A new report from the IMF (hat tip: Markus Henn) tallies surprisingly closely, at least in part, with what’s in Treasure Islands. Take this, for example, on the role of secrecy jurisdictions (the IMF prefers the term Offshore Financial Centers, or OFCs:)
Before the 2008–09 economic crisis, many banks and hedge funds used OFCs for off-balance-sheet activities such as the so-called special purpose vehicles or structured investment vehicles. These vehicles were typically funded in onshore financial markets and purchased onshore assets.
Indeed. Off-balance-sheet finance isn’t the same as offshore finance – but as I mention in Treasure Islands, and as the IMF agrees, there’s a massive overlap. Now here’s something else, in the same vein:
Commercial operations may establish an insurance company in an OFC to manage risk and minimize taxes, or onshore insurance companies may establish an offshore company to reinsure certain risks and reduce the onshore company’s reserve and capital requirements.
That’s called getting around the rules. To “reduce the onshore company’s reserve and capital requirements.” As I remarked recently on the shadow insurance system, these rules, for all their flaws, are put in place for good reason – to protect society at large. Tax havens help firms get around these rules – at great cost to society. The IMF says exactly this – albeit in its usual overly polite, stilted language:
OFCs are cost competitive, because they frequently operate under relatively weaker regulatory and supervisory financial standards—standards that are set by the host jurisdictions. This lax operational environment translates into lower administrative and operating costs but may not be fully consistent with international best practices.
Just as I explain in Treasure Islands. Anyone who thinks tax havens had nothing to do with the financial crisis is gravely mistaken. And don’t just take this as evidence – look at this trove.
Does the headline to this blog over-egg the IMF’s views? It merely calls the article “Bankers on the Beach” and provides the photo to accompany it, reinforcing the old myth that tax havens are palm-fringed islands. The IMF has been something of a tax haven apologist for years, and it says several more supportive things about tax havens elsewhere in the article. But read what the IMF says, above. I don’t think my headline is unfair.
There’s a table showing how big OFCs have become – over US$ 5 trillion in (each of) assets and liabilities – but my riposte is that the IMF, along with other organisations like the Bank for International Settlements, takes a politically convenient view of what a tax haven is – they think it’s mostly small islands like Cayman, whereas in fact the biggest ones are nations like the UK, the US, Luxembourg, Switzerland, Ireland and so on – big OECD economies.
I like the fact that the IMF mentions another key theme of Treasure Islands: alongside a picture of Cayman’s disproportionate share (73%!) of Caribbean offshore activity, it says
“the largest OFCs are located in nonsovereign territories—in particular, the Cayman Islands, a British overseas territory.”
Indeed – for those who keep saying that Cayman and its peers have the right to set their own sovereign tax policies – well, even the IMF knows that they are ‘nonsovereign.”
Towards the end of the document, the IMF reverts to its traditional Love-The-Havens approach by wheeling out a discredited bit of research by James Hines, who claims that having a tax haven near your country boosts growth and foreign investment. Recently, my colleagues John Christensen and Richard Murphy heard that Hines was speaking at a meeting of the Policy Exchange in London, puffing the havens’ case. Christensen takes up the story:
“Richard and I sat in opposite corners of the room. It was a turkey shoot. We put it to him that his paper hadn’t taken into account the gigantic issue of round-tripping. [That is, that much of that investment is not real foreign investment, but the result of locals going offshore, dressing up in tax haven secrecy, coming back pretending to be foreigners, and harvesting all the tax breaks and other privileges accorded to foreigners.] The effect of this will show up in figures on inequality and income distribution. Headline growth rates, which is what these studies use, simply won’t capture this. His paper doesn’t stand up the claim about growth.
We put these points to Hines, and he looked like a startled rabbit. There was a long pause – it was all quite theatrical – and he said he didn’t know.
(The name of the Hines research cited by the IMF? Why, Treasure Islands! His came out before mine, I have to confess . . . )
The IMF also asserts, without presenting any evidence, that tax havens and the ‘tax competition’ between jurisdictions that they lead, make for more efficient resource allocation in global markets.
“To some degree, this tax competition can facilitate better resource allocation.”
So here’s a challenge to the IMF. This is not just about tax competition, but about regulatory competition, competition to provide the best secrecy, and so on. How exactly does that ‘competition’ work? How does the secrecy world, or these regulatory problems it mentions here, or the ensuing inequalities, play into this ‘more efficient resource allocation?’
IMF: I would love to hear from you on this.
End Note: s a nice picture, for aspiring policy wonks, of which body has responsibility for which bit of the offshore financial architecture: