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Put the hidden trillions to work

By Frank-Jürgen Richter

Business Times, August 16, 2012

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 better opportunities.

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 everywhere.

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.