Mar 14 2011

Tax Haven USA attracts over $3 trillion in foreign dirty money

Posted by: Nick Shaxson in: Thoughts

I have found a number for the amount of dirty money that is attracted into the United States on account of the secrecy facilities it provides: US$3 trillion. Yes, three trillion dollars. Which goes quite some way to explaining why the United States came top of the Tax Justice Network’s Financial Secrecy Index.

The number comes from a letter to Tim Geithner, US Treasury Secretary, sent by every single member of the Florida Delegation to the House of Representatives. They are whinnying about new proposed IRS regulations for the United States to be more transparent about what foreigners earn there. Currently, almost all foreigners can bank in the U.S. in complete secrecy, and evade taxes they owe their own governments. These excellent proposals would see the U.S.  co-operating with other countries to help them tax their own citizens properly.

The key section of the letter says:

“Because of the privacy laws of the United States, nonresident aliens are estimated to have deposited over $3 trillion in U.S. financial institutions . . (the United States has) refrained from taxing the interest earned by them or requiring their reporting).”

That is unequivocal. This is not a measure of non-resident deposits, they are saying: it is a measure of how much money foreigners stash in the United States “because of the privacy laws of the United States.” Nearly all the money deposited in Florida banks, by the way, is drained out of Latin America.

Let’s now play with numbers here. Imagine US$3 trillion earning a conservative five percent annually: that’s $150 billion in income. Let’s say those foreigners (nearly all wealthy) ought to pay an average 35% top rate of income tax, but that tax is evaded. That’d be over $50 billion in lost taxes per year.

Which would be, on these numbers, twice the size of total U.S. official development assistance.

Make no bones about it: this is very, very dirty tax haven business that these Congresspeople are defending. And some Latin American governments are angry about it. Take this letter, again to Tim Geithner, by Agustín Carstens, Mexico’s Secretary of Finance, in 2009:

“We do not exchange information on interest paid by banks from one country to residents of the other country. . . . I truly believe that we should enhance our cooperation and strengthen our capacities to protect our peoples and wealth. The [automatic] exchange of information on interest paid by banks will certainly provide us with a powerful tool to detect, prevent and combat tax evasion, money laundering, terrorist financing, drug trafficking and organized crime.”

Now take this quote from Robert Goulder of TaxAnalysts, cited in Time Magazine:

“Replace the nationalities mentioned in the letter, and you’ve replicated the UBS affair point for point,” says Robert Goulder, international editor in chief at Tax Analysts, a nonprofit publisher about taxes worldwide, which first reported on the Carstens letter. “If you are a Mexican drug lord, you can put as much money as you want into U.S. banks. We ain’t going to tax it, and the Mexicans can’t tax it because they are never going to know about it. It’s the financial equivalent of ‘Don’t ask, don’t tell.’ “

All this dovetails neatly with three main points I make in Treasure Islands.

First, there is a two-way flow going on here. U.S. taxpayers are seeing money flow out and tax revenues lost to tax havens (or secrecy jurisdictions) elsewhere – but there is money flowing in the other direction: dirty money from other countries, particularly developing countries, is flowing into the U.S., and tax revenues lost on that money too.

Second, the dirty money flowing in to Tax Haven USA absolutely does not compensate for the money flowing out. These hot-money inflows are one of the big reasons why Wall Street is so powerful. The money flows in large measure into real estate, pushing up property bubbles; it also flows into government bonds, worsening the macroeconomic imbalances that contributed to the global economic crisis.  This stuff not only harms developing countries – it harms the United States. The outflows are a cost to U.S. taxpayers, while the inflows are a benefit only to Wall Street, and indirectly a cost to U.S. taxpayers too.

The third point I’d make would be to repeat a section of the latest press release from the Center for Freedom and Prosperity (led by my old friend Dan Mitchell, whose arguments I eviscerate in the chapter  “Resistance”) that this letter was signed by

“all members of the Florida Delegation to the U.S. House of Representatives.”

That is – every single last one of those Floridans defends this criminal business.

What we have here is something I describe in Treasure Islands as the Captured State syndrome: one of the big telling markers for tax haven business. I think the best illustration of that comes in a chapter “Ratchet” where I compare two episodes, one in Delaware in 1981, and another in the Channel Island of Jersey in 1996, where I show how financial interests effectively write each jurisdiction’s laws, and find that any democratic discussion of this measure — that is, any potential opposition — is effectively neutered. The two episodes, despite being 15 years and a continent apart, were stunningly similar.

We all know of Wall Street having captured politicians in Washington. Well here we have a more granular story: the politicians of Florida captured by tax haven interests.

It’s a horrible, horrible story, and just goes to underline what’s laid out in my book.

17 comments so far

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Cesar Esteban 3th March, 2011 3.39 am

Unfortunately the case of sharing info with Latin America is more complex…..I say yes to information sharing with primarily honest governments like the one in Chile….but some of these corrupt Latin American governments want to use the info for reasons that have nothing to do with creating a better society.

Nick Shaxson 3th March, 2011 8.44 am

That is not right. The criminal tax-evading elites in these countries strongly oppose information-sharing, and influence the government to do nothing about getting the information. There is one set of rules for the elites, and another for ordinary folk, who lose faith in the system. Hence the corruption. In other words, the lack of information=sharing savagely undermines the social contract, causing corruption. This is the problem. Start information-sharing, first with the better governments, then push forwards with others, and once elites start getting taxed then governance will change. See some of the more subtle arguments here

Links Ides of March « naked capitalism 3th March, 2011 9.54 am

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Denis 3th March, 2011 11.23 am

So basically, you’re offended because an occasional crime lord or high profile celebrity is stashing millions in the US, alongside multitudes of perfectly honest foreigners who happen to have kept their bank account after leaving the US.

Had you left the US cocoon and lived for a couple of years in a country whose government and/or tax code was oppressive, you’d make a lot more sense of why US banks shouldn’t proactively report assets held by foreigners.

Plus, foreign governments can already go through US courts in order to conduct fishing expeditions, and banks have an obligation to do some due diligence for any unusually large wire transfers since the Patriot Act.

Nick Shaxson 3th March, 2011 11.34 am

Denis, let me answer these point by point. First, I have nothing at all against people putting their money in other countries. But secrecy has nothing to do with it. It’s the secrecy that I object to. And the crime lords are a small part of the picture. It’s the secrecy leading to crimes including wholesale tax evasion – twice the size of foreign aid on these numbers (which are, admittedly, a guess) — that I object to. Nothing more.

Had I left the US cocoon – er, I live in Switzerland, and I have lived in a lot of countries. I was the Reuters correspondent in Angola for a while. So I know all about what it’s like to live in such places. And the thing that strikes me most forcefully is the impunity with which a criminalised elite is granted by the international community when they want to loot their countries and hide it offshore. The U.S. is complicit in this looting, and this acceptance of dirty money goes a long way towards explaining why these countries are so messed up.

And finally, fishing expeditions, in the parlance, generally aren’t allowed: you have to know what you are looking for before you ask for it. And that information exchange is pitifully, pitifully weak. Privacy is fine – banks all over the world don’t plaster their customers’ details all over the internet, for good reason. But if their clients are commiting crimes by evading taxes, then they are complicit in criminal activity.

Denis 3th March, 2011 2.29 pm

OK, fair enough on your having left the cocoon.

Still, I’ve a very real issue with a couple of your points:

“But if their clients are commiting crimes by evading taxes, then they are complicit in criminal activity.”

By the same token, any business could be tarred into being complicit with criminal activity. If you buy a knife and use it to rob someone in the street, does that make the local hardware store complicit in criminal activity?

“You have to know what you are looking for before you ask for it. And that information exchange is pitifully, pitifully weak.”

That’s part of being presumed innocent. The alternative is to allow governments to harass anyone they want for any reason they want.

Anyway… A widespread punitive tax rate on interest and on capital gains by bank account holders who cannot prove that the relevant assets were declared in their country of residence, for instance, would be a much cheaper and much more efficient way to shed light onto undisclosed assets. And if, in light of that, tax evaders then decided they’re better off paying taxes in the US or Switzerland, it only seems fair to let them do so…

Nick Shaxson 3th March, 2011 5.43 pm

So you support a two-tier system: one where elites wealthy enough to use offshore banking get special treatment and protection from government, while the majority of the population has to submit to whatever oppression is being dished out? That seems like a one way ticket to tyranny, in my book. Your last para is fair comment, up to a point (it’s more complex than that) though governments have proved curiously reluctant to do this.

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Denis 3th March, 2011 8.57 am

“So you support a two-tier system”

Not really. What bugs me is, basically, that you seem to be advocating to mend something that’s completely broken in the first place.

Governments spend inordinate amounts of resources seeking to tax things that they shouldn’t. They tax discreet subsets of flows of goods and money; the latter are, as you know all too well, easy to hide if you’re wealthy.

Now, in your view, efforts be made to make it harder to hide these flows. Great idea, but you can count on human resourcefulness to find new loopholes if the current ones disappear.

Considering that, it seems to me that trying to enforce transparency is a waste of time.

By contrast, consider these few things off the top of my head that are prohibitively expensive to hide:

1. A (massive) tax on gas and energy consumption. Call it a carbon tax if you want. It’s an indirect tax on any consumption, which you can’t escape short having a solar panel on your roof and sticking to consuming low-carbon signature goods — hardly a bad thing, isn’t it?

2. A tax on assets. Hiding or under-reporting one’s income or corporate earnings is easy; hiding one’s houses, cars, bank accounts, portfolio, factories, inventory, etc. is much less so.

3. A (punitive) tax on inheritance. Nobody should be entitled to measurable wealth for having gone through the right womb.

4. A tax on financial transactions. Not just sales. On any transaction, of any nature, that involves two distinct parties, irrespective of whether it’s a sale, an interest payment, a capital gain, a loan, etc. A transfer of funds from A to B would get taxed; period, end of story.

I’m sure you’re already itching to reply that things are “not that simple” and blah blah and that I live in fantasy land. Fair point, but note how the above examples, however naive sounding, have this much in common:

1. A bottleneck (the gas station, the electric utility, the bank, the notary…) ensures that it’s painful to hide non-trivial economic activity.

2. The tax collection can be done at the source, without any reporting requirement by the final tax payer.

Reporting income or earnings for tax purposes is boring, time-consuming, intrusive, and expensive if an accountant or an auditor gets involved. It’s a cost center, hence the high incentive to reduce it. We need less of that, not more.

Nick Shaxson 3th March, 2011 9.39 am


Human trafficking is difficult, or even impossible to eradicate. So according to your logic, trying to stop that “a waste of time” would you? So we give up on trying to tackle money laundering, terrorist finance, tax evasion, insider trading, the proceeds on mafia extortion, and so on – because it’s too difficult? It’s an interesting argument. I don’t think too many people would agree with you. You can achieve quite a lot, actually, with the right political will. And my book seeks to contribute to building the political will that’s necessary.

I haven’t opposed any of the measures you propose, though not sure if “punitive” taxes are politically possible, or even desirable (ok, then there’s an argument about what punitive is, but hey.) It’s not an either-or situation. I’d add land value taxes as the glaring omission in your list, though perhaps one could argue that that is ‘a tax on assets.’

So we disagree on only one thing – whether or not this is an either-or situation.

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