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Showing posts with label Paradise. Show all posts
Showing posts with label Paradise. Show all posts

Wednesday, 15 November 2017

Why do people care more about benefit ‘scroungers’ than billions lost to the rich?

Robert De Vries and Aaron Reeves in The Guardian


The Paradise Papers have once again revealed the ingenuity and energy the super-rich are willing to deploy to keep their money away from the taxman. By illuminating the scale of this injustice, journalists have provided an invaluable service. And yet the revelations do not seem to have generated the level of public outrage that might have been expected.

At a time of staggering global inequality, it is perhaps surprising that people are not more animated by the determination of the ultra-rich to avoid their obligations to support our roads, hospitals, soldiers and schools – when regular citizens are unable to take advantage of such arrangements. However, this relative lack of concern is consistent with research on people’s attitudes towards tax avoidance.

Last year’s British Social Attitudes survey asked Britons about their feelings on this issue. Our analysis of this data (with Ben Baumberg Geiger of the University of Kent) revealed that the British public believes tax avoidance to be commonplace (around one third of taxpayers are assumed to have exploited a tax loophole). In moral terms, people seem rather ambivalent; less than half (48%) thought that legal tax avoidance was “usually or always wrong”.

By contrast, more than 60% of Britons believe it is “usually or always wrong” for poorer people to use legal loopholes to claim more benefits. In other words, people are significantly more likely to condemn poor people for using legal means to obtain more benefits than they are to condemn rich people for avoiding tax. This is a consistent finding across many different studies. For example, detailed interviews conducted by the Joseph Rowntree Foundation in the wake of the 2008 financial crisis found that people “tended to be far more exercised by the prospect of low-income groups exploiting the system than they were about high-income groups doing the same”.

This discrepancy is reflected in government priorities. Deep public antipathy towards benefit “scroungers” has been the rock upon which successive Conservative-led parliaments have built the case for austerity. Throughout his premiership, David Cameron, along with his chancellor, George Osborne, kept the opposition between “hardworking people” and lazy benefit claimants right at the centre of their messaging on spending cuts. Though gestures have been made towards addressing widespread tax avoidance by the wealthy, very little has actually been achieved. This stands in stark contrast to the scale and speed with which changes have been made to welfare legislation.

Will the Paradise Papers shift the public’s focus? The leaks alone are seemingly not enough. The 2016 British Social Attitudes survey was conducted just four months after the release of the Panama Papers. Even then, the British public remained more concerned about benefit claimants than tax avoiders.

Fundamentally, the Paradise Papers are about numbers – vast sums of money disappearing offshore that could be spent on public services here in the UK. However, as the former chair of the UK Statistics Authority, Andrew Dilnot, has often pointed out, people are bad at dealing with numbers on this scale. Unless you are an economist or a statistician, numbers in the millions and billions are just not particularly meaningful.

The key is to link these numbers to their consequences. The money we lose because people like Lewis Hamilton don’t pay some VAT on their private jet means thousands more visits to food banks. The budget cuts leading to rising homelessness might not have been necessary if Apple had paid more tax. Fewer people might have killed themselves after a work-capability assessment if companies like Alphabet (Google) had not registered their offices in Bermuda, and the downward pressure on benefits payments was not so intense. 

The causal chains connecting these events are complex and often opaque, but that does not make their consequences any less real, especially for those who have felt the hard edge of austerity.

The Paradise Papers have dragged the murky world of offshore finance into the spotlight. However, calls for change may founder against the British public’s persistent focus on the perceived crimes of the poor. That is, unless we – as academics, politicians, journalists and others – can articulate how the decisions of the very rich contribute to the expulsion of the vulnerable from the protection of state-funded public services. Quite simply, people get hurt when the rich don’t pay their taxes.

Wednesday, 8 November 2017

Britain's role in the growth of tax havens

Andrew Verity in The BBC


Here's the received wisdom: when the British Empire faded in size and significance after World War Two, a few scattered islands around the globe wanted to keep their imperial ties to London.

The British government had to find a way to reduce the economic dependence of the likes of Bermuda, Montserrat or the British Virgin Islands, so it awarded them special tax-exempt status, creating the conditions for a thriving financial services industry.

Yes, tax evasion and money laundering may have got a little out of hand from time to time, but overall it succeeded in lifting them out of dependence on the UK government.

But there's a deeper story. It wasn't by design that the remnants of a dying British Empire morphed into a world leader in offshore financial services, selling secrecy and tax avoidance to multi-nationals and the wealthiest individuals in the world.

Instead, the crucial moment was more of an accident - which gave rise to advantages no-one had foreseen.

And it began not in Bermuda or Jersey but in another offshore centre - "offshore" not to the UK, but to the US - the City of London.



Incentives to avoid

When the 20th Century began, income tax was in single digits and progressive taxation - charging richer people a higher rate - had barely begun.

In the run-up to World War One, chancellors of the exchequer - from Asquith to Lloyd George - began raising taxes to pay for social reforms, such as the old age pension.

As the war progressed, the state demanded more and more income tax from every citizen and higher rates for the wealthy, leading to a top rate of 30% by 1919.

Accountants to wealthy individuals began to devise ways to avoid tax. Clients could become resident in Jersey, where tax rates were far lighter.

Or, if they wanted to stay in London, they might put their money in a trust registered elsewhere, perhaps on the Isle of Man, where in theory it was no longer the
irs - and therefore not visible to the prying eyes of an Inland Revenue inspector.

David Lloyd George served as Chancellor in Herbert Henry Asquith's government, before rising to PM in 1916

But it was in the dying days of the Empire that the offshore financial services industry truly boomed.

Defined by purpose rather than geography, "offshore" means any jurisdiction that seeks to attract investors on the basis of light taxes and looser regulations.

On that basis, the epicentre of the offshore industry is not Nassau in the Bahamas or George Town in the Cayman Islands.

As author Nick Shaxson points out in his fascinating offshore expose, Treasure Islands: "The modern offshore system did not start its explosive growth on scandal-tainted and palm-fringed islands in the Caribbean, or in the Alpine foothills of Zurich. It all began in London, as Britain's formal Empire gave way to something more subtle."


By accident - not design

In 1957, Britain and its imperial remains were trying to recover from a financial crisis. The previous year the UK had joined forces with France and Israel to try to recapture the Suez Canal after it was nationalised by the defiant anti-colonial Egyptian President, Gamal Abdel Nasser.

Viewing the invasion as European imperialism at its worst, the US refused any assistance.

By the end of 1956, a run on the pound was under way. The Bank of England wanted to curb the outflow of pounds by boosting interest rates sharply, but Her Majesty's Treasury had other ideas.

Since the Bretton Woods economic conference of 1944 towards the end of World War Two, countries had agreed to control movements of capital to curb the speculative flows into and out of countries that had worsened the economic crises of the past.

If, say, Tate & Lyle wanted to invest several million pounds in a new sugar production facility in Jamaica, it would need signed approval from Her Majesty's Treasury.

Normally this was a formality. But during the Suez crisis, the Treasury announced that, on a temporary basis, it would no longer approve foreign capital investments.Image copyrightREUTERSImage captionThe Bank of England did not get its way against the Treasury

The City's merchant banks were alarmed. Arranging finance for projects in the former colonies was their lifeblood. How would they avoid ruin?

Digging through the archives, financial academic Gary Burn unearthed what happened next.

Hearing the banks' complaints in a series of meetings, the Bank of England agreed in late 1957 to allow the commercial banks to continue to lend and borrow to foreign clients on two conditions:
the lending had to be in a currency other than sterling, and
both sides of the transaction - the lender and the borrower - had to reside somewhere other than the UK

"The decision was momentous in all respects," says one of the leading experts in offshore finance, Prof Ronen Palan of City, University of London. "They simply deemed certain transactions as not taking place in the UK. Where did the transactions take place for regulatory purposes? Nowhere.

"I think it wasn't at all by design; it was a mistake. They didn't understand the implications. It was seen as an accounting device."

The so-called "Eurodollar" was born - a global offshore financial market, transacting in dollars and allowing unlimited sums to be borrowed and lent, but under the control of no single state. No act of Parliament (or Congress) sanctioned the decision. There was no thoughtful policy-making, no careful debate.


Success of the Eurodollar

The Treasury was at first left in the dark. But within years the implications were obvious - this could revive the City of London's fortunes.

"By the time the Treasury figured it out, they thought, 'this is good business for the City'," said Prof Palan.

Banks from all around the world could borrow and lend in dollars without being subject to US tax or banking regulations - making banking in dollars more profitable out of London than out of Wall Street.

Offshore banks didn't have to hold money in reserve for every dollar they lent (as they would in the US), which would dramatically cut their costs.

While transactions were arranged in London, the lenders and borrowers could be registered anywhere. But the parties to Eurodollar transactions needed addresses.

So, zero-tax jurisdictions from the Cayman Islands to the Montserrat were used by London's investment banks as the official tax residences of their wealthy customers.

Clients could avoid both tax and undesirable scrutiny - for example from the US tax authorities.

In the British Overseas Territories, local laws were passed to attract more registration business, collecting modest fees that mounted up. No need for a bank branch out there - just a drawer in an offshore lawyer's filing cabinet.

The City of London began its recovery to become the centre of finance it is today
Howls of protest from the US government were ignored. Between 1960 and 1970, the size of the Eurodollar market went from $1bn to $46bn.

In the 1970s, countries rich in petrodollars from soaring oil prices were faced with a dilemma: repatriate the money to New York - where they would be taxed on it - or keep it offshore.

By 1980, the so-called Eurodollar market was worth more than half a trillion.

After the deregulation of the City of London in the 1986 "Big Bang", US banks joined in, setting up in London.

And as the 1990s and 2000s progressed, it became the undisputed global centre for foreign currency trading.


Not for the weather

Banks' wealthy individual and corporate clients didn't incorporate in the Cayman Islands or the British Virgin Islands because they liked the weather there - many never visited.

Offshore centres were attractive to businesses looking to reduce their tax bill, but sometimes, more importantly, to avoid what they regarded as excessive regulation.

Cayman Islands-registered companies were used heavily, for example, by the energy giant Enron as it built its business model based on fraudulent accounts.

Tax-free, light regulation jurisdictions, including the Bahamas, the Cayman Islands and Delaware in the US, became the corporate locations of choice for legitimate hedge funds.

They were also used to incorporate the vehicles at the heart of the global financial crisis - the 'structured investment vehicles' that did not show up on bank's balance sheets and bought billions of mortgage-backed securities, massively increasing the unnoticed risks in the global financial system which led to the crisis of 2008.

Likewise, the British Virgin Islands has been used by many legitimate businesses. It has also become the favourite secrecy jurisdiction for clients of the Panama-based law firm exposed in last year's Panama Papers revelations, Mossack Fonseca.

Since those revelations, governments around the world have pledged to improve transparency with measures such as automatic information sharing and registers of beneficial owners of offshore companies.

Many of those measures are yet to be enacted or tested.

But as the Paradise Papers are now confirming, the secrets of Britain's offshore empire are no longer quite so safe.