Joe Hendren

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Friday, April 14, 2006

Greedy transnational corporations and their tax havens cause poverty

Just finished reading 'Tax us if you can' a report published last year by the Tax Justice Network (TJN).

In 'Tax us if you can', TJN explain how rich individuals and transnational corporations have taken advantage of the 'globalisation' of the world economy to avoid their fair share of tax, by locating their wealth in offshore jurisdictions offering minimal or zero tax rates.

In March 2005, TJN estimated that US$11.5 trillion of personal wealth is held offshore by the rich, with a large amount of this sent to around 70 tax havens scattered around the world. If this income from this wealth was charged to tax in the countries where the rich were resident or derived their wealth, TJN estimate an additional tax revenues of US$255 billion would be available to fund public services and investment around the world. They explain explains how global tax avoidance and fraud has a significantly disproportionate negative impact on developing countries, where the rich minority in these countries hold a far larger proportion of their income in offshore tax havens (70% in the case of the Middle East). Such unethical and sometimes downright illegal behaviour comes at a serious cost. TJN make the point very plainly on the back cover of 'Tax us if you can', in large point type - "Tax havens cause poverty".

TJN are also highly critical of pro-business political actors (such as our own Business Round Table, National and Act) who argue that nations should compete with each other to attract inward international investment by offering lower tax rates, little regulation and other related concessions. TJN point out that such 'tax competition' can lead to investment being directed to territories where, in many cases, it is inefficiently used.

"The only winners in such a process are the mobile businesses that can play one government off another in order to secure tax advantages and subsidies"
"Taken to its logical extreme, tax competition will lead to a race to the bottom, meaning that Governments will be forced to cut tax rates on corporate profits to zero and subsidise those companies choosing to invest."

So the next time you hear the BRT or other business lobbyists bleating for a lower corporate tax rate and a regulation nuddy run - ask the question - do we really want to play their zero sum game?

If our Government bows to pressure to lower tax rates it not only reduces the amount of money available to improve public services in New Zealand - it also places pressure on the governments of other countries keep playing the game. Many developing countries, faced with massive capital flight and tax avoidance have shifted the burden of tax onto consumers through sales taxes (like GST). Such taxes are widely regarded to be regressive as lower income households spend a higher proportion of their income on consumption. So playing any attention at all to the zero sum tax competition game promoted by the transnationals hits the poor of the world, whether they be in New Zealand or overseas.

'Tax us if you can' includes a very telling quote from 'Growth Strategies" from the Economic Policy Institute (2004)
"There is little evidence that state and local tax cuts - when paid for by reducing public services - stimulate economic activity or create jobs. There is evidence, however, that increases in taxes, when used to expand the quality and quantity of public services, can promote economic development and employment growth."

"Tax us if you can" is an excellent introduction to the topic of tax havens and is well worth reading. Especially as the report contains a number of constructive recommendations to stop the transnationals from free riding on the tax paid by everyone else, most notably encouraging greater cooperation between countries on tax matters and insisting transnationals make public who they are, what they do and how much tax they actually pay. I look at some of these recommendations in a future post.

Tags: Politics, Economics, Corporates, Tax, Mulitnationals

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At 10:05 am, Blogger Hans Versluys said...

Placing your cash in tax havens doesn't mean that it's lost to local investment, those dollars and euros get recycled in the globalised world economy since banks in tax havens do make investment decisions on behalf of their clients. It's not just sitting in a Swiss or Monegasque bank vault, otherwise there would be a shortage of money around the world, becoming worse as time goes on.
Attracting foreign investment is more than just a function of corporate tax rates. The world (even capitalism) isn't that simple.

At 2:38 am, Blogger Joe Hendren said...

Hmm, how do you assume money in tax havens comes back to local investment, other than through a globalised version of the trickle down theory?

I am not denying that some of the money is spent, however many questions are raised over the question of how this money is spent.

Cash in tax havens is lost to public revenue, and as the Tax Justice Network point out, this can have significant negative impacts on developing countries. I would prefer to see such countries able to make investment decisions on behalf of their people, instead of a few banks making investment decisions in the interests of a few. In many cases the banks and the transnationals aquired this money though processes akin to legalised theft. All I am asking is that the corporates pay their fair share of tax, which in NZ has been defined as 33c in the dollar.

Corporate tax should not be regarded as a business expense - it is more akin to dividends - ie making returns to stakeholders, whether they be shareholders or governments.

"Attracting foreign investment is more than just a function of corporate tax rates. The world (even capitalism) isn't that simple."

On this point totally I agree with you. Yet why do the right (National/Act/BRT) consistently trot out this simplistic rot ever election campaign?

thanks for your comment :)


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