When is a Tax Haven Not a Tax Haven?

This question began forming itself in my mind last month when I heard a presentation from Lynne Oats, Professor of Taxation and Accounting at Exeter University, describe how difficult it would be to get a legal handle on the problem of corporate tax avoidance. She drew attention to the accelerating race to the bottom between countries in terms of their corporate tax rates. While to my mind this is not enough to constitute a tax haven, and I am not convinced that this is a technically impossible issue, it is interesting to note that UK corporation tax was reduced again in last week's budget.

But surely there is more to being a tax haven than having very low rates of tax? Doesn't it involve aspects such as not asking too many questions, or allowing companies what we might politely call a lack of transparency in their dealings? Here I think the UK might also score rather highly. Why else is Britain opposing the EU's proposal for a Financial Transactions Tax but for the fact that, in order to tax something, you have to measure it first? The rate is not finally determined but at the level of a fraction of a percent it cannot have bankers shivering in their shoes about the loss of asset value. But the advent of transparency is a different matter.

Which brings me to the issue of Cyprus, a country in our midst, in our very own single European market which is suddenly revealed as being a tax haven. This was not mentioned when Nicosia's communist government took over the leadership of the European Union?.It is only since the new government came into power that the big beasts of the Eurozone have decided to throw Cyprus to the wolves. Yet its problems started because of the Troika policy of fudging rather than solving Greece's bankruptcy. Given the close ties between Greece and Cyprus the haircuts led to massive losses for Cypriot banks. The cover stories about Russian billionnaires being funded by German taxpayers arise from the problems faced by Merkel in the forthcoming elections rather than any serious attempting at analysis or policy-making.

The bloggers as Naked Capitalism make a brave attempt to explain why Cyprus is not a tax haven, but for my money they are not making a very convincing job of it. So given that George Osborne has made it central to his policy to attract foreign investment and to keep the financial sector happy, and that he is deliberately and successively reducing our rates of corporation tax, how long will it be before we will be thinking of the UK as a tax haven?
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Laughing All the Way to the Bank Bailout

At last something has come out of Ireland that gives you a reason to smile, if only wryly. Campaign Group Debt Justice Action has made an application to the Guinness of Book of Records on behalf of the Irish government. The category: most expensive bank bailout per head of population. As the video tells, since Iceland refused to allow its citizens to carry the weight of private bank failure, 'plucky little Ireland' has enforced on its citizens more private debt than any other country - including Greece. The cost is €16,500 for every man, woman and child in the country.

According to the Irish Independent, Ireland is the only country currently suffering from a banking crisis so serious as to rank in the top ten worst banking crises of all time. The country has already won the dubious accolade from the International Monetary Fund of being the costliest since the Great Depression. The study by IMF researchers compares the severity of 147 banking crises between 1970 and 2011.

Debt Justice Action tells us that:

'It is estimated that at least €67.97 billion has been poured into Irish banks so far, representing 45% of GDP, which came to €156.4bn in 2011 though DJA argue that the nature of Ireland’s economy makes the figure of 56% of GNP, €123.9bn in the same year, more relevant.

Of the €70 billion, one single institution, the infamous Anglo Irish Bank, accounts for over €30 billion of socialised debt. When the interest is factored in, this will cost Ireland €47 billion, or the equivalent of €26,000 per person working for pay or profit in the country.'

Two conclusions seem worthy of note. First, and most obviously, a global financial system that is so crisis-prone, and whose costs are so immense, is clearly in need of major structural reform. But secondly, the loss of the Irish people is the gain of the financiers, hence the general paean of praise for Ireland's politicians while they beat up on their old, sick and vulnerable citizens to pay their corrupt bankers.
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Whose Bailout? Whose Responsiblity?

A guest post from Professor Penny Ciancanelli of Glasgow University

Recently, JP Morgan research estimated that of the €410bn borrowed by the Greek government over the past three years, only €15bn went into the Greek economy.  The rest went to Greece’s creditors.

The first question raised by these facts must be--who got the money borrowed by the Greek government?  The answer is mainly the German and French banks that lent money to Greece (e.g purchased Greek government bonds).

For nearly two years, the ‘troika’ of the ECB, EU and IMF created financial packages to pay off ‘private creditors’ using public money borrowed in the name of German taxpayers.  Just to be clear: The bankrupt German banks were recapitalized with German (and Dutch and Finnish) taxpayer money but via troika repurchase of Greek bonds.   The theatre piece of merit is the mis-representation of the bailout of German banks by German taxpayers as a bailout of Greece by their friends in the Euro club. 

The second question raised is why the narrative?  After all neither the US nor the UK government made any pretence; they announced they would use public resources to bail out their banks.  Indeed, politicians of the right in both countries have sought to make a virtue of increased government debt by forcing through radical changes in the scale and scope of government activity.

The reluctance of the French to admit its banks were bankrupt and recapitalize them could be attributed fears of being shut out of the bond markets, given already high level of public debt.  The reluctance of the Germans is harder to figure since they could afford (technically) to bail out the banks.  It is worth noting, however, that the banks it would have had to bail out the most were precisely those (Landesbanken) most successfully tricked by derivatives traders in London and New York.  Hugely embarrassing really.  So rather than take the hit on derivatives trades, better to get dodgy sovereign bonds taken off the balance sheets.

Once undertaken, the strategy conjured up by Merkozy two years ago (of hiding the de facto bankruptcy of its own banks) elevated the problem into a crisis of the Euro (a pure miscalculation owing much to the surprising financial illiteracy of both).  Both leaders had to carry on regardless of the cost to Greece.  For example, about three weeks ago the Greek government borrowed another €4bn or so from the EFSF (an EU finance facility) to pay €4bn to the ECB (another EU finance facility).  At the same time, cancer patients in Greece could no longer get the drugs they need.  But this is the price Merkozy decreed must be paid to keep up the appearances both thought would hide their own bankruptcies.

What next? After the Greek elections, the same people who agreed the debt burden will ask for better terms from the troika.  They will probably get some headlines.  It won’t last.  After all, it must soon occur to someone that economic growth is unlikely to result from Merkozy imposed at EU level which to date consists of the ECB lending money to the bankrupt banks of Portugal, Spain and Italy so that each bank might stuff its balance sheets with the sovereign debt of its own national lender of last resort--a tactic which implies zero net investment in the real economy. 
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Poor Standard of Credit Rating

The delight about the rapprochement between Merkel and Sarkozy was short-lived, being undermined almost immediately by a threat from the credit-rating agency Standard and Poors. How are we to interpret these events?

The estrangement in the Franco-German affair was the result of Merkel taking a hard line on monetary policy and refusing to sanction the direct creation of money by the European Central Bank to ease the debt problems of the 16 other Euro members. Apparently yesterday she relented on this, allowing a relaxation of monetary policy in return for a new treaty imposing debt restraint on the Eurozone members.

In response to this a downgrading of the quality of the debt of most Eurozone countries might seem reasonable. But why Germany, which is clearly capable of paying its debts? It appears that this may be more an act of revenge for Merkel's previous insistence that bond-holders must bear some of the cost of their risky investment decisions. The Greek hair-cut was the last stand of a politician who would not accept that the innocent would bear all the pain. Germany will now be punished for the losses this brought to financiers, its own national debt now attracting higher interest rates than the state of its economy demands.

More fundamentally we might question why the US and UK, who are far more debt-ridden and whose economies are struggling much more than that of Germany, are not being threatened in the same way by the markets. The huge money-printing operations of both the Fed and the Bank of England makes investment in these countries far more risky, as does their lack of real production and their low rates of growth, and yet they are not the target of the credit raters. The conclusion is clear: the credit-rating agencies are rating finance-friendly policies, not the strength of national economies and the debt they issue.

More fundamentally the explicit evidence of economic policy being negotiated between politicians and rating agencies makes more urgent the need for politicians to have the courage to articulate an alternative and to co-operate to reclaim the democratic power to determine the direction of their own economies. We need to find a way through this present crisis that is compatible with democracy, not just compatible with the wishes of market investors. If alternative views are not articulated then we will be heading for a political rupture rather than the evolution to a more stable and equitable economic model that our happiness and well-being requires.
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Ten-Point Stabilisation Plan

Spurred on by my recent realisation that I am better qualified for the job than Christine Lagarde, I have put together a modest proposal to resolve the turmoil in the global financial markets. Please send it around, discuss it with your friends, and most importantly: improve upon it.

The most obvious feature of the current crisis in the Eurozone, and the longer-term crisis over the rebalancing of power in the global economy between east and west, is the way that it is happening in a political vacuum. The sense of failure of politicians to manage these historic developments risks exposing us all to an extended period of chaotic change during which the vulnerable suffer.

This short statement is a summary of what it would mean for politicians to act in the interests of their electors to protect them against financial instability. It begins by listing the assumptions that are framing, and limiting in an unhelpful way, the present debate. It then moves on to propose 10 specific actions which need to be taken; further explanation for these actions and greater detail is provided in the following notes.

Failed Assumptions

The most striking feature of the present crisis is the limited range of policy options that are included in the discussion. The most constructive actions are being ruled as ‘impossible’ because of a number of mistaken assumptions which should now be abandoned. These include:

• That markets are efficient while politicians are not;
• That the problem of finance is essentially technical rather than political;
• That politicians should not have a role in managing the flow of money and credit within and between national economies.

Our proposal rests on the understanding that we need politicians to take strong and wide-ranging action to support the interests of their citizens rather than responding to the increasingly incoherent and inconsistent demands of a range of financial interests.

10-point Stabilisation Plan

1. The announcement by the finance ministers of the world’s leading economies of a six-month moratorium period during which all trade in their currencies and their bonds will be suspended.
2. During the period of moratorium, the negotiation of a global international agreement to create an agreed system of political control over finance.
3. The creation of a new reserve currency instrument, not linked to any single national economy.
4. The linkage of the new reserve instrument to carbon dioxide emissions.
5. The reintroduction of national democratic control over currencies, with a system of negotiated exchange between currencies.
6. The reintroduction by national governments of strict reserve requirements on their national banks and a parallel system of rationing of consumer credit.
7. The creation of public banks to provide a safe haven for citizens’ deposits and with lending designed to facilitate the transition to a sustainable economy.
8. The creation of an independent body to undertake the monitoring of country’s sovereign debts and the rating of their credit-worthiness. The majority of the membership of this Global Audit Committee should be comprised of academics and laypeople, rather than those who work in the finance sector.
9. The creation of national Audit Committees to evaluate the process by which current debt was acquired; where this debt was acquired by a process that was not in the interests of the citizens of the country it would be possible to repudiate that debt.
10. The elimination of secondary markets trading in the debt of nation-states and the establishment of a global body to register all derivative instruments on the basis of their ability to increase social and/or environmental welfare.

Notes on the Plan

1. At present politicians are finding it impossible to act because of fear of the immediate response from the financial markets. The moratorium would give them the space to consider a policy proposal.
2. Following the last period of international financial instability in the 1930s, which ultimately led to the Second World War, a global agreement to govern international finance was signed at Bretton Woods. It was gradually abandoned following the US’s unilateral decision to cut the link between its currency and gold in 1971, however, the role of the dollar as the global reserve currency, which depended on the link with gold, has continued. The story is told by Paul Davidson in ‘Reforming the World’s International Money’.
3. The role of the dollar as a national currency of the world’s largest economy, as well as the international numeraire, is a key cause of the instability in the global financial system. Such a call was made in UNCTAD’s Trade and Development Report 2009. Earlier this year the IMF proposed that its Special Drawing Rights might play such a role (Enhancing International Monetary Stability—A Role for the SDR?), however the lack of neutrality and representativeness of the IMF undermines its credibility in making such a proposal.
4. This linkage, first suggested by Richard Douthwaite in The Ecology of Money, would enable the new reserve currency to also introduce an ecological limit on the global economy, in contrast to the current emphasis on a return to rapid economic growth whatever the environmental consequences. A discussion of the proposal can be found in Molly Scott Cato’s paper ‘A New Financial Architecture based on a Global Carbon Standard’.
5. The fact that the Chinese currency the Renbinmi is under political management by the state has attracted attention in recent discussions, but less has been made of the fact that until the 1980s most western economies also managed their currencies. The history of exchange controls in the UK between 1939 and 1979 is described in an article by Brandon Hugget in the National Archives.
6. The financial crisis of 2007/8 was clear evidence of the failure of the Basel process for determining the capital requirements for banks, which is unsurprising given the domination of the financial interest in these negotiations. Simon Johnson, former Chief Economist at the IMF, has made this case in an article ‘Capital Failure’ published in the New York Times. Since as was made clear following the crisis, the citizens of nation-states are the ultimate guarantors, it should be the role of their democratic representatives to ensure that banks do not take on more liabilities than they are able to support.
7. Such a bank could operate in a way similar to the Banco do Brasil, which is state-controlled and uses credit to support the interests of the citizens of the country, while also providing a place for them to invest their savings.
8. Such a body would replace the increasingly discredited credit-rating agencies. It has long been apparent that these agencies have fundamental conflicts of interest, since they profit from the very system that they are established to monitor. They have also faced criticism for their failure to accurately assess the risk faced by banks as a result of the range of ‘exotic’ financial products before, during and since the financial crisis of 2008. Such a crucial role as assessing the costs national governments should pay for their borrowing should be undertaken in a democratic and transparent way. President of the EU Commission Jose Manuel Barroso is one leading European politician to have challenged the role of these US-based institutions; German Chancellor Angela Merkel another.
9. The prototype for such and Audit Committee is that established by President Correa following his election as President of Ecuador in 2005. In spite of the country’s oil wealth poverty was widespread because 50% of national income was being spent on servicing foreign debt. The Audit Committee was established to investigate who the creditors were and how they had persuaded governments to take on the debt. Eventually, it found that some 70% of the debt was illegitimate and the creditors were forced to sell at reductions of around 90%. Audit Committees have now been established in Greece and Ireland.
10. Such a proposal would help to democratise this centre of power in the global economy. During the process of registration, the onus will lie on the product’s originator to demonstrate that it is beneficial and there is no alternative way of achieving the same purpose. The root cause of the financial crisis was the deliberate obfuscation on the part of financiers of the riskiness of the activities. Under this proposal, only those derived investments which can be demonstrated to have a social value, say by spreading risks over a wider group of people, would be permitted.
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Just Say 'No'

The Irish State faces a historical moment. In keeping with its tradition of courageous struggle for freedom and justice and the unique role that Irish people and culture have played on the world stage, Ireland can now be the country that stands up against the bullying forces of the financial markets. The morally unacceptable terms it is being offered mean that any other response is unthinkable.

The bond traders responded to Merkel's attempt to constrain their profiteering by downgrading Irish debt - thus raising the income they gain from it - increasing the costs imposed on the Irish state, and crucifying the Irish people. It is time for a proud nation to say no: default is better than humiliation.

Such a strategy will also turn the tide. Since the break-up of the euro nwo appears inevitable Ireland could be a player in the end-game, rather than a victim. The plan of the financial interests is to pick off one Euro country after another. This is similar to the financial contagion that began in South-East Asia in the 1990s, but with the added appeal that, as each country falls, Germany will pay off the traders. Ireland's default would signal the end of this process and force a political solution on the Eurozone. If Ireland does nothing Germany will come under increasing pressure itself to abandon the euro and create a new currency, leaving the smaller nations of Europe in turmoil.

And here is one I prepared earlier. All EU states should simultaneously suspend trading in their national debt. They should then agree interest rates that they are prepared to pay on their national bonds over a 10-year period. These rates would vary to reflect the nature of the economies involved, but only within narrow bands, and at much lower rates than are being paid today. New dated bonds with fixed returns would be issued up to a percentage of current holdings.

States would thus retake the power over their national economies. Traders could accept the terms or lose everything. Their game of extorting the value of national economies through pressurising their politicians would be finished.

This radical political move would clearly have serious implications for the other global currencies, and especially the dollar. But it would bring the interests of citizens back into play and increase the pressure for urgent negotiations to establish a new global financial architecture which serves people rather than financial interests.
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Merkel Confronts the Market Wolves

Throughout the years of financial crisis it has been notable that financial and business interests have been writing the story. Media analysts have been colluding: those who understand what is going on are in the pockets of the business lobbyists; those who do not are scared to reveal their ignorance. The result is that we are being sold a lie.

The official version of what is happening in the finance markets goes like this. Countries are in debt so they look like a bad risk. The debt of risky countries is harder to sell and so the price falls and traders need to be offered a better rate of interest to accept it. Traders will not buy it at all unless they are convinced about the soundness of the national economy selling it, so that markets demand that countries introduce austerity measures. If they are not satistifed the austerity must be made more austere.

The truth is different. As they pick on each country in turn the bond traders create a self-fulfilling prophecy. They (through the credit-rating agencies) downgrade the surety of the country's debt. Its price falls and the return they gain from holding it rises. Thus their creation of this story is a simple means of increasing their profits. They feel they can still squeeze more out of Irish debt, hence the story that the 'markets don't believe' the Irish government is secure. Once they have destroyed Ireland they will move on to Portugal, Spain and even Belgium, according to today's story. Governments in those countries tremble and beat up on their own people.

Understanding the behaviour of market traders is not difficult; devising policy to counteract it is. The process of globalisation meant the signing away of political power over economics, so even when the free operation of finance markets is clearly disastrous for the world's people politicians feel powerless. If one country acted alone they would face the massive movement of speculative money and, as Black Wednesday proved, no country or currency can withstand that.

German Chancellor Angela Merkel has been clearest about the need for political action, perhaps because she represents the strongest economy, perhaps because of the folk memory of the 1930s and the destructive consequences unrestrained finance wreaked then, perhaps because she grew up in a debt-averse Protestant home. First she called for political controls over credit-rating and now she is suggesting that the bond-holders should contribute to paying for the costs of the crises they are causing, shifting the balance of their incentives away from destroying domestic economies. These represent the first feeble attempts to reassert political authority over the globalised economy. "Have politicians got the courage to make those who earn money share in the risk as well? Or is dealing in government debt the only business in the world economy that involves no risk?" she asked on Wednesday.

Gordon Brown is short of a job these days. Perhaps the son and daughter of the church could combine their efforts in devising a plan for European governments to take charge. If he really wants to save the world, now could be just the right time.
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