En Passant

These are notes for a talk I gave to postdoctoral law students (of which I am sort of one).

There are a couple of key ideas I use. I have in mind a model of the band of hostile brothers – I’d use siblings but the phrase is now so entrenched – productive capital, commercial capital, finance capital, landlords, monopolists and the state.

All are fighting over a share of surplus value. Surplus value is the difference between what workers are paid and the value they create. For example, workers work for 8 hours but are paid for 5 hours; the 3 hour difference goes to the owner of capital – the surplus value.

I am also looking at global profit rates, and the tendency of profit rates to fall. Various left wing analyses show this to have been the case since the late 60s and early 70s in the developed world, with ups and downs (especially the impact of neoliberal policies from about 82/83 till 97) but the long term trend appears downwards. There is general agreement more or less among a range of left wing writers that profit rates now are about half those of the halcyon days of the 50s and early 60s.

Countervailing tendencies exist like the attempts to drive down living standards, decrease the share of national income going to labour, lengthen the working day, make workers work harder.

But you could also reduce the share of surplus value the state demands, allowing more to go to the other brothers. This could involve a reduction in taxes on capital and/or reduction in government spending.

Part of my thinking is prompted by Henry Tax Review proposal to shift the burden of taxation from mobile capital to fixed capital and other fixed tax bases such as consumption, mainly workers’ consumption, and land, mainly workers’ land, and economic rent (resources and land).

Australia is a capital importing nation. When I led International Tax Reform in the early to mid-2000s in the Australian Tax Office that was changing. If the trend to increasing capital exports at twice the rate of capital imports growth continued then Australia would be a capital exporting nation by about now. This change was offered as a reason for changing the international (i.e. cross border) tax base. But about the time the various international tax changes came into being the trend stopped and Australia remains a capital importing nation with our capital imports about twice our capital exports.

I had been planning to write about how tax havens helped the other hostile brothers escape the net of the home state’s taxes. I talked to my supervisor about unfair tax competition (the buzz words to describe tax haven activity) and he asked why that was different to what the Henry Tax Review was recommending – lower tax rates for capital, especially on mobile finance capital. Hence the title for this very brief discussion on fair and unfair tax competition.

The tentative answer may be that fair tax competition occurs in the process of production, i.e. in the creation of surplus value in Australia but that ‘unfair’ competition occurs in the process of redistributing that surplus value once created. In tax havens individual capitalists hide from the state; in tax reform the state hides from the individual capitalist.

Let’s move on to looking at my main focus today – tax havens.

Jeffrey Owens, the head of the OECD tax section at the time, famously described tax havens as sunny places for shady people. There is some truth to this, since many tax havens are former British colonies or protectorates in very warm spots,(Vanuatu, Caymans, British Virgin Islands, etc) or countries now in the US sphere of influence (Bahamas, Bermuda etc).

And the Netherlands, as part of its tax haven subterfuge, has the Netherlands Antilles, and operates as a conduit regime through Europe.

But what it doesn’t tell us is who are the ringmasters? One answer is the City of London, then Jersey, Guernsey, Isle of Man, Cayman Islands etc. This central role of the City in world finance makes it almost impregnable to attacks on its role.
Another aspect is the increasing financialisation of capital. Today about 40% of all capital is finance capital – banks, insurance companies etc.

This financialisation does two things. First it supports the development of productive capital. So finance and productive capital work closely together, to develop real surplus value.

However, as profit rates have fallen around the globe, the frantic search for profit has seen a greater and greater search for profit in the finance sector, and trade in finance products has substituted for investment in productive capital. Sub-prime mortgages and the bundling up of them come to mind. This is what Marx called fictitious capital – trade not in real assets but pieces of paper which may or may not represent something real.
Certainly collateralised debt obligations turned out to be hollow logs without the wood.
Where do tax havens fit into this?

There are 2 important aspects of tax havens – low or no tax and bank secrecy. Say for example Bain Capital wants to undertake private equity activities outside the US. It might set up a group in the Caymans to do that. No tax on that activity, slack regulatory regime, and bank secrecy means the prying eyes of the US Internal Revenue Service and other countries’ tax offices cannot get their hands on information about the users of the havens and their activities.

Say the Private Equity group wants to target investment in an Australia company, say Myers for example. It gathers investment from around the world – the US, China, Europe, even Australia, in the Caymans, in say a unit trust. Instead of investing direct from the Caymans, they invest through wholly owned subsidiaries in Luxembourg and then Holland, and them into Australia. The aim is for at tax free flow across all jurisdictions.

The free flow of capital around the globe requires tax havens for their low taxes and secrecy. The figures around tax havens are staggering. They have about 3% of the world’s population. According to Nicholas Shaxson in his great book Treasure Islands, half of all trade passes through them, at least on paper. Half of all banking assets and one thrid of foreign direct investment pass through them. Some 85% of international banking and bond issuance take place in the stateless Euromarket.

The Tax Justice Network recently estimated that between US $21 trillion and US $32 trillion is held in tax havens. If the latter figure is true, that is twice the size of US GDP a year, or 30 times Australia’s GDP.

The Australian figures might help us understand the nature of tax havens for legitimate purposes.

When the ATO last issued figures about tax havens, about half the trade between tax havens and Australia was between Australia and one tax haven – Bermuda. Why? Insurance and re-insurance is done there. If you want your insurance premiums to be higher then maybe attack those tax havens.

Of course, as the TJN study shows the magnitude of the money in tax havens is so huge that it looks like there can be no other explanation for it than that it is there to be hidden, or is tax free and aids the flow of capital across the globe, or both.

Since 1998 the OECD has been running a campaign against tax havens called harmful tax competition. It was going nowhere until the global financial crisis. Then the US under Obama weighed in on the side of the campaign and, as the OECD head said at the time, we achieved more in ten months than we had in ten years.

One Congressional study estimated the US could be missing out on up to $100 billion in revenue.

The GFC saw the State ‘roar back’ to use Callinicos’s phrase.

One complaint, echoed by Barack Obama, was that the secrecy of tax havens had made it easy to hide the real risk of the products so they weren’t priced realistically. So developed countries needed better information.

The main achievement of the ten or more years of the OECD campaign, and the renewed interest after the GFC, is Tax Information Exchange Agreements. These are agreements between tax havens and major economies to share information. Countries that didn’t agree to enter into the process would be subject to restrictions. 36 tax havens have signed up, 7 have not.

TIEAs are an attempt to regulate the flow of capital in ways that didn’t produce the GFC again.

But a couple of points. Home countries can only ask for information about taxpayers they know about. There can be no fishing expeditions. So that doesn’t undermine the whole point about tax havens – bastions of secrecy except now when the home country has supported suspicions from other non-haven sources.

Second, havens only have to negotiate 12 TIEAS to be removed from the potential black list. So havens are entering agreements with countries they historically have little relationship with.

Third, it looks like the search is on for the lowest common denominator TIEA and that might be one that the Netherlands or UK strikes with a favoured tax haven. This then sets the new low which others aspire to.

Fourth the TIEAs don’t challenge the dominance of places like the City of London and Wall Street in being the originators and conduits for finance capital around the globe through tax havens. They reinforce it.

Fifth, if the TJN figures are correct about funds in tax havens, then the ATO figures probably reflect the legitimate use rather than the hiding ‘off the scent’ use.
Australia has about 2% of the global economy. 2% of $30 trillion is $600 billion in Australian assets offshore in havens. An assumed 5% rate of return and a tax rate of 30% means this could be worth ten billion in lost tax, enough to wipe out the deficit and to halt Labor’s disgraceful attack on single mums.

What did Henry say? Basically that to attract mobile capital to Australia we had to have a competitive tax system, and this meant lower taxes on capital generally and on finance capital specifically. He recommended a company tax rate of 25 in the short to medium term and a move to more stable tax bases like land, consumption and the more volatile economic rent of mining companies.

The tax competition logic appears the same but from the other side of the coin. Individual investors route through tax havens for the free tax lunch and the secrecy. They route it to Australia for the lower or lowering taxes and higher returns.
Global competition for investment funds put these investment funds, banks and the like in the driving seat. With the click of a button they can invest or not in country after country. They are very responsive to headline tax rates. So developed countries like Australia reform their tax systems to comply to the low tax wishes of mobile capital.

States like Australia want to attract capital to Australia through lower company tax rates and other international tax reforms in my time in charge like exempting non-residents from capital gains tax, changing our treaty rules to facilitate loans to and equity investment in Australia by reducing withholding tax rates on interest and dividends, exempting conduit income flowing from some countries to other countries through Australia, and so on.

Henry doesn’t spell out how the lighter taxation of highly mobile capital would occur, other than general cuts to company tax rates and suggestions the position be looked at. The concentration on more stable tax bases (falling mainly on workers) indicates the future – tax workers more highly and capital less. Throw in some economic rent to tax monopolists – an allowance for corporate equity might be one way of doing that more widely than just a resource rent tax applying to mining companies – and the future begins to emerge. Greater reliance on GST, land tax, and less tax on companies with changes as yet unspecified to attract mobile capital which is very responsive to headline tax rates and is especially adverse to high tax rates compared globally.

In other words, Henry is about, in part, the wider process of turning Australia into a tiny tax haven by competing for funds through cutting tax rates on capital. The difference of course is we don’t have blanket secrecy laws; we have exchange of information with our treaty countries.

The other difference is that Australia’s modern economy and its productive work force create or add real value to investments, i.e. enable various of the hostile brothers to capture more surplus value.

Henry is about less imposition by the state on the other hostile brothers and in keeping the accumulation process which creates surplus value ticking over and running smoothly it has to reduce its taxes on capital to do so. This is the logic of tax competition – and tax havens are its ultimate expression.

That means it has to search for alternative bases of tax, especially taxes on labour, and consumption of workers is one, as is land tax. And taxing economic rent so the state acts to impose some equivalent of the impact of competition in areas where competition cannot occur – i.e. monopoly areas or oligopoly areas like resource rents and land. But that my friends is a talk for another day.