The Prime Minister of Iceland and his wife were the first to receive notoriety when it was revealed they had transferred a goodly sum of their assets to the Virgin Islands. The Prime Minister announced his resignation, then backtracked, saying he only stepped aside for a short period. Now it appears he will be replaced by the agriculture and fisheries minister, after all. So it goes.
According to Cass Sunstein (New York Review of Books (1/14/16) many individuals in the United States and elsewhere have been transferring their money to foreign countries—Switzerland, Luxembourg and the Virgin Islands. In this way they have been able to avoid paying taxes in their home country.
Drawing on the work of Gabriel Zucman in his The Hidden Wealth of Nations, Sunstein says the magnitude of these transfers is considerable.
• About 8 percent of the word’s wealth, $7.6 trillion is held in tax havens.
• As a result, governments lose about $200 billion in tax revenue each year.
• In the United States, the annual tax loss is $35 billion; it Europe it is $78 billion.
While awareness of these figures is growing and the issue has been much discussed, to date no major “crackdown” has occurred.
James Surowiecki describes (New Yorker, 1/11/16) a somewhat similar tax avoidance strategy of large, multinational corporations. It is not (currently) illegal for American corporations to locate their operations outside this country and more and more of them are doing this to avoid paying US taxes.
He also discussed Pfizer’s recently announced merger with the Irish drug company Allergan. Pfizer was planning to reconstitute itself as an Irish company, thereby lowering its overall United States taxes. However, the plan was recently called off after the Treasury Department removed many of the tax benefits of such a merger.
In January of this year, before the new Treasury Department rules were in place, Johnson Controls announced its merger with Tyco International also based in Ireland. By doing this, the Times editorial page (1/29/16) claims they will avoid taxes in the United States “by at least 150 million a year.”
In commenting on tax inversions, Sunstein suggests that regardless of political party, it is unlikely you would approve of illegal corporate tax havens. Here is an area he believes “in which significant reforms might appeal to people who otherwise disagree on a great deal.”
Why am I writing about this? I am not an economist and I know little of the ins and outs of tax law. Yet it seems to me just another form corporate and individual irresponsibility.
I am dismayed when I think about the billions of dollars that are not paid to the government and, if they were, the potential benefits that might accrue. At the very least, it is clear that this is yet another reason why the United States tax system is long overdue for changes.
I am but one among millions, my words are scarcely heard, they count for nothing, but I cannot avoid expressing them.
6 comments:
It's hard to imagine what all that money might do if taxes were paid like they were supposed to be. The programs that could be funded, the people who could be helped. It's really mind boggling.
Stefanie: You're absolutely correct. Let me count the ways--education, infrastructure (roads, bridges, factories, etc), debt reduction, promoting arts of every variety, and poverty stricken bloggers. Richard
I hear you, Richard. And it enrages me too.
Can the tax obligations imposed on corporations and individuals be that bad? I know that shareholders and employees of big multinational companies want them to be profitable so the shareholders' investments grow and employees salaries can rise, but at some point the cost control measures go too far. Operating understaffed by design is a measure I've lived under - it took a physical and mental toll on me and many of my colleagues. The off-shore tax haven is another measure - which is just wrong. Many of these corporations were incubated in and grew and flourished in the unique entrepeneurial environment in the U.S. - it doesn't seem right to avoid contributing back to their founding country. Same with wealthy individuals - there are too few like Buffett and Gates. I don't know - I'm no economist or tax expert, but it seems like the experts should be able to restore some balance - I guess they are too busy working for the big corporations and the top 1%.
Linda: The only way to restore some balance, as you put it, depends on a Congressional overhaul of current tax law. And you know how likely that is given our current Congress. As you know, corporations seek to maximize their profits in anyway they can, anyway they believe is legal. Unfortunately that doesn't include "giving back to their founding country." The moral imperative is not a top corporate priority. We are coming to better understand the limits of capitalism and this is but one of a great many. It is said that we are a country of laws, but laws are made by individuals. There is no doubt about that. Changing the cast of characters who make our laws is the only way I know how to address these problems and that isn't going to happen overnight or in my lifetime either. Richard
I am posting this comment on behalf of Dom, who wasn't able to post it yesterday:
The following are the thoughts and questions that came to my mind during the course of my review of this blog post:
“Panama papers” seized illegally? – As I have read the various articles that have been published dealing with the events that have been described as the “Panama Papers” I have not seen anyone address the issue of if and what laws may have been violated by the seizure of the law firms confidential records and the dissemination of that confidential information throughout the world. Since an attorney’s client records are legally confidential and deserving of protection from the unauthorized seizure and disclosure, was the seizure and disclosure somehow legal, or did the seizure and disclosure constitute a legal violation?
Tax evasion or tax avoidance? – It appears to me that legal tax avoidance transactions are being characterized as illegal and immoral. There is an important distinction between tax “avoidance”, which is legal, and tax “evasion”, which is not. If tax avoidance is illegal and immoral, then anyone who purchases a home to get a mortgage interest tax deduction to reduce their taxes, rather than to continue renting, should also be castigated, criticized, etc.? Were our my tax deductions justifiable, but yours are not?
Transfer of assets illegal? – So what was illegal about the Prime Minister of Iceland transferring “a goodly sum of their assets to the Virgin Islands”? The blog did not say that the transfer was illegal, but there appears to be an assumption that it was wrongful. Why is that?
Government loss of revenue? – Mention is made that the government loses tax revenue from the “Panama papers” transactions. The government didn’t lose anything that the government wasn’t entitled to in the first place, since the transactions have been described as “tax avoidance”, which is not illegal, rather than “tax evasion”, which would be illegal.
In summary, it appears to be from what I have read about these “Panama papers” transactions that:
Law violated to criticize others? – Someone violated the confidentiality laws to seize and illegally disseminate a law firms confidential client records, and I have not seen anyone criticized for doing that;
Jealousy & envy run amok? – A lot of people who have “less” are jumping on the bandwagon to find some reason to criticize those who have “more”, even if that “more” was obtained legally; and
Making profits by criticizing profits made by others? – The media are having a field day using this “story” to increase circulation, and therefore advertising revenue, to generate profits by publishing misleading articles condemning other individuals for their having made profits, which appears to me to be a bit of hypocrisy on the part of the media.
However, if anything that I have said is inconsistent with independently verified facts, I would welcome having that disclosed to me, so that I can better and more fully understand the situation. I have learned long ago not to believe everything that I have read in the media.
Dom: Thank you for your thoughtful questions/comments.
Either tax avoidance or tax evasion as a result of placing assets in a foreign country strikes me as unfortunate at the least and immoral at most. That was the central point of my blog. Both come at the expense of how the funds might be used to benefit the country of origin. We need only look at our own country to identify what could be done with those funds, projects that stand in need of considerable sums. I wasn't so concerned with the law, what is and is not legal. That is an entirely separate issue in my mind. As I said, the current tax laws in this country call for an major overhaul, an overhaul where the first priority is the "commons" in the sense that Garrett Hardin used that term in The Tragedy of the Commons. I quote:
"The tragedy of the commons is an economic theory of a situation within a shared-resource system where individual users acting independently and rationally according to their own self-interest behave contrary to the common good of all users by depleting that resource."
Richard
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