Monday, 30 July 2012

The Art of Tax Dodging and the Science of Economic Inequality

Nat O'Connor: The topic of economic inequality is (rightly) high on the news agenda in recent months. A recent report from the UK Tax Justice Network estimates that a minimum of $21 trillion has been hidden in tax havens by just 92,000 people.

Gene Kerrigan gives a particularly vivid description of $21 trillion as 250 Croke Parks, each with one million euro sitting on each seat. He might have added that there would only be 368 people in each stadium gathering up the cash.

And how is it done? Kerrigan points the finger at the banking sector for facilitating tax dodging on a massive scale.

Even the Conservative-led UK Government is also taking a new, hard look at aggressive tax avoidance.

More unusually, the theme of economic inequality is taken up in a nine-page special feature and editorial in the latest New Scientist (28 July 2012). They too focus on the richest one per cent, but they go beyond this to look at the scientific evidence underpinning how we got into this position.

The New Scientist report looks at the anthropological development of inequality, which only rose in the last 5,000 years after millenia of egalitarian human societies (from which and for which we have evolved). The report examines the impact of stress caused by inequality as a health factor. Societies with inequality above 30 measured by the Gini co-efficient (i.e. the standard measure of economic inequality) experience thousands of avoidable deaths. The UK with a Gini score of 33 had 12,000 avoidable deaths due to inequality.

The latest Gini score for Ireland is 33.2 (Eurostat 2010 data). TASC's Health Inequalities report gives more detail on the socioeconomic links to ill health and avoidable deaths in Ireland.

The New Scientist report also describes cognitive biases around money and other psychological aspects of inequality and acquisitiveness. They point to the inherent instability of unequal societies.

Conversely, one article makes the observation that environmental damage is partially lessened by inequality, as a more equal distribution of that money would lead to more consumption. However, they don't take into account the likelihood of inflation and the option of increased taxes to reduce this threat.

Overall, the feature suggests that economic inequality is being more widely acknowledged for the substantive social problem that it is. The editor writes: "...for much of the past 40 years, inequality has remained a topic of serious discussion for just a small cadre of academics."

However, increasingly, scientific analyses (such as The Spirit Level as well as the New Scientist feature) are reinforcing the normative arguments for creating more equal societies. As one of the New Scientist articles concludes:
"The policy implications seem obvious, if politically contentious: a more even distribution of wealth would improve health on national and global scales. ... a clearer picture is emerging of inequality and its relation to health, self-worth, the ability to participate in society and to take control of one's life."


Seamus Coffey said...

The jump by TJN that everything that is offshore is somehow "hidden", "unreported" or "secret" and the claim here that it is the "art of tax dodging" is very wide of the mark. It is very loose to suggest that anything that is offshore is "hidden in tax havens".

Included in offshore wealth would be a huge proportion of Irish pension assets which are invested abroad. There have been numerous calls to have this money invested in Ireland.

Is this money "hidden" or "tax dodging"? Last year the 0.6% private sector pension levy raised €457 million. Much the same amount will be raised for the next three years.

This is almost the same amount that would be raised by a 30% tax on a 3% on €75 billion.

The CSO have some useful statistics on the onshore and offshore assets of Irish residents.

Also TJN attribute the $21 trillion figure to 10,000,000 people not the 92,000 used here.

Global wealth inequality is an issue worthy of significant debate. Trumped-up figures designed to mislead are not.

Nat O`Connor said...

@Seamus Coffey

First of all, you are quite right on one point. The New Scientist editorial I quoted incorrectly cited the figure of 92,000 from the TJN study in relation to the $21 trillion. In fact, the 92,000 "Happy Few" identified in the TJN report have $9.8 trillion offshore, a further 839,000 people have $5.1 trillion, and the rest of the 10 million people have the remaining $4.7 trillion between them.

So, in Gene Kerrigan's terms, the 92,000 would only have 119 Croke Parks full of money.

But overall, we are not talking about "trumped-up figures designed to mislead". The TJN purposefully calls attention to the phenomenon of 'offshore' movement of financial capital. They could more academically say that 'we don't have sufficient information being widely publicised and examined in public forums by informed experts who can explain this to the general public, identify problems and propose workable policy responses'. They could, but they would be ignored. So they draw attention by calling it 'hidden'. I don't think this is too far off the mark.

The CSO produces many useful figures, such as the Quarterly International Investment Position and External Debt (30 March 2012) which indicates that at end-2011 there was €2.7 trillion of foreign fiancial assets in Ireland, alongside €2.8 trillion in foreign financial liabilities. However, there is a huge amount we don't know about these flows of capital in and out of Ireland.

But we do know that many offshore arrangements are 'tax efficient'. We know a lot of capital flows through Ireland to avoid of our low corporation tax rate and other incentives. We can safely assume that a proportion (maybe a large proportion) of offshore finance is used to avoid tax. Hence, it is relevant to point to the 'art of tax dodging' in relation to the role of offshore finance in facilitating tax avoidance.

That does not imply that all offshore finance is problematic, but there is a large scale problem with the overall system.

We could argue about the appropriateness of using rhetoric to draw attention to these issues. Or instead we could ask whether we are satisfied that we know enough about international capital flows that we can, on the basis of existing data, pursuade the public and policy makers that this is important and contains one part of the solution to both our economic problems and the issue of global wealth inequality.

I don't think we have enough information. I don't people are bring well informed on these issues through the mainstream media. So, in the context of economic contraction and austerity measures, I think it is appropriate to point the finger at offshore financial capital and demand that it is less secretive and less hidden.

Seamus Coffey said...

Hi Nat,

I'm not disputing the significance of the issue in question. I would question TJN's approach.

I read the original report by James Henry. It is interesting but more of the focus is on offshore assets held in low- and middle-income countries and the fact that many of these "high debt" countries are actually aggregate net lenders to the rest of the world. This only gets a single paragraph on the bottom of page 2 in the TJN release.

According to the figures used by TJN there is €141 trillion of household gross financial assets in the world. The figure used for household financial liabilities is €41 trillion. Global household net financial wealth is €100 trillion.

Given their emphasis on HNWIs I'm not sure TJN distinguish enough between the household, financial, corporate and government sectors. Not all non-financial sector assets are held by the household sector.

There are numerous reasons why someone would wish to place funds 'offshore'. Irish pension funds clearly have reasons for investing their assets outside Ireland. Atlantic Philantropies had plenty of 'offshore' assets.

I still dispute the 'hidden', 'secret' and 'unreported' slant used by TJN. It is at odds to the data sources they use and indicate are "the World Bank, the IMF, the United Nations, central banks, the
Bank for International Settlements,
and national treasuries". There seems to be plenty of reporting going on.

The CSO publish a lot of information on asset holdings but we cannot expect them to divulge any information that breaches confidentiality. There must be a mass of information collected by the CSO when they assemble the data. Filling in survey forms for a statistical agency is not how I imagine something 'hidden' to be treated.

TJN do raise some valid points (on this and other issues) but if they have to resort to hyperbole to get attention they some of the merit of their argument.

Ireland easily managed to raise half a billion from this 'offshore' wealth. We must presume that other countries would be able to do likewise.

Nat O`Connor said...

Hi Seamus,

"Ireland easily managed to raise half a billion from this 'offshore' wealth. We must presume that other countries would be able to do likewise."

This is a very important point. Yes, indeed, the means to regulate and tax some flows of international capital are within the means of many countries. But this is greatly facilitated if voters demand it from politicians (in democratic regimes).

Some international co-ordination of this is probably needed too. Yet, some regimes (with tax haven features, if not full-blown tax havens) are precisely unwilling to co-operate.

Pension funds are an easier target for Ireland, because they benefit from special domestic tax relief when money goes into them from income and they have to be accounted for quite clearly as 'pension funds' rather than any other kind of fund. Arguably, other types of fund could be taxed, but I think there needs to be much more political pressure before a wider 'wealth tax' will be advanced in Ireland.

The struggle to have a financial transaction tax (FTT) or financial asset tax (FAT) advanced at the EU and international level is one example where, despite concerted campaigning and learned arguments by many economists, there are powerful interests (such as the City of London) who are successfully opposing the proposals. This is an example of where one country cannot go it alone. And the signs are that Ireland would opt out of any EU FTT/FAT arrangement if the IFSC's rival, the City of London, is not covered too.

Niall said...

@ Seamus

The Irish role in hiding these assets abroad should also be of interest and our role in ensuring that no tax is ever paid on the income accruing.

Irish tax legislation has a provision under Section 110, dealing with Special Purpose vehicles. The purpose of the legislation was to create work for Irish tax lawyers and accountants as there is no other benefit to the State. The SPVs are transparent and as such have no liability here and thus pay no tax to the State. Indeed because all of the underlying assets held are outside the EU, they can claim all VAT on inputs back!

A Dáil question by Eric Byrne elicited details of the numbers of these SPVs and also that there is no co-ordination between the Revenue & Central Bank or policing of them.

The assets held are unknown and more importantly from those involved completely unsupervised. One of their suggested uses is funding the purchase of expensive military equipment such as aircraft and tanks, with the manufacturers offering discrete leasing arrangements via these SPVs. The participating investors base themselves in other tax havens such as the Caymans etc., ensuring no tax is paid.