Tax avoidance is one of the greatest difficulties besetting the world economy. Accountant and tax campaigner Richard Murphy estimates that 10% – maybe more – of the world’s wealth is hidden away in tax havens. Taxed, the secreted trillions would provide more roads, more schools, more hospitals, everywhere.
Tax havens put a permanent brake on the economic progress of developing countries, which must compensate for lost revenue by accepting more development aid. Aid comes with conditions that often diminish national sovereignty.
Tax avoidance by corporations and the wealthy angers voters and coarsens politics. Populist politicians, most recently Donald Trump, seek to broaden their appeal by inveighing against the rich elite that refuses to share its increasing gains.
The defenders of tax havens are typically also advocates of privatisation and believers in chimeras such as free trade and free markets. They do not believe that the state should have an important role in the economy.
Tax havens, indeed anything which shrinks the state, are fine by them. But a belief in free markets is incompatible with defence of tax havens. Companies which operate in secret and do not disclose their true financial position to competitors and potential investors enjoy an unfair advantage, and are in effect skewing the market.
The secrecy and opacity tax havens offer is their great attraction to tax avoiders. Murphy is not greatly exercised about rates of corporation tax: it is the state’s prerogative to set the rate it deems appropriate.
What to do about tax havens? Murphy calls for ‘country by country reporting’: corporations should provide accurate information on the taxes they pay – and where they pay them – on the profits they make in their operations across the world.
The prospect of having to present a true picture of their finances might nudge corporations towards tax compliance.
None would want to suffer the reputational damage that followed the announcement by Barclay’s Bank in 2013 that it was losing roughly £25,000 per employee in the UK but that its ‘mysteriously productive’ 14 employees in Luxembourg were each generating a profit of almost £99 million.
EU pressure forced the bank into disclosing details of its operations. Professional facilitators of tax avoidance (Murphy has spoken to many of them off the record) acknowledge that reform is inevitable.
The next recession may jolt governments into co-ordinated action. In years to come places that have grown dependent on finance for employment and prosperity – Jersey, the Cayman Islands and others – may undergo wrenching economic changes.