Sunday 29 July 2012

Economic Myths: There's £13 trillion hidden in tax havens

From the BBC:

A global super-rich elite had at least $21 trillion (£13tn) hidden in secret tax havens by the end of 2010, according to a major study. The figure is equivalent to the size of the US and Japanese economies combined. The Price of Offshore Revisited was written by James Henry, a former chief economist at the consultancy McKinsey, for the Tax Justice Network...

"The lost tax revenues implied by our estimates is huge. It is large enough to make a significant difference to the finances of many countries. From another angle, this study is really good news. The world has just located a huge pile of financial wealth that might be called upon to contribute to the solution of our most pressing global problems," he said.


OK, the £13 trillion figure itself might be correct, this would equate to about one-fifth of all the money in the world, but so what?

"Money" is a game of two halves, for every asset there is a liability and it all nets off to nothing, it's all just book keeping entries. Further, the underlying asset is usually land; three-quarters of bank assets are mortgages which are secured on land.

So if you have money on deposit with a UK bank and decide to transfer it to a Bahamas bank account, you are merely at one end of a long chain of debits and credits, three-quarters of which goes back to "land". The land does not do any work to generate the money, the borrower does the work, and the borrower hands over the cash to the bank who then hands it over to the depositor-vendor (step 1).

You can interpose an extra step between UK bank and depositor-vendor called "offshore bank" (step 2).

Or you can strip out two steps, perhaps purchaser-borrower and depositor-vendor decide to cut out the bank-middleman, and the purchaser pays directly to the vendor (step 3). If the vendor moves abroad, that's his decision, he's perfectly entitled to do so, you can hardly count that as tax evasion or anything.

Or maybe the current owner of the land decides not to sell it but to rent it out instead (step 4), that's not much different from step 3.

And maybe the occupier and the owner are the same person, step 5.

The basic picture is always the same, it doesn't matter how few or how many intervening steps there are. And of course, when the depositor-vendor wants to spend that money, the only place he can spend it is where happens to live, which almost certainly is not in the tax haven in which the bank is situated in which he thinks he has his money:

10 comments:

Physiocrat said...

You have not been reading what I was saying in my LVTC blog. At this very moment, trillions of pounds worth of wealth are being shipped out of Europe through the huge container ports at Rotterdam, Hamburg, Southampton and Felixtowe. All of it is converging on the Cayman Islands where a ports have been constructed bigger than all of these put together, to handle more wealth being shipped out from the ports in China and Japan.

The tax haven islands will soon be completely covered with secure warehouse storage for all this wealth. Meanwhile, the islands' harbours are heaving with luxury yachts to the point that they are becoming dangerously overcrowded. And it isn't even the First of April.

Mark Wadsworth said...

Ph, aha, right. Actually I was alluding to a spat which Robin Smith had with the TJN.

Physiocrat said...

Oh, TIN, you mean. Can they produce a piccie of one of the the secure warehouse compounds they have built on the Caymans?

Mark Wadsworth said...

Ph, no of course not, the secure warehouses are in underground bunkers to stop prying eyes.

mombers said...

Isn't smashing that the one thing that can't be moved to the Caymans isn't taxed in the UK?

Mark Wadsworth said...

M, that was Robin's other point, which TIN brushed aside.

All these paper trails start with land, it doesn't matter where along the trail you tax them, so administrative simplicity says tax the land bit and you can ignore the rest.

The "Substance over form" rule says 5 is no different to 4, so tax 5 the same as 4.

Physiocrat said...

A tin of surströmming to the first person that can convince Richard Murphy that the way to prevent tax avoidance is to tax things that are not going to go anywhere.

Mark Wadsworth said...

Ph, to be honest, I'm glad that RM doesn't support LVT, it would damage the cause irreparably if he did.

Physiocrat said...

I would like to give Murphy the surströmming, though.

Lola said...

Ph - through which orifice?