REVIEW: Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens (1st 2011)
By Nicholas Shaxson. Palgrave Macmillan
Nicholas Shaxson is a well-traveled British investigative writer who specializes in international business. Treasure Islands is an investigation of the many ways that criminals and multinationals contrive to evade taxes by setting up ‘special purpose vehicles’ and other kinds of shell entities in lenient tax jurisdictions like Switzerland, the Cayman Islands and – so Shaxson claims – even Wall Street and the City of London. The book exemplifies views of bien pensant Europeans. Taxes are good and government is always beneficent.
I read Treasure Islands with interest but some puzzlement. Shaxson does indeed provide a fascinating description of the grotesquely complicated network of locations and dodges that makes up the offshore network. But I’m puzzled because he seems extraordinarily naïve about the nature of competitive commerce. He clearly thinks that multinationals that take steps to minimize taxes by putting assets offshore, mispricing intra-company transactions and the like – that these guys are morally defective: “Irresponsible players treat tax as a cost to be minimized, to boost short-term shareholder value alone…” Er, yes. But morality is irrelevant if survival is at stake. If these companies are competing (which to some extent they surely are), then as soon as one company figures out how to reduce its costs through offshoring, the others must follow suit or die. In any case, what’s so bad about (legally) minimizing one’s taxes? Should these companies be expected to voluntarily impoverish their shareholders (not to mention their officers, who are both the real winners and the decision-makers) by in effect donating money to the IRS?
My other beef is that Shaxson never seems to question the legitimacy of taxation. To him, all tax avoidance, legal or not, is wrong. Yet almost everyone agrees that the present US tax structure is indefensible, even though there is little agreement on what exactly should replace it. Although there have been many hiccups. he feedbacks in our democratic system tend to drive it in the direction of ever-increasing taxation. High taxes are bad for many reasons. But the main one is that the money taken from citizens is to a large extent returned to them – with conditions. High taxes thus go along with high dependence of the citizens on the state.
As a practical matter, taxing companies, as opposed to individuals, obviously doesn’t work very well: “corporations paid about two-fifths of all U.S. income taxes in the 1950s; that share has fallen to a fifth” Shaxson writes. So why do we tax them at all? The answer of course is the Colbert principle – not Stephen but Jean-Baptiste (1619–1683): “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” This principle says you should tax as many different things as mildly as possible so as to get the fewest complaints. So why not add corporate profits to the mix? Unfortunately, because, in the US, corporations (but not individuals) are not liable for profits kept abroad, they have every inducement to juggle things so that much of their wealth is kept out of the U.S.. Well done Washington!
On the other hand, offshoring clearly is a problem if only because it wastes resources, makes the accounts of businesses harder to figure out (ENRON, WorldCom q.v.) and surely impairs overall efficiency. Shaxson writes “The Big Four accounting firms—PricewaterhouseCoopers (PWC), Ernst & Young, KPMG, and Deloitte Touche—are giants: PWC employed over 146,000 people and generated $28 billion in revenues in 2008, making it the world’s largest professional services firm.” This is ridiculous in the modern era when computers should be used to speed up and make traditional accounting less, not more, people-intensive. Obviously what’s going on is the opposite: technology in the service of increased financial complexity.
What is the solution? We might start by asking: Why tax businesses at all? The taxes are hard to figure out, hard to collect – and costly and confusing to avoid. Why not set the business tax to zero? – which would completely wipe out the incentive for offshoring, reduce the unfair competitive tax advantage big, multinational – hence offshoring – companies have over intra-national, small companies, and simplify the tax system quite a bit. (Recall that Mitt Romney’s 2009 tax returns, which he made public in 2012, were 500 pages long including stuff on his accounts in the Cayman Islands. Rich as he is, that still strikes me as absurd.) The shortfall in total tax revenue caused by abolishing corporate tax (assuming, as some do, that reduced tax revenues are a bad thing!) could be made up by increasing individual income taxes, which can’t legally be sheltered offshore and involve no new collection bureaucracy. The rates would presumably be adjusted to be revenue-neutral.
But of course much hissing would ensue! The populace would probably not accept the substantial increase in individual taxes that would be necessary to offset the loss of corporate taxes – even though they are already paying the corporate taxes indirectly anyway: they are passed on by companies in the price of goods and services. (I’m betting that relatively little comes out the compensation of their senior employees.) And the increased efficiency of the whole economy caused by tax simplification would surely increase total wealth. So, the problem is basically political rather than economic.
On one point that Shaxson makes, all should agree: “The latest crisis has made clear that much financial services activity is actually harmful. So if certain parts of the financial industry leave town—so much the better.” That view will get few cheers from Wall Street, but it’s probably correct.
Photo credit: Skyscrapers by Sharee Basinger