Introduction
In "Treasure Islands," Nicholas Shaxson takes readers on a journey into the shadowy world of offshore banking and tax havens. This eye-opening book exposes the intricate web of secrecy jurisdictions that enable wealthy individuals and powerful corporations to avoid taxes, launder money, and hide their financial activities from scrutiny. Shaxson's work is a wake-up call to the devastating impact these practices have on global economies, particularly in developing countries.
The Nature of Tax Havens
Secrecy is the Key
Tax havens are not just about low tax rates. Their primary function is to provide secrecy. These jurisdictions create a veil of mystery around financial transactions, making it difficult for authorities to track money flows or identify the true owners of assets. This secrecy is the foundation upon which the entire offshore system is built.
Shaxson explains that tax havens don't cooperate with other countries' authorities. They only provide information when specific details are already known, and even then, the process is often lengthy and complex. This lack of transparency makes it nearly impossible for governments to effectively tax their citizens or corporations who use these offshore services.
The Trust Game
One of the key tools used by tax havens to maintain secrecy is the trust. In a trust arrangement, the person who pays the money (the owner) designates a goal for their fund and appoints a professional manager (the trustee). The trustee is often a lawyer who manages hundreds of trusts simultaneously.
The beauty of this system, from the perspective of those seeking to hide their wealth, is that tax authorities can only identify the trustee, not the actual owner of the assets. Lawyers are bound by confidentiality agreements, so they can't reveal the identities of their beneficiaries. This creates a perfect storm of secrecy that shields the wealthy from scrutiny.
Manipulating the Paper Trail
The Corporate Shell Game
Shaxson reveals how multinational corporations use tax havens to manipulate their profits and minimize their tax bills. He uses the example of Starbucks to illustrate this point. When you buy a coffee from Starbucks, the company can argue that the profit was generated not by the individual café, but by the Starbucks brand itself.
To take advantage of this, Starbucks establishes a separate subsidiary that owns the rights to its brand. The main Starbucks company then pays money to this subsidiary for the "right" to use the brand. This subsidiary can be located in a tax haven, where it pays little to no tax on its profits.
Accounting Tricks
The book exposes the accounting tricks used by corporations to shift their profits into tax havens. Companies can charge themselves any amount they want for these intangible assets like brand rights, making it difficult to determine their true value. This allows them to funnel large sums of money into low-tax jurisdictions, effectively reducing their overall tax burden.
Shaxson provides a striking example of this practice with Rupert Murdoch's media empire, News Corp. Despite being a massive global corporation, News Corp reported absurdly low profits in the late 1980s, a clear indication of creative accounting practices designed to minimize tax liability.
Debunking the Arguments for Tax Havens
The Myth of "Tax Competition"
Proponents of tax havens often argue that they promote healthy tax competition among nations. Shaxson systematically dismantles this argument, pointing out that it's not a logical concept. Tax havens create a "free ride" situation where individuals and companies benefit from their home country's services without paying for them.
Moreover, the author demonstrates that high taxes are not a threat to a country's competitiveness. He cites the World Economic Forum's competitiveness rankings, which show that countries with the highest tax rates, such as Finland, Sweden, and Denmark, are among the most competitive in the world.
The False Moral High Ground
Shaxson also addresses the moral arguments sometimes used to defend tax havens. He debunks the oft-repeated story that Swiss banking secrecy laws were created to protect Jews during the Nazi era. In reality, these laws were passed before Hitler came to power and were a response to a different political scandal.
The author argues that these defenses of tax havens don't hold up under scrutiny. The real purpose of these jurisdictions, he contends, is to allow wealthy and powerful elites to maintain their status and avoid paying their fair share.
The Impact on Wealth Inequality
A Tool for the Elite
One of the most damning aspects of tax havens, as Shaxson reveals, is how they exacerbate wealth inequality. Despite claims that they protect the powerless from greedy governments, tax havens primarily benefit elite foreigners and large corporations.
The book points out that tax havens often "ring-fence" their economies, offering low tax rates and secrecy only to non-residents. This means that ordinary citizens of these jurisdictions don't benefit from these policies and must pay normal taxes like everyone else.
The High Cost of Entry
Shaxson highlights how the services provided by tax havens are only accessible to the very wealthy. The intermediaries who facilitate these offshore arrangements – accounting firms, lawyers, and banks – charge such high fees that their services are only profitable for those with substantial wealth. The author cites a former bank employee who stated that the minimum amount they would hide was €3 million.
Corporate Advantages
The book also explores how tax havens give large corporations an unfair advantage over small and medium-sized enterprises. One example is the concept of "deferred taxes," where profits held in tax havens aren't taxed until they're repatriated. This essentially provides big companies with interest-free loans from the government, a benefit that smaller businesses can't access.
Shaxson drives this point home with the shocking revelation that in 2006, billionaire Warren Buffett had a lower tax rate than anyone else in his office, including his receptionist. This stark example illustrates how tax havens allow the wealthiest individuals to pay far less in taxes than they should.
The United States: From Crusader to Culprit
A Shift in Policy
One of the most surprising aspects of Shaxson's book is his examination of the United States' role in the world of offshore finance. He traces the country's transformation from a crusader against tax havens to one of the world's largest secrecy jurisdictions.
The author discusses the Carter administration's Gordon Report, which was the first major global survey on secrecy jurisdictions. This report condemned tax havens and called for the United States to lead a global crackdown. However, with the election of Ronald Reagan, who favored low taxes and a small state, this initiative was quickly abandoned.
Domestic Tax Havens
Shaxson reveals how certain U.S. states, particularly Delaware, have become domestic tax havens. He describes how easy it is to create a shell company in Delaware, requiring minimal information and offering substantial secrecy. The author provides a startling statistic: a single office building in Wilmington, Delaware, houses over 217,000 companies.
This domestic tax haven status puts the United States in an awkward position. Shaxson recounts how when President Obama criticized a building in the Cayman Islands for housing thousands of companies, the chairman of the Cayman Islands' Financial Services Authority suggested he focus on Delaware instead.
The British Spider Web
A Global Network
Shaxson dedicates a significant portion of the book to exploring what he calls the "British spider web" – a network of tax havens centered around the United Kingdom. This system, which evolved from the remnants of the British Empire, is described as the world's most prominent offshore system.
The author outlines three layers of this web:
- Crown dependencies: Jersey, Guernsey, and the Isle of Man
- Overseas territories: Including famous tax havens like the Cayman Islands
- Former colonies: Such as Hong Kong, Singapore, and the Bahamas
Money Laundering on a Global Scale
Shaxson likens this system to a spider's web that catches and launders money from around the world. He provides a hypothetical example of how a Mexican drug lord might use this system to clean his ill-gotten gains, moving money through various trusts and jurisdictions before finally investing it in London real estate.
The scale of this system is staggering. Shaxson cites estimates suggesting that the British spider web holds over a third of all international bank assets, rising to almost half when London is included.
The Devastating Impact on Developing Countries
Capital Flight
One of the most damning indictments of tax havens in Shaxson's book is their impact on developing countries. He argues that tax havens are the single most significant problem facing these nations, facilitating massive capital flight that dwarfs foreign aid and development assistance.
The author cites a 2011 study by Global Financial Integrity, which estimated that the total capital flight from all developing countries exceeded $1.2 trillion in 2008. This means that for every dollar of foreign aid these countries received, they lost ten dollars to capital flight.
Debt and Development
Shaxson explores how tax havens enable corrupt politicians to steal foreign aid and hide it offshore. He cites a study of 40 African countries that found their capital flight, with interest, amounted to $607 billion between 1970 and 2004 – more than two and a half times their international debt.
The book also reveals how elites in developing countries profit from their nations' debt. Shaxson describes how in the early 1990s, government bonds from countries like Argentina were often held by Argentine insiders operating from offshore centers. These insiders knew the debt would be serviced because of their connections to institutions like the central bank.
Foreign Investment Illusion
One of the most shocking revelations in the book is how tax havens distort foreign investment statistics. Shaxson points out that in 2007, the biggest source of foreign investment in India wasn't the United States or another wealthy country, but the tiny tax haven of Mauritius, accounting for 43 percent of the total.
This statistic illustrates how tax havens can create the illusion of foreign investment while actually facilitating the round-tripping of domestic capital. This practice not only deprives developing countries of much-needed tax revenue but also skews economic data, making it difficult for policymakers to make informed decisions.
The Human Cost
Undermining Democracy
Throughout the book, Shaxson emphasizes that the impact of tax havens goes far beyond lost tax revenue. He argues that these secrecy jurisdictions undermine democracy itself by allowing wealthy individuals and corporations to operate outside the rules that govern everyone else.
By enabling tax avoidance on a massive scale, tax havens reduce government revenues, leading to cuts in public services or higher taxes for those who can't access offshore arrangements. This exacerbates inequality and erodes public trust in institutions.
Facilitating Crime and Corruption
The author also highlights how tax havens facilitate crime and corruption on a global scale. By providing secrecy and complex financial structures, these jurisdictions make it easier for criminals to launder money and for corrupt officials to hide stolen funds.
Shaxson provides numerous examples of how tax havens have been used to finance terrorism, fuel civil wars, and prop up dictatorships. He argues that by enabling these activities, tax havens contribute to global instability and human suffering.
Challenges to Reform
Powerful Interests
One of the key obstacles to reforming the offshore system, as Shaxson points out, is the powerful interests that benefit from it. Banks, accounting firms, and law firms make enormous profits from facilitating offshore arrangements. These institutions have significant lobbying power and often resist attempts at increased transparency or regulation.
Jurisdictional Competition
The book also explores how competition between jurisdictions makes it difficult to implement meaningful reforms. If one tax haven increases its transparency or tightens its regulations, there's always another ready to step in and offer even more secrecy or lower taxes.
Complexity and Secrecy
Shaxson argues that the very complexity and secrecy of the offshore system make it challenging to reform. The intricate web of shell companies, trusts, and other financial structures can be so convoluted that even experienced investigators struggle to unravel them.
Potential Solutions
Global Cooperation
While the challenges are significant, Shaxson doesn't leave readers without hope. He argues for increased global cooperation to combat tax havens, suggesting that international bodies like the G20 or the OECD could play a crucial role in coordinating efforts.
Transparency Initiatives
The author advocates for greater transparency in financial transactions and corporate ownership. He suggests measures like public registries of beneficial owners for all companies and trusts, which would make it much harder to hide assets offshore.
Strengthening Regulation
Shaxson also calls for stronger regulation of the financial sector, particularly the intermediaries who facilitate offshore arrangements. He argues that accountants, lawyers, and bankers should be held more accountable for their role in enabling tax avoidance and evasion.
Conclusion
"Treasure Islands" is a powerful exposé of the offshore financial system and its far-reaching consequences. Nicholas Shaxson's work reveals how tax havens have become a central feature of the global economy, enabling wealthy individuals and powerful corporations to avoid taxes and hide their financial activities.
The book makes a compelling case that tax havens are not just a minor issue of lost tax revenue, but a fundamental threat to democratic governance, economic stability, and global development. By facilitating capital flight, enabling corruption, and exacerbating inequality, tax havens undermine the social contract and contribute to a range of global problems.
Shaxson's investigation into the British "spider web" of tax havens and the surprising role of the United States in the offshore world provides crucial insights into how these systems operate. His exploration of the impact on developing countries is particularly damning, revealing how tax havens perpetuate poverty and hinder development on a massive scale.
While the challenges to reform are significant, "Treasure Islands" serves as a call to action. It urges readers to recognize the true cost of tax havens and to support efforts for greater financial transparency and accountability. Ultimately, Shaxson argues that addressing the issue of tax havens is not just about recovering lost tax revenue, but about creating a fairer, more stable, and more democratic global economic system.