Apr 27 2011

Offshore expert Hines pretends tax havens are small

Posted by: Nicholas Shaxson in: Thoughts

James R. Hines Jr., a professor at the University of Michigan who is routinely wheeled out by the tax havens as an academic apologist for their activities, has written an academic article entitled “Treasure Islands” which contains an elementary, fundamental error in the very first paragraph:

“Tax havens are small: most are islands; all but a few have populations below one million.”

If Hines has spent any time studying the offshore phenomenon, then he will know very well that the world’s biggest tax havens (or secrecy jurisdictions) — those that offer tax haven services – are large OECD economies or their dependencies, notably the UK, the US, Switzerland, Ireland, Luxembourg, and  Cayman. But wait – he does note this:

Some intriguing recent evidence suggests that large wealthy countries such as the United States and the United Kingdom may have become locations of choice for those interested in establishing anonymous accounts.

So he is saying in the same paper that some of the world’s top secrecy jurisdictions are big OECD countries – yet they still won’t go on his list.

Why does he insist on keeping the biggest havens out of the picture? And why do the OECD, the IMF, and others, insist on following the same pattern (as Hines says of them, “those who have considered the issue keep compiling very similar lists?”)

I can think of two reasons why this should be so. The first is realpolitik: nobody likes being called a tax haven, so the big OECD countries that dominate the IMF, World Bank and OECD, for example, like to make sure that they aren’t on the lists, and that the only ones on the list are those jurisdictions small enough to be bullied.

But there is a second possible reason — a more Machiavellian one — why one might want to air-brush out the biggest tax havens from the picture. And that is that if you exclude the biggest tax havens you simply cannot understand the offshore system. And if you can’t understand it, then people won’t measure it, and they won’t see what’s going on. And secrecy jurisdictions will remain what they have always been: the version that persists in the popular imagination – small, exotic sideshows to the global economy, not worth bothering too much with.

And the blindness that has characterised the offshore system will persist.

Which of these two motivations is driving Hines? It’s hard to know. (I am discarding a third possible explanation – that he isn’t intelligent enough to understand the issues – because he is clearly a smart enough fellow.)

There are endless other problems with this paper. For example, it claims that tax havens boost investment in nearby economies. Yet it makes no mention of ’round-tripping’ – the practice whereby local investors go offshore, dress up in a secrecy structure or two, then come back home to invest, pretending that this mysterious secret investor is genuinely a foreign investor. That will go a very long way, if not all the way, to explaining the changed investment patterns. Hines has been challenged on round-tripping before, has never successfully rebutted that argument, and persists in leaving it out of his analysis. Why?

He also does nothing — quite literally, nothing — to explore the vast range of harms that stem from offshore activity, and argues such things as:

“The presence of a nearby thriving tax haven financial sector seems to increase the competitiveness of a country’s banking sector.”

Please. That weasel word ‘competitive’ is as bad as the term ‘innovation’ when applied to the finanical industry. As my book Treasure Islands explains in great detail, this sort of ‘competitiveness’ is the harmful sort, not the beneficial sort. And still Hines persists in pushing this, after all that has happened. There is plenty more hogwash in here (such as the particularly idiotic “there are almost no poorly governed tax havens”,) but I’ll get to that another day.

Message to James R. Hines – stop hiding the world’s biggest secrecy jurisdictions.

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