Taxlinked (TL): The release of the Panama Papers was a huge victory for tax justice proponents throughout the world. Six months later, in your opinion, what sort of effect has it had on international taxation?
Nicholas Shaxson (NS): I think that the results are quite diffuse and intangible, but nevertheless potent. In short, they have ridden a wave - and reinforced a wave that has been steadily building since the global financial crisis. The wave of anger against tax havens and tax cheating is fed by a number of factors - rising concerns about inequality, cash-strapped governments seeking to tap sources of revenue, anger at élite impunity and bank bailouts, and globalisation anxiety. What’s new, also, is that there is now a new and coherent economic and political analysis for understanding tax havens out there, put together by the likes of the Tax Justice Network and others, which has enabled the world to see and understand the size and scope and nature of the problem for the first time in history. Tax havens aren’t an exotic sideshow, but a central element in the global economy. For a while, there were significant numbers of people who pooh-poohed this analysis and accused us of exaggerating and making this stuff up. But the Panama Papers have simply confirmed in vivid detail what we have been saying for some time. (Read my book Treasure Islands
, which was published in 2011, then read the Panama Papers coverage, and you’ll see what I mean.) This hard evidence has been essential and timely, for focusing minds on the need to do something.
None of these factors I’ve described is going to go away any time soon, and there are grounds for thinking they’ll intensify. The fight against tax havens is only going to get stronger.
TL: What are your thoughts on the European Commission’s latest effort at assembling a “blacklist” of non-cooperative tax jurisdictions? Will it prove to be more effective than 2015’s version?
NS: Well, blacklists can be a good idea in theory, but the main problem with blacklists is that they tend to become politicised. Will the European Commission blacklist member states like Luxembourg, which are key players in the game? Will they blacklist the United States, which is another key player in the game? I think not. It is generally better, I think, to lay out a set of objective criteria for judging countries’ compliance or not with international norms, and to act on that basis, since the pitfalls in the blacklisting process are simply too great. Objective lists such as the Financial Secrecy Index are far more useful as a guide to action.
TL: Is it ill advised for countries to lower their corporate tax rates for the sake of competition? What are the main ramifications of lowering corporate taxes?
NS: Yes, it is a fool’s errand. First of all, tax ‘competition’ is not competition as most people understand it. (To get a first sense of this, ponder the difference between a failed company and a failed state.) I prefer the term ‘tax wars’ for two reasons: first, the process of jurisdictions jostling with each other to keep cutting corporate taxes in a race to the bottom is much more like currency wars or trade wars than it is like market competition. Second, it more accurately conveys the harm. Tax wars (or tax ‘competition’, if you must) is always - and I stress always - harmful for the world economy, and for societies that engage in the race too. They cut taxes on the stuff that’s mobile - that is, multinationals and the wealthy — and they make up for that by raising taxes on the less mobile local businesses, poorer people. This rewards the large at the expense of the small. Aside from boosting inequality, it also distorts markets by increasing market power and monopolies. Not only that, but corporations are now amassing huge idle cash piles, which they aren’t investing because the demand for their outputs aren’t there. Corporate tax cuts simply add to those cash piles, while withdrawing demand from the rest of the economy. The whole corporate tax-cut ideology is built on sand. I’m confident the consensus on this will change soon. I’d say that increasing effective corporate tax rates these days is the way to make your economy more productive, and more geared to the needs of citizens.
TL: Given all the OECD-led initiatives like BEPS and CRS, among others, is there an end in sight for the so-called tax havens? Or will tax havens in one shape or another always exist?
NS: I had two interviews with Donald Trump recently, and he told me it would be ‘easy’ to ‘fix' tax havens. (http://www.vanityfair.com/news/2016/06/the-great-trump-tax-mysteries)
He’s quite wrong. They'll always exist. It will be a never-ending fight. It’ll always be possible to take your money somewhere else and escape the rules and responsibilities you don’t like, whether they be taxes or disclosure or financial regulation or whatever. Offshore is baked into the very essence of financial globalisation. There are signs that globalisation is now retreating, and this will certainly affect the offshore centres, but they will keep creating new niches in the constantly evolving and metastatising offshore ecosystem. For example, Cayman used to be a turntable for the cocaine trade: now it’s all about hedge funds (a sector that still, by the way, contains huge amounts of nefarious, illegal and abusive activity.) You can certainly squeeze the offshore ecosystem and reduce its most harmful effects in some areas, but eliminating it isn’t going to happen. (And by the way, Trump cut off each interview at the point where I pressed him to explain exactly how he would fix the tax haven problem.)
TL: The United States is considered one of the world’s main “new” tax havens. How can anyone convince or pressure the US to move away from this model and participate more actively in the transparency efforts being carried out throughout the world?
NS: That’s a good question. The US is both a big player in the ‘beneficial ownership transparency’ game, with its secret shell companies offered out of mucky jurisdictions like Delaware or Nevada, and also the biggest recalcitrant in not playing ball with the Common Reporting Standard, the OECD’s project for sharing banking information. It is kind of paying lip service to the CRS, but in practice what’s happening is a flood of information coming into the US about US taxpayers via its (supposedly equivalent) FATCA scheme, while only a trickle of information flows out in the other direction, about foreigners’ assets stashed in the U.S. The US political system is so dysfunctional right now, and Wall Street players so powerful, that I don’t see much hope of serious reforms to Tax Haven USA any time soon. Then again, who knows what this bizarre coming US election will throw up?
TL: Any additional thoughts you’d like to share with our community?
NS: Yes. I think that people should in general stop using the term ‘tax avoidance.’ Traditionally, people say ‘avoidance is legal and evasion is illegal.’ But the fact is that a lot of what gets called avoidance isn’t: it’s indeterminate. Big 4 firms sell tax schemes to their multinational and other clients, often knowing that these schemes have a good chance of failing in court if challenged. Mostly, you don’t know if this stuff is legal or not: it’s in some kind of grey area. But libel lawyers in media organisations make their journalists call it ‘tax avoidance’ because that is less risky. I am sympathetic to the often terrifying implications of libel suits, but I’d argue that the correct response isn’t to publish an inaccuracy. I prefer to sidestep the thorny questions of what is or isn’t legal and instead focus on the economic and political aspects of what’s going on. So I prefer terms like ‘tax cheating,’ ‘tax abuse’, or the more neutral ‘tax escape.’ There’s a really good concept called Risk Mining, developed by a British lawyer called David Quentin, which you can read about on the Tax Justice Network’s "Tax Avoidance" webpage. http://www.taxjustice.net/faq/tax-avoidance/