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07.05.2011 - 06:47PM

Category: Business Ethics

Vampire Tax Havens: The Secret Drain on the Global Economy


By Francesca Rheannon

Offshore tax havens are starving economies of the capital needed for productive investment and saddling governments with crippling deficits.

The headlines scream it every day: city, state and national budgets are being cut, cut, cut. Citizens are up in arms, outraged that needed government services are being eliminated, wages and pensions slashed and the national patrimony sold off. The poor in "developing" countries are getting poorer and the funds to repair aging infrastructure or adapt to climate change are drying up. A "silver tsunami" of boomers turning 65 is heading our way while politicians threaten to shrink government support for medical care for the elderly -- if not eliminate it entirely. And young people are seeing their future dry up and blow away in the wind.

There's not enough money, our leaders say and shrug their shoulders in helplessness. This kind of voodoo economics conveniently forgets there are actually two sides to a financial balance sheet -- spending and income -- even when it comes to government budgets (like any other budget).

It's worst in the U.S., where a Congress dominated by mathematically-challenged right-wing extremists is holding the world economy hostage over lifting the debt ceiling by refusing to entertain the merest hint of raising tax revenues to balance the budget. As the New York Times reported Tuesday, Republican leader Mitch McConnell "dug in deeply against proposals for new tax revenue, suggesting that the deal should be struck mainly by cutting spending. New taxes, he said, would harm the economy."

It's precisely the fact that governments are losing their will and power to tax corporate profits that underlies the fiscal crisis so many find themselves in. In 2008, the GAO reported two-thirds of companies, both domestic and foreign, doing business in the US paid no taxes whatsoever, while raking in corporate sales to the tune of $2.4 trillion.

And why are they losing the will and power to do so? A deeply illuminating new book by British author Nicholas Shaxson, Treasure Islands, provides the answer: because fully a quarter (or more) of the globe's business is being conducted in the shadowy world of offshore tax havens, robbing governments of revenue, transferring huge portions of the national wealth from poor countries to private bank accounts in the rich countries, and sticking middle class and lower income taxpayers everywhere with the burden of keeping public services afloat.

Adding insult to injury, when the casino economy that is getting fat from offshore profits crashes, the taxpayer is tapped to bail it out. As we find out from Shaxson's book, Citigroup has 427 tax haven subsidiaries; Morgan Stanley is next with 273. Yet when the financial house of cards they built imploded, they made sure big government saved their bacon.

Contrary to the common notion that offshore tax havens are for drug and gun smugglers, "spies, petty criminals or celebrity tax dodgers," the big users of what Shaxson called "secrecy jurisdictions" are the banks and other financial institutions.

The tax revenue heist happens in a variety of ways. One is the "magic of transfer pricing," as Shaxson calls it, which allows profits to escape detection by national governments. One example of this came to light in the 2007 case against GlaxoSmithKline. According to one writer, "The investigations carried out by Internal Revenue Service found that the American subsidiary of GlaxoSmithKline overpaid its UK parent company for drug supplies during 1989-2005 period, mainly its blockbuster drug, Zantac. These overpayments were meant to reduce the company's profit in the US and thereby its tax bill. The IRS charged Europe's largest drug company for engaging in manipulative 'transfer pricing.'"

The secrecy fundamental to tax havens violates a core principle of CSR: transparency. But we hear little complaint about offshoring from the CSR community.

Possibly it's because so many of us rub shoulders with those who benefit from the offshore economy -- whether we are connected to NGOs working with multinational corporations or big financial institutions, or working to expand the reach of CSR in the corporate community, or working as CSR officers in corporations themselves. Citigroup is part of the Ceres network; Morgan Stanley is on the Dow Jones Sustainability Index. Or possibly because business people everywhere have bought the anti-tax and anti-regulatory mantra.

But, as Shaxson says, the tax havens that shelter corporate profits are "acting as berserkers in the global economy, forcing other nations to engage in the competitive race to the bottom and in the process cutting swaths through the tax systems and regulations of nation states, rich and poor, whether they like it or not."

Where will we get the money for a Marshall Plan for the Planet? Every dollar or euro or rouble that remains offshore in these tax havens is money that is lost to fostering the development of a clean, green global economy or helping poor countries to adapt and develop in an environmentally sustainable manner. With human civilization running out of time to tackle mitigation and adaptation to climate change, it's time to drive a regulatory stake into the vampire's heart -- and put finance capital to the service of the world's citizens once again.

About Francesca Rheannon

Francesca is CSRwire's Talkback Managing Editor. An award-winning journalist, Francesca is co-founder of Sea Change Media. She produces the Sea Change Radio's series, Back to The Future, and co-produces the Interfaith Center of Corporate Responsibility's podcast, The Arc of Change. Francesca's work has appeared at SocialFunds.com, The CRO and E Magazine, and she is a contributing writer for CSRwire. Francesca hosts the nationally syndicated radio show, Writers Voice with Francesca Rheannon.

This commentary is written by a valued member of the CSRwire contributing writers' community and expresses this author's views alone.

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