Wealthy individuals, fund managers and corporations continue to avoid taxes by using offshore havens at a time of increasing inequality and declining public goods.
This week, Russian President Vladimir Putin did not commemorate the hundredth anniversary of the 1917 Bolshevik Revolution. November 7, the day when Vladimir Lenin presided over the rupture of the “ancien régime and the advent of the brave new world” has now been consigned to the dustbin of history. In contrast, the Romanovs have moved from tsardom to sainthood. Now, films made on the steamy love affairs of Russian tsars attract allegations of blasphemy, petrol bombs and ostracism by cinema chains. Karl Marx and Vladimir Lenin are safely dead in the land where 10% of the population own 87% of its wealth, making Russia “the global capital of inequality.”
It turns out that not only unequal Russia but also powerful Disney is engaging in censorship. In the US, large numbers of journalists have turned lapdogs who dutifully regurgitate public relations memos. Apparently, The Los Angeles Times missed out on some Disney memo and had the temerity to publish an article that the company did not like. In retaliation, Disney banned the newspaper from its press screenings. Unlike Russia, there was a backlash in the US and Disney has revoked its restriction, but only after “productive discussions with the newly installed leadership at The Los Angeles Times regarding [its] specific concerns.”
As Russia and the US grappled with the chilling effects of censorship, Delhi suffocated in smog. Pollution levels reached 30 times the World Health Organization’s recommended limit. From dust to firecrackers, car fumes to smoke, a toxic cocktail of factors have led to terrible air pollution in India’s capital. With its ever increasing population, a burgeoning number of motor vehicles and a rising number of industries in satellite towns, it is unlikely that residents of Delhi will be able to breathe easy anytime soon.
Even as Indians were gasping for air, US President Donald Trump and Chinese President Xi Jinping “set out starkly different visions for the future of global trade” at the Asia-Pacific Economic Cooperation (APEC) summit in Vietnam. Trump thundered that the current trade imbalance was unacceptable, that he would not let the US to be taken advantage of anymore, and that he would put America first. On the other hand, Xi declared globalization to be an “irreversible historical trend” and defended multilateral trade deals. A hundred years after 1917, it is incongruous to see capitalist Uncle Sam battening down its hatches and communist Middle Kingdom open for business.
Yet it is neither Trump nor Xi who take center stage this week. A huge leak of financial documents has brought to light how politicians, multinationals, celebrities and high-net-worth individuals avoid taxes. The Paradise Papers show that taxes are only paid by those who cannot hire expensive lawyers and cunning accountants.
LIKE LUNCH, TAXES ARE FOR WIMPS
The Paradise Papers reveal what many have known for a while: The rules do not quite apply to the ultra-rich. They get around inconvenient taxes by secretly investing vast sums in offshore tax havens.
The rich do not evade taxes while doing so. They simply avoid them. The former is illegal and could land people in prison. The latter is perfectly legal, but it is a pay-to-play model. Only those who can hire expensive lawyers from Harvard or Yale get to enter the tax haven club.
From television celebrities to sports stars, oligarchs to politicians, it seems everyone with wealth is parking their cash in offshore tax havens. Even Queen Elizabeth II, the sovereign of the United Kingdom and Northern Ireland, is no exemption. Some of her private money is invested offshore. The commerce secretary of the US has done better than the queen. He has invested in the same Russian company in which Putin’s son-in-law has parked his cash.
Not only individuals but also companies have joined this party. Gabriel Zucman, the author of The Hidden Wealth of Nations, explains brilliantly how those with wealth use complex structures such as trusts, foundations and shell companies to shelter their cash from pesky tax officials. So does the BBC’s Panorama program, which found most inconvenient truths about the rich and famous. For instance, Lewis Hamilton, the British Formula 1 car racing legend, appears to have used shell companies in the British Virgin Islands, the Isle of Man and Guernsey to avoid his entire £3.3 million tax bill when he imported his £16.5 million jet into England in 2013. Accounting firm Ernst & Young and law firm Appleby acted as his advisors.
For years, the tax burden has fallen disproportionately on the middle class. In 2013, Warren Buffett famously pointed out how he was still paying lower tax rates than his secretary despite a hike in tax rates. In the US, capital gains tax is considerably lower than income tax. So, Americans who earn their living by investing in assets pay less for roads, schools, hospitals, aircraft carriers and drone strikes than those who earn their daily wages by building roads, teaching in schools or serving in uniform.
Many fund managers have told this author off the record that they consider “carried interest” to be a racket that benefits them unfairly. Some even confess feeling queasy about this sordid tax practice. This practice allows private equity and hedge fund managers who handle money to be taxed as if they were owners of capital. For a long time, they were taxed at around 15% while firemen, policemen and teachers paid tax at around 35%. The justification for this practice was that these worthy fund managers enable efficient allocation of capital that leads to innovation, growth and job generation.
Mitt Romney, the Republican presidential candidate in 2012, got into trouble for paying tax at a rate of 15%. It turns out that many of the ultra-rich prefer paying 0%. As yet the public does not seem to mind.
SATANIC APPLE AND EVIL GOOGLE
Not only ultra-rich individuals but also mega-companies avoid taxes. Zucman brilliantly explains how Google transferred ownership of intellectual property regarding its search and advertising technologies to Google Ireland Holdings. This entity was then “managed” in Bermuda. Google Ireland Holdings then created another subsidiary, Google Ireland Limited, and granted it a license to use the mother company’s intellectual property. This subsidiary, in turn, licensed technologies based on the intellectual property to Google affiliates in Europe. This resulted in affiliates like Google France paying royalties to Google Ireland Limited, which transferred money to Google Ireland Holdings, which in turn moved the moolah to Bermuda. If your head is spinning by now, bear in mind that this is a relatively simple structure. Other structures are far more complex.
The key reason for such convoluted corporate structures is to avoid tax. Unlike tax evasion, tax avoidance is entirely legal but the law, as a wise man once said, is an ass. As Zucman points out, $15.5 billion of Google’s profits made their way to Bermuda in 2015 or $240,000 per inhabitant of the island. The company pays a tax rate of 0% in such a paradise-like island. Naturally, this smells fishy and Ireland has announced that it will close this “double Irish” loophole by 2020.
Ireland’s decision might impact Google, but Apple is already two steps ahead. The Paradise Papers reveal that, as early as 2014, this creative company moved its Irish subsidiaries to the English Channel island of Jersey. Like Hamilton, Apple used the services of Appleby to shift Apple Sales International and Apple Operations International to their new home. Here, Apple will continue paying tax at a hard-to-beat rate of 0%.
This practice is endemic and the US alone loses $70 billion a year in lost taxes thanks to creative tax planning. Poorer countries lose much more. About 11.5% of the world GDP, over $10 trillion, is held in secretive tax havens. Zucman argues for transparency and says it is the first step to ensure that “the wealthy don’t cheat their way out of contributing to the common good.” This author disagrees.
Transparency would not make much of a difference. In 2016, The World This Week highlighted the Panama Papers. Like the Paradise Papers, they revealed that the high and mighty stash away billions in offshore tax havens. Nothing has changed since except for the Americans voting for Trump, the British for Brexit and the Filipinos for Rodrigo Duterte. Neither sensible plans on tax reform are in the offing, nor are any moves toward transparency.
Zucman takes a narrow and technocratic view of what is a much broader political and economic problem. This is an era of medieval level inequality. Yes, people can buy things off Amazon and spend time on Facebook, but capital is in few hands. Those with capital have no intention of allowing anyone to pry into their wallets. As elections become more expensive, it is not one person one vote but one dollar one vote. This means that politicians are in the big pockets of those with fat wallets. Without a mass movement and public uproar, transparency is a pipe dream.
Besides, the problem today is not enough information but too much noise. Transparency will not stop smartphones and social media from shortening attention spans. Collapsing communities and isolated individuals are too busy surviving day to day to bother about financial details concerning the rich and famous. Google and Apple offer a classic case in point. We now know these companies are not paying their fair share of taxes. Yet who will stop using Google or buying Apple products as a result? The bottom lines of either company will not suffer.
As the October 27 edition of The World This Week pointed out, the fiduciary duty of chief executive officers is to maximize profits for their shareholders. The big bosses of Google and Apple have fulfilled that duty well. In any case, many make the argument that bumbling bureaucrats often waste, if not steal money. Therefore, tax avoidance is a jolly good thing. It ensures that capital remains with lean and mean professionals who know how to deploy it efficiently and efficaciously.
This view was espoused with exquisite clarity by Gordon Gekko, the too-clever-by-half character in the 1987 film Wall Street. Gekko, who declared “greed is good,” has since come to personify the Ronald Reagan era. For many, this was a time of “morning again in America” as the Gipper unleashed markets, slashed regulations, lowered taxes and got the government off the backs of the people.
This author’s mother oft quotes an ancient Sanskrit proverb, “Ati Sarvatra Varjayet,” that decries excess of anything as undesirable. The same could be said of Reagan’s theology of greed as good. Today, entire countries are for sale as ruthless robber barons seek ever higher returns. Even the land of Nelson Mandela fell prey to the Gupta brothers who, in the words of Matthew Campbell and Franz Wild, bought South Africa with not inconsiderable help from the likes of McKinsey and KPMG.
Clearly, there are some things that probably should not be for sale. Perhaps one could include children, judges or politicians among them if not eagles, dolphins and elephants. Reagan’s fanatical worshippers could do well to remember that markets can be dynamic and price signals often effective, but only when they are underpinned by “moral sentiments” and civic conscience. As this author wrote in 2016, we have to rediscover “the idea of shared identity, collective conscience and citizenship” that has taken a battering. When that happens people will expect Hamilton, Google and Apple to pay their taxes and change rules when they do not see these fat cats paying their fair share. Enacting some regulation is not enough. We have to change the zeitgeist.
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