Unreported income avoiding regular taxation is creating social distortion
The Tax Justice Network commissioned James Henry to investigate
offshore investment processes. He found that at least US$21 trillion
has been hidden from regular taxation, an amount which is equivalent
to the combined economies of America and Japan.
Of course this has become a very sensitive issue for finance ministers
of nations in the developed world as they all suffer from the same
global recession. They look for local growth but are forced to enact
austerity measures, and as their countries’ unemployment rates rise,
the taxes taken from salaries and purchases fall further, lowering the
minister’s ability to create a favourable investment climate.
The governments do not have the cash to plough into public-sector work
schemes (like building new houses), nor can they give long-term
guarantees to private investors who thus sit on their cash to wait for
Banks are also stuck in this mess as they are reluctant to offer
interbank loans due to the Libor uncertainties (or because of other
nations’ interbank rates round the world). The knock-on effect is that
banks do not lend to small businesses or to households no matter how
devoid of risk – they may be looking only for a small loan to bridge a
brief cashflow shortfall but even that request is refused by many
banks. And we must not forget that banks from the biggest to the
smallest are now subject to increasing regulation, not least relating
to their own cash cover in case there is a run on their assets.
Money and trade go together, as Niall Ferguson and James Bernstein
explain well in separate tomes. They note how increasingly complex
financial instruments were developed by trading nations from late
medieval times through to the present day. These days, bright
doctorate holders in science and mathematics develop very complex
algorithms often only well expressed as computer codes.
Standard clients of banks – and sometimes even bank general managers –
do not understand these systems which have now been scrutinised, and
often condemned as oversold by “uneducated” lower-level staff in
banks. However, clients who have a lot of cash to invest are granted
personal advisers who will support every whim – not only relating to
investing, but also to renting apartments and cars when the client
visits. Client retention is the foremost aim of banks such as UBS,
Credit Suisse and HSBC. The latter is alleged to have handled cash
from money laundering, drug trafficking and terrorist financing
involving transactions with several blacklisted money havens.
Nevertheless, the global elite do not wish to be public figures.
The top financial guys have also been fooled – the International
Monetary Fund noted an increasing imbalance between the global net
trade and its income over the past three decades: essentially these
ought to sum to zero, but there is now a “trade gap” of about 15 per
cent, or well over US$3 trillion.
Much of this gap is “unreported income” often put away in offshore
investments – not of course by ordinary people but by the elites from
developing countries who hold offshore bank accounts and other assets.
They never reported their unearned incomes or offshore re-investments.
And they avoided Third World and Developed World taxation, which in
turn has contributed to widening fiscal and social imbalance
So serious are the social distortions created by this edifice that
Raymond Baker, the director of Global Financial Integrity at the
Centre for Strategic and International Studies in Washington, said in
June 2007: “... for the first time in the 200-year run of the
free-market system, we have built and expanded an entire integrated
global financial structure the basic purpose of which is to shift
money from poor to rich.”
So I ask – what ought we to do? Henry estimates that about 100,000
people control US$10 trillion of these hidden assets, and in many
cases, a person’s assets far exceed the value of the overseas debts of
the countries they come from.
I suggest the high personal wealth holders be evaluated for honesty,
trust and transparency since some people are simply hardworking and
have good investment skills or support, while others are unfit and
have got rich mainly by milking their nations.
Of course this would require banks to become even more accountable and
transparent – which is slowly happening. In addition, a few honest
rich guys and their advisers could put their money to work, with
positive benefits for their countries, or even the global economy.
By turning these hidden trillions to work more productively,
theworld’s recession could be defeated or at least made less painful.
And perhaps by having economies managed to a greater degree by savvy
investors and their bright advisers, we may find the world’s money and
trade begin to work more in harmony.
The writer is founder and chairman of Horasis, a global business community.
Horasis is a global visions community committed to enact visions for a sustainable future. (http://www.horasis.org)
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