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Trillion Dollar Tax Havens, Inequality and Recession (Part II)

Friday, 10 August 2012 11:25 By Paul Jay, The Real News Network | Interview and Video

James Henry: Vast amounts of money avoid taxes and productive investment.

Also see: Major Banks Help Clients Hide Trillions in Offshore Tax Havens (Part I)

TRANSCRIPT:

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore.

This is the second part in our series of interviews about offshore tax havens. Somewhere between 20 and 30 trillions of dollars, says a new study, is being stashed in these various tax havens to avoid tax, primarily.

Now joining us to continue this discussion is James Henry. He's an economist, an attorney, investigative journalist. He was a chief economist, I should say, at the international consultancy firm McKinsey & Company. And he's the lead researcher of this report, titled The Price of Offshore Revisited. He's also a global board member of the Tax Justice Network. Thanks for joining us, James.

JAMES S. HENRY, ECONOMIST, LAWYER, AND INVESTIGATIVE JOURNALIST: You're welcome.

JAY: So how many people are we talking about? Like, how many people are rich enough and are taking advantage of these tax havens? And give us again the sense of the kind of money involved.

HENRY: Well, when you look at the distribution of wealth here that's offshore, we think there's no more than about 10 million people that really account for about 83 percent of the $21 trillion that is at a minimum offshore. And that's pretty concentrated. The top 100 are multibillionaires. They account for about 8.1 percent of the total. The next 2,900, billionaires with an average wealth of $1.4 billion, account for another 7 percent of it. So that's about 3,000 people that already are owning nearly 15 percent of the world's financial wealth.

And then we have—the next step in the ladder is the sort of ultra high net worth crowd, which are—their average wealth is on the order of $58 million, and there's about 117,000 of them in the world. And then, finally, there's another fortunate few, who are about 9.9 million, whose average wealth is on the order of $6.3 million, and they account for about 60 percent of this. So 82 percent of the world's wealth, then, when you add all this up, is—of the offshore wealth is owned by about 0.14 percent of the world's population.

So if you look at it from the standpoint of who's actually benefiting from this industry, you know, it's a tiny share of the global population. And that group has—in terms of global wealth, which is about $231 trillion, they own about a third of all that global wealth. And so that's a—you know, 0.14 percent is a tiny fraction owning that much wealth.

JAY: You do a calculation in your study about what kind of tax revenues might be derived from this if this was taxed.

HENRY: [Yeah, I've done a] calculation, rough estimate that somewhere between $250-300 billion a year of revenue, if all this money were—all this wealth were really declared and the earnings on it were—you know, and that's assuming kind of a very conservative 3 percent yield on the wealth and a 30 percent marginal tax rate. So it could be far higher than that depending on the year.

Obviously, it's presumptuous to assume that tax authorities are ever going to be able to get people to declare this income, but the option that we're suggesting is that, you know, since it's concentrated in these big banks, we could imagine having 0.5 percent annual withholding tax on this wealth that would be easy for the banks to implement. They know what these folks' wealth is every quarter 'cause they have to report to them. And if it was just 0.5 percent applied to these anonymous assets, you might generate, you know, somewhere that would be big enough to basically pay the world's aid budget, which is about $89 billion this year. So we're talking about—if you want to talk it about in Occupy terms, the top 1 percent of the world's population now owns about 61 percent of all financial wealth and 100 percent of the offshore wealth that we're talking about in this study.

JAY: And what are the consequences of this on the global economy, that so much money is sitting in these tax havens?

HENRY: Well, first of all, we know that inequality is understated. The standard statistics for inequality leave out all this wealth. And even though it's only 10 percent of the world's total wealth, it all accrues to this tiny fraction of the population. So that means that the GINI statistics, all the other kind of routine statistics we've used to measure wealth inequality are understated.

And secondly, we also understated the growth of inequality, because all of this activity is relatively new in world history. And so it goes back to the beginnings of 1970s, when havens started to take off and then a lot of this offshoring of wealth started to soar, partly financed by the debt crisis, partly because the haven infrastructure was being refined by these banks. And, you know, since then it's taken off.

And we learned a lot more lately about the impacts that inequality really has on welfare, on people's lives, on the performance of the macroeconomy as well. For example, one characteristic of all this wealth is that it's invested in relatively low-yielding time deposits and secure assets in First World countries. You know, and compared with investing in a high-growth developing country like Brazil, the opportunity cost is really pretty high here for this kind of investment.

And the people who are this wealthy are not consuming. I mean, they've consumed about as much in the way of real estate and yachts and art and other things as—you know, the finer things in life as they can, but at the end of the day, they are almost required to save it. So they do consume a lot of political power, which is—seems to be an outlet for virtually unlimited expenditures. But aside from that, you know, they're not creating a lot of jobs with their savings here.

JAY: The theory's supposed to be that if they have this much capital, they're going to invest it. Are they not?

HENRY: Well, you know, as Keynes pointed out back in 1936, the problem is that in a capitalist economy, investment depends on expected profitability, and savings can be made for other reasons. In this case, just because distribution of welfare is people who don't—you know, it's far too much for them to consume. So there's no necessary coupling between savings and investment, unless business people really expect the economy to get better. Right now we've seen that the investment side is very weak. So when you have all these people, you know, just necessarily saving rather than consuming, you know, it's—in a recession environment it makes things worse.

JAY: And I suppose if the underlying motivation here is tax avoidance, which is why you have this money in these shelters, I suppose it's not so easy just to take it and then start investing it anyway, is it?

HENRY: No, it's not easy at all. I think if, you know, you can imagine that if this wealth were taxed and the funds were distributed to the poor or to needy people or, you know, sort of people with a higher propensity to consume, you know, that would have some stimulating effect we're not seeing from all this wealth inequality.

This is a political phenomenon. You know, the regulations are designed in Washington, in the City of London, and, you know, in the leading capitals of First World countries partly by an industry that receives—has enormous stake in this game, not only these wealthy clients, but, you know, the banking industry. For them this is a matter of, you know, billions of dollars a year of profits and a lot of shareholder value.

They are spending, too, heavily on campaign contributions and lobbyists to make sure that their point of view is represented. Anytime there's a Treasury regulation, any time there's a major prosecution of a major bank, you know, one can be sure that they are there helping to write the regulations and lobby against the prosecutions. So in the last—since 1990, I calculated that the U.S. banking industry, for example, has spent about $6.6 billion on campaign contributions and lobbying in Washington alone. That's about $2,200 per congressman per day since 1990. And that's one of the reasons we're seeing this kind of result.

JAY: Now, if a big bank helps someone from a developing country to avoid taxes and/or embezzle a public treasury and then park this money in a tax haven, that's a criminal conspiracy, one would think. And there is an argument that's been made, I think, by one of your colleagues, too, James Boyce, and others, that there's historic precedent for then the countries to say, well, banks, you did this knowingly, and now you're lending us money, and we're in debt to you, although on the whole we'd actually be a creditor if we could repatriate all this money that you colluded with, so maybe we don't owe you this money. And I think the concept is called odious debt. What do you make of that?

HENRY: Yeah. Well, I'm familiar with that argument. It dates back to the United States' intervention in Cuba in 1898, where they ended up basically forgiving Cuba's debt to Spain because it had been imposed on them by a dictator.

Unfortunately, the United States has stopped using that doctrine elsewhere or generalizing it. It doesn't really help us with these offshore assets. It would help us forgive some of the debt that developing countries still have, but in terms of this—at this situation, you have global private bankers basically helping the money to go out.

Now, I would argue that the analogy really is to the kind of prosecutions that the U.S. Justice Department has been making against UBS for helping wealthy Americans take their money abroad and, you know, that we've already seen several private bankers go to jail. We've seen UBS heavily fined. The Justice Department just levied a $1 billion fine against HSBC for facilitating $14 billion of money laundering for the Colombian, Mexican cartels. But these major institutions which are involved in this—HSBC is, by the way, the third-largest player in this particular private banking industry that we're seeing here. They launder—they serve about $633 billion of offshore private wealth, and it puts them number three on the list.

But basically the point is that, you know, developing countries might also want to take advantage of making the exact same argument against these banks when they come to Mexico or the Philippines, you know, to try to take money out there and basically enabling all of this kind of funny business.

But we haven't seen such prosecutions, and it's for no accident. I mean, I've tried to understand why, for example, the Philippines, which was a major victim of bad banking by the foreign banks that were looking the other way while Marcos ripped off the Central Bank of the Philippines for billions and billions of dollars, parked it in Switzerland, and the Philippine government was left holding the bag for that debt. I asked the Philippine ministers at the time why they didn't go after these people. They said they were basically intimidated by the international banks and, you know, felt that the Philippines couldn't really have any bargaining power with them.

So this is something that's very difficult for any individual developing country to tackle, you know, 'cause the banks quickly, you know, gang up on them and will make life hard and single them out and move elsewhere. But it is something that cries out for collective action.

JAY: Well, in the next segment of our interview, we're going to talk about what that collective action could look like and what Americans might be demanding of their government on this score, given that all of these big banks, one way or the other, are touched by American regulation or a lack thereof. So please join us for the next segment of our interview, and we will be back soon on The Real News Network.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Paul Jay

Paul Jay is CEO and Senior Editor of The Real News Network. As Senior Editor of TRNN Paul has overseen the production of over 4,500 news stories and is the Host of our news analysis programming. As Executive Producer of CBC Newsworld's independent flagship debate show counterSpin he produced over 2,000 shows during its 10 yrs on air. He is an award-winning documentary filmmaker with over 20 films under his belt and was founding Chair of Hot Docs!, the Canadian International Documentary Film Festival (now the largest in North America).


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Trillion Dollar Tax Havens, Inequality and Recession (Part II)

Friday, 10 August 2012 11:25 By Paul Jay, The Real News Network | Interview and Video

James Henry: Vast amounts of money avoid taxes and productive investment.

Also see: Major Banks Help Clients Hide Trillions in Offshore Tax Havens (Part I)

TRANSCRIPT:

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore.

This is the second part in our series of interviews about offshore tax havens. Somewhere between 20 and 30 trillions of dollars, says a new study, is being stashed in these various tax havens to avoid tax, primarily.

Now joining us to continue this discussion is James Henry. He's an economist, an attorney, investigative journalist. He was a chief economist, I should say, at the international consultancy firm McKinsey & Company. And he's the lead researcher of this report, titled The Price of Offshore Revisited. He's also a global board member of the Tax Justice Network. Thanks for joining us, James.

JAMES S. HENRY, ECONOMIST, LAWYER, AND INVESTIGATIVE JOURNALIST: You're welcome.

JAY: So how many people are we talking about? Like, how many people are rich enough and are taking advantage of these tax havens? And give us again the sense of the kind of money involved.

HENRY: Well, when you look at the distribution of wealth here that's offshore, we think there's no more than about 10 million people that really account for about 83 percent of the $21 trillion that is at a minimum offshore. And that's pretty concentrated. The top 100 are multibillionaires. They account for about 8.1 percent of the total. The next 2,900, billionaires with an average wealth of $1.4 billion, account for another 7 percent of it. So that's about 3,000 people that already are owning nearly 15 percent of the world's financial wealth.

And then we have—the next step in the ladder is the sort of ultra high net worth crowd, which are—their average wealth is on the order of $58 million, and there's about 117,000 of them in the world. And then, finally, there's another fortunate few, who are about 9.9 million, whose average wealth is on the order of $6.3 million, and they account for about 60 percent of this. So 82 percent of the world's wealth, then, when you add all this up, is—of the offshore wealth is owned by about 0.14 percent of the world's population.

So if you look at it from the standpoint of who's actually benefiting from this industry, you know, it's a tiny share of the global population. And that group has—in terms of global wealth, which is about $231 trillion, they own about a third of all that global wealth. And so that's a—you know, 0.14 percent is a tiny fraction owning that much wealth.

JAY: You do a calculation in your study about what kind of tax revenues might be derived from this if this was taxed.

HENRY: [Yeah, I've done a] calculation, rough estimate that somewhere between $250-300 billion a year of revenue, if all this money were—all this wealth were really declared and the earnings on it were—you know, and that's assuming kind of a very conservative 3 percent yield on the wealth and a 30 percent marginal tax rate. So it could be far higher than that depending on the year.

Obviously, it's presumptuous to assume that tax authorities are ever going to be able to get people to declare this income, but the option that we're suggesting is that, you know, since it's concentrated in these big banks, we could imagine having 0.5 percent annual withholding tax on this wealth that would be easy for the banks to implement. They know what these folks' wealth is every quarter 'cause they have to report to them. And if it was just 0.5 percent applied to these anonymous assets, you might generate, you know, somewhere that would be big enough to basically pay the world's aid budget, which is about $89 billion this year. So we're talking about—if you want to talk it about in Occupy terms, the top 1 percent of the world's population now owns about 61 percent of all financial wealth and 100 percent of the offshore wealth that we're talking about in this study.

JAY: And what are the consequences of this on the global economy, that so much money is sitting in these tax havens?

HENRY: Well, first of all, we know that inequality is understated. The standard statistics for inequality leave out all this wealth. And even though it's only 10 percent of the world's total wealth, it all accrues to this tiny fraction of the population. So that means that the GINI statistics, all the other kind of routine statistics we've used to measure wealth inequality are understated.

And secondly, we also understated the growth of inequality, because all of this activity is relatively new in world history. And so it goes back to the beginnings of 1970s, when havens started to take off and then a lot of this offshoring of wealth started to soar, partly financed by the debt crisis, partly because the haven infrastructure was being refined by these banks. And, you know, since then it's taken off.

And we learned a lot more lately about the impacts that inequality really has on welfare, on people's lives, on the performance of the macroeconomy as well. For example, one characteristic of all this wealth is that it's invested in relatively low-yielding time deposits and secure assets in First World countries. You know, and compared with investing in a high-growth developing country like Brazil, the opportunity cost is really pretty high here for this kind of investment.

And the people who are this wealthy are not consuming. I mean, they've consumed about as much in the way of real estate and yachts and art and other things as—you know, the finer things in life as they can, but at the end of the day, they are almost required to save it. So they do consume a lot of political power, which is—seems to be an outlet for virtually unlimited expenditures. But aside from that, you know, they're not creating a lot of jobs with their savings here.

JAY: The theory's supposed to be that if they have this much capital, they're going to invest it. Are they not?

HENRY: Well, you know, as Keynes pointed out back in 1936, the problem is that in a capitalist economy, investment depends on expected profitability, and savings can be made for other reasons. In this case, just because distribution of welfare is people who don't—you know, it's far too much for them to consume. So there's no necessary coupling between savings and investment, unless business people really expect the economy to get better. Right now we've seen that the investment side is very weak. So when you have all these people, you know, just necessarily saving rather than consuming, you know, it's—in a recession environment it makes things worse.

JAY: And I suppose if the underlying motivation here is tax avoidance, which is why you have this money in these shelters, I suppose it's not so easy just to take it and then start investing it anyway, is it?

HENRY: No, it's not easy at all. I think if, you know, you can imagine that if this wealth were taxed and the funds were distributed to the poor or to needy people or, you know, sort of people with a higher propensity to consume, you know, that would have some stimulating effect we're not seeing from all this wealth inequality.

This is a political phenomenon. You know, the regulations are designed in Washington, in the City of London, and, you know, in the leading capitals of First World countries partly by an industry that receives—has enormous stake in this game, not only these wealthy clients, but, you know, the banking industry. For them this is a matter of, you know, billions of dollars a year of profits and a lot of shareholder value.

They are spending, too, heavily on campaign contributions and lobbyists to make sure that their point of view is represented. Anytime there's a Treasury regulation, any time there's a major prosecution of a major bank, you know, one can be sure that they are there helping to write the regulations and lobby against the prosecutions. So in the last—since 1990, I calculated that the U.S. banking industry, for example, has spent about $6.6 billion on campaign contributions and lobbying in Washington alone. That's about $2,200 per congressman per day since 1990. And that's one of the reasons we're seeing this kind of result.

JAY: Now, if a big bank helps someone from a developing country to avoid taxes and/or embezzle a public treasury and then park this money in a tax haven, that's a criminal conspiracy, one would think. And there is an argument that's been made, I think, by one of your colleagues, too, James Boyce, and others, that there's historic precedent for then the countries to say, well, banks, you did this knowingly, and now you're lending us money, and we're in debt to you, although on the whole we'd actually be a creditor if we could repatriate all this money that you colluded with, so maybe we don't owe you this money. And I think the concept is called odious debt. What do you make of that?

HENRY: Yeah. Well, I'm familiar with that argument. It dates back to the United States' intervention in Cuba in 1898, where they ended up basically forgiving Cuba's debt to Spain because it had been imposed on them by a dictator.

Unfortunately, the United States has stopped using that doctrine elsewhere or generalizing it. It doesn't really help us with these offshore assets. It would help us forgive some of the debt that developing countries still have, but in terms of this—at this situation, you have global private bankers basically helping the money to go out.

Now, I would argue that the analogy really is to the kind of prosecutions that the U.S. Justice Department has been making against UBS for helping wealthy Americans take their money abroad and, you know, that we've already seen several private bankers go to jail. We've seen UBS heavily fined. The Justice Department just levied a $1 billion fine against HSBC for facilitating $14 billion of money laundering for the Colombian, Mexican cartels. But these major institutions which are involved in this—HSBC is, by the way, the third-largest player in this particular private banking industry that we're seeing here. They launder—they serve about $633 billion of offshore private wealth, and it puts them number three on the list.

But basically the point is that, you know, developing countries might also want to take advantage of making the exact same argument against these banks when they come to Mexico or the Philippines, you know, to try to take money out there and basically enabling all of this kind of funny business.

But we haven't seen such prosecutions, and it's for no accident. I mean, I've tried to understand why, for example, the Philippines, which was a major victim of bad banking by the foreign banks that were looking the other way while Marcos ripped off the Central Bank of the Philippines for billions and billions of dollars, parked it in Switzerland, and the Philippine government was left holding the bag for that debt. I asked the Philippine ministers at the time why they didn't go after these people. They said they were basically intimidated by the international banks and, you know, felt that the Philippines couldn't really have any bargaining power with them.

So this is something that's very difficult for any individual developing country to tackle, you know, 'cause the banks quickly, you know, gang up on them and will make life hard and single them out and move elsewhere. But it is something that cries out for collective action.

JAY: Well, in the next segment of our interview, we're going to talk about what that collective action could look like and what Americans might be demanding of their government on this score, given that all of these big banks, one way or the other, are touched by American regulation or a lack thereof. So please join us for the next segment of our interview, and we will be back soon on The Real News Network.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Paul Jay

Paul Jay is CEO and Senior Editor of The Real News Network. As Senior Editor of TRNN Paul has overseen the production of over 4,500 news stories and is the Host of our news analysis programming. As Executive Producer of CBC Newsworld's independent flagship debate show counterSpin he produced over 2,000 shows during its 10 yrs on air. He is an award-winning documentary filmmaker with over 20 films under his belt and was founding Chair of Hot Docs!, the Canadian International Documentary Film Festival (now the largest in North America).


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