Wednesday, May 30, 2007

A Breed Apart

John Christensen’s piece in the UK’s Guardian newspaper highlights how the offshore world is creating fundamental tensions and contradictions in very foundations of market economics.

For example, tax haven activities warp David Ricardo’s classic theory of comparative advantage, which holds that economic activities should tend to gravitate towards the most geographically relevant areas. Instead, as a result of the tax havens world, economic activity is being shoe-horned into weird locations with no real economic connection to the underlying businesses. Many other tensions exist. Company managers feel they have a duty to deliver value to shareholders by minimising taxes, and yet they have a duty to the societies that made their businesses possible – by paying the right amount of tax. In theory, this tension is resolved easily enough: companies simply pay their taxes as required by law: no more, and no less. But the offshore world plunges companies into a huge grey area, where they can evade ever larger amounts of tax, using ever more elaborate schemes to do so. So we end up with many thousands of international companies operating out of a single building in the Cayman Islands, or African state oil companies using special purpose vehicles, registered in the British Virgin islands and organised from London, to hide assets from creditors, and from ordinary African citizens.

This is not real business. It is, in the words of U.S. Senate Budget committee chairman Kent Conrad, monkey business. As he says, addressing this problem has nothing to do with changing tax rates and doesn't need to imply raising overall tax levels. It just means that a charmed section of society should pull their weight, like everyone else. In fact, if these élite interests paid their proper taxes, the end result could be lower taxes for the majority for the same level of public services.

This state of affairs has emerged, to a large degree, from the unco-ordinated actions of an array of nations, acting in their own self-interest, playing a beggar-my-neighbour game to suck capital out of each other. But what kind of self-interest is this? Even Britain, a true champion of the offshore world, isn't reaping easy prosperity from its embrace of offshore tax avoidance and secrecy. Another article in the Guardian two days earlier suggests why: the richest one percent of Britons now own a quarter of its wealth, while the bottom fifty percent own just one-twelfth of the total – and their share is falling. Britons from the poorest parts of the country now have a life expectancy eleven years lower than those from the richest parts. Britain now has the second highest child death rate among the 24 richest countries in the world, with infants in the UK twice as likely to die before the age of five as children in Sweden. (The worst of all is the United States, and the tax haven of Ireland is not far behind.) Is this prosperity, built on a foundation of dirty money which is eroding the underpinnings of market economics, shareholder capitalism and democracy, really what we want?

It probably seems so for some of the global mandarins who, as Christensen points out, have set themselves up as a breed apart. It doesn’t look quite so good for the rest of us.

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