only based in islands and small states: `offshore’ has become an insidious growth within the entire global system of finance. The largest financial centres such as London and New York, and countries like Switzerland and Singapore, offer secrecy and other special advantages to attract foreign capital flows. As corrupt dictators and other élites strip their countries’ financial assets and relocate them to these financial centres, developing countries’ economies are deprived of local investment capital and their governments are denied desperately needed tax revenues. This helps capital flow not from capital-rich countries to poor ones, as traditional economic theories might predict, but, perversely, in the other direction.

Countries that lose tax revenues become more dependent on foreign aid. Recent research has shown, for example, that sub-Saharan Africa is a net creditor to the rest of the world in the sense that external assets, measured by the stock of capital flight, exceed external liabilities, as measured by the stock of external debt. The difference is that while the assets are in private hands, the liabilities are the public debts of African governments and their people. (Read more)

Globalisation and international trade and finance have got a bad name of late. Each brings opportunities, and risks. We must now start to address seriously what may be the biggest risk of all: tax abuse, and tax havens and everything they stand for.

What can you do?

Our resources are small, yet the huge, well-funded public and private interests that oppose us have no answers to the agenda we are setting. Our message is starting to spread fast. Please join us, support us, and engage with the emerging debate.

OUR CORE THEMES 

Our core themes are briefly outlined below. The Resources section to the left of this page has more details.  

We support sustainable finance for development 

Tax is the most sustainable source of finance for development. The long-term goal of poor countries must be to replace foreign aid dependency with tax self-sufficiency. Developing nations in Africa, Latin America and elsewhere are especially vulnerable to the offshore world. Action on tax has the potential to deliver gains to poor countries that are orders of magnitude greater than what can be achieved with aid. To meet the Millennium Development Goals, OECD countries have been urged to raise their levels of aid to 0.7 percent of Gross National Income – but this is as nothing when compared to potential tax revenues: in some rich countries, tax constitutes over 40 percent of GDP. 

Tax is the link between state and citizen, and tax revenues are the lifeblood of the social contract. The very act of taxation has profoundly beneficial effects in fostering better and more accountable government. It is astonishing that so many members of the aid community have ignored tax for so long. Action on international taxation is, quite simply, the key to lifting hundreds of millions of people out of poverty. Read More

We support international co-operation on tax, regulation and crime

The tax policies of one country can seriously harm the citizens of another. In the 19th and 20th Centuries, rich nations agreed that a balance should be struck between corporations, governments and societies. Tax and regulation lay at the heart of these democratic contracts, and it was feasible to set up coherent systems under single nation states. But these grand bargains began to unravel in the 1920s, as multinational companies began to emerge as a force in world markets and exploit cross-border loopholes to reduce their taxes. This accelerated in the 1970s, as financial liberalisation increasingly allowed companies to shop around for jurisdictions to escape tax and regulation. Tax havens are now intensifying competition between jurisdictions on tax and regulation in a beggar-my-neighbour scramble to attract international capital, undermining already weak regulation of public companies and stock exchanges. International efforts to tackle this harmful “tax competition” are, to date, feeble, and the amount of wealth offshore is growing fast.

Insular, nationally-based approaches cannot do justice to these challenges. From the perspective of individual countries, it may be relatively easy to argue in favour of cracking down on outflows of money into tax havens, but it is far harder to challenge the inflows. Only a global approach will do: this means co-operation between nations on tax havens. Far from weakening state sovereignty, as is sometimes suggested, stronger tax cooperation is the best way to strengthen national tax systems in this age of globally mobile capital. Read More

We oppose tax havens and offshore finance

Tax havens and offshore financial centres have created an interface between the illicit and licit economies, corrupting national tax regimes and onshore regulation. The result is a shift of the tax burden away from capital and onto labour, and a dramatic rise in income and wealth inequality, as well as the corruption of democracies around the world as élites escape their responsibilities with impunity. Supporters of tax havens point to the wealth enjoyed by such tax havens as Switzerland or the Cayman Islands to bolster their arguments. This is like pointing to the wealth of a corrupt politician and arguing that corruption is therefore a good thing: tax havens effectively appropriate other countries' taxes for themselves.

We recognise that some small island economies depend heavily on hosting harmful tax practices, and may lose investment and economic growth from efforts to tackle the abuses. But the harm these activities cause are orders of magnitudes greater than any claimed benefits. We propose multilateral support for these countries to assist with re-structuring as part of efforts to clean up the tax haven scandal. In any case, the biggest culprits are the big financial centres such as in Britain, the United States and Switzerland. Read More

We support transparency and we oppose corruption

The Tax Justice Network supports transparency and opposes secrecy in international finance. We want companies to be made more open about their financial affairs and to publish data on every country where they operate. We want the finances of wealthy individuals to be visible to their tax authorities, so they pay their fair share of tax. Markets work better, and companies are more accountable, in an environment of transparency. Secrecy hinders criminal investigation and fosters criminality and corruption such as insider trading, market rigging, tax evasion, fraud, embezzlement, bribery, the illicit funding of political parties – and much more. We want to expand the commonly accepted definitions of corruption so that they no longer focus only on narrow aspects of the problem such as bribery. We must bring tax, tax avoidance and tax evasion decisively into the corruption debate.

Corruption, crime and corporate abuse have a demand side (such as the theft of public assets by a politician) and a supply side – the provision of corruption services, like the concealment of a politician’s stolen assets offshore. Tax havens and associated activities stimulate the demand side – so they are a central part of the corruption problem.  Eva Joly, an investigating magistrate who broke open the “Elf Affair” in France (Europe’s biggest corruption investigation since the Second World War) was furious about how tax havens stonewalled her probes. She compared magistrates to sheriffs in the spaghetti westerns who watch the bandits celebrate on the other side of the Rio Grande. “They taunt us – and there is nothing we can do.” As she says, the fight against tax havens must be “Phase Two” in the international fight against corruption. Read More

We support a level playing field in competitive markets

We support simplicity and a level playing field on tax. Complexity and loopholes provide a windfall for a pinstripe infrastructure of lawyers, bankers and accountants and distort markets, undermining market competition, mis-directing investment, and rewarding economic free-riders. These distortions favour  multinational companies over national ones; they promote big companies over small, and they hinder start-up companies in the face of established vested interests. New forms of finance that have become prominent recently, such as hedge funds and private equity companies, greatly benefit from lower tax rates, lack of transparency and minimal accountability which provide them with competitive advantages over their peers that have nothing to do with efficiency or innovation in the real world, or with the quality or price of what they offer. Companies wishing to act in an ethical manner find themselves at a competitive disadvantage vis à vis their more irresponsible competitors. Read More

We favour progressive and equitable taxation

We support progressive taxation, founded on the basic principle that tax should be based on ability to pay -  that is, the wealthy should pay higher rates of tax. The principle of progressive taxation has been supported almost unanimously by democratic choices in countries around the world – and we support those choices. To advocate progressive taxation is to oppose regressive tax systems where the poorer sections of society pay a higher share of their income. Financing public goods, according to voters’ wishes and ability to pay, mitigates inequality, which is one of the greatest political challenges facing the world today. 

Tax systems should also be comprehensive, containing layers of different taxes such as income tax, corporation tax, enviromental taxes, inheritance taxes, customs duties and so on. Different taxes have different functions, and tax systems should contain an appropriate mix of them all. Read More

We support corporate responsibility and accountability

Tax is the forgotten element in the corporate social responsibility debate – and probably the most important. We believe that corporate responsibility starts with paying tax.

We oppose a financial and legalistic approach to tax, which focuses exclusively on the boundary between what is legal (tax avoidance) and what is illegal (tax evasion.) Instead we favour an accountability-driven approach, differentiating between what is responsible, and what is not. A responsible approach sees tax not as a cost to a company to be avoided, but like a dividend: a distribution out of profits to all stakeholders. Companies do not make profit merely by using investors' capital. They also use the societies in which they operate -- whether the physical infrastructure provided by the state, the people the state has educated, or the legal infrastructure that allows companies to protect their rights. Tax is the return due on this investment by society from which companies benefit.

We suppport greater transparency in corporate reporting. We want to see corporate tax policies brought firmly and transparently into wider governance frameworks such as business principles and corporate values. We also support intervention to protect company directors who wish to behave in an ethical manner from being undermined by predatory actors who thrive on abuse. Read more

We favour tax compliance and a culture of responsbility

Tax compliance means paying the right tax in the right place at the right time. We want to see the restoration of a culture of tax compliance among individuals, corporations, tax professionals, and governments, and an ethical approach to tax. They should follow not only the letter of the law, but the spirit of the law, with respect to their tax affairs.

Both tax evasion and tax avoidance are anti-social and equally harmful. Tax avoidance may be the more so, because it is so insidious. Highly paid professionals spend their lives devising ingenious schemes to reduce or eliminate the tax liability of wealthy people, and they have set themselves up as the “experts” on international taxation, developing and propagating a world view that sees these kinds of abuses as acceptable. Huge, well-resourced vested interests support them and have skewered international efforts to address the problems. Politicians, economists and civil society groups, perhaps daunted by the complexity of the issues or unable to see or measure what is happening in the secret world of offshore, too rarely challenge this world view. Meanwhile, tax authorities rarely have the staff or time to combat the enormous resources and wiles of the tax avoidance industry. The resulting mouse-and-cat game – besides its effect on corrupting democracy – is enormously wasteful. 

It is time for change. Our code of conduct on taxation outlines our approach. Civil society groups, economists, journalists, and ordinary people need to rouse themselves and make this one of the great political struggles of this young century.

December 2007