When a rock-star French economist comes to our country to tell us that the surest way to fix inequality is to tax the hell out of the privileged, they are guaranteed a sympathetic audience. And so we will partly have Thomas Piketty to thank when Pravin Gordhan introduces tax hikes later on Wednesday. But does Piketty have a handle on the giant scam at the heart of the global tax system? KEVIN BLOOM speaks to a tax haven investigator who says that he doesn’t.
I. Tax Holiday
Quick, to qualify for the grand prize – a week at an island of your choice in any Caribbean archipelago under de facto British rule that has twice as many registered companies as it has private citizens – who said, ”Africa doesn’t need development aid, it needs people to pay their fair share of tax”?
If you answered Thomas Piketty, give yourself a pat on the back – you’re through to the next round. Now, if you’re not bored yet, you are invited to answer a further two questions. 1) According to Piketty, up to what percentage of all financial assets in Africa are held offshore? 2) According to which of Piketty’s expert critics is this number ridiculously low?
Nicely done. It is, contends Piketty, “as much as 50%” of all Africa’s financial assets that are held offshore. And take a bonus point for reminding us that Piketty mentioned this statistic during his Nelson Mandela lecture in Johannesburg late last year – the same event at which the 2,000-strong crowd flattered the 44-year-old French economist with two standing ovations and four eruptions of spontaneous applause.
But – and who can blame you? – it appears to be the last question that’s tripping you up. Which of Piketty’s expert critics? The list is long, and it includes the likes of Joseph Stiglitz of Globalization and Its Discontents fame (winner of the Nobel Prize in Economics in 2001), Daron Acemoglu and James A Robinson of Why Nations Fail fame (odds-on winners of the Nobel Prize in Economics before 2025), and Martin Wolf, celebrity economics commentator at the Financial Times (winner of an honorary doctorate from the London School of Economics in 2006 and an honorary acronym – CBE – from Buckingham Palace in 2000).
The name you want, however, is not as recognisable as any of these – either you know who called bullshit on Piketty’s one-in-two ratio for the total number of African financial assets held offshore, or you don’t. And so, assuming it’s the latter (in which case you are no longer in the running to sup with the blessedly untaxed in one of Her Majesty’s overseas territories or crown dependencies), we’ll tell you. The correct answer is James S Henry, former chief economist at McKinsey & Co, member of the New York Bar and Global Justice Fellow at Yale; the man who, after turning his hand to investigative economics journalism in the late 1980s, was instrumental in producing documentary evidence that brought down Panamanian narco-kingpin Manuel Noriega in 1992.
“In general,” Henry informed the Daily Maverick in late January, “Piketty is an armchair economist who will no doubt win the Nobel for his bloated book, but he knows little about tax, doesn’t do fieldwork, and relies on Zucman, a young PhD guy whose estimates of offshore private wealth for the world – and Africa – are about 75% too low.”
The bloated book to which Henry refers is, of course, Capital in the Twenty-First Century: the text that caused The Economist magazine to pronounce its author “the modern Marx”. For Henry to question the “fieldwork” credentials of such a destiny-kissed character, one would have to assume that his own credentials in the category were fairly good – and one would find oneself justified in the assumption. In the bio appended to two of Henry’s better known books, The Blood Bankers: Tales from the Global Underground Economy and Pirate Bankers: First-Hand Investigations of Private Banking, Capital Flight, Corruption, Money Laundering, Tax, we learn that his “first-person approach to investigative economics” have taken him to more than 50 developing countries, including Colombia, Haiti, Mexico, Russia, Sudan and Zimbabwe.
Not exactly countries whose native yacht collectors, gangster dictators and bankster magic-men you could successfully investigate from your study in the thirteenth arrondissement. And so here – apart from quickly mentioning that Henry was also instrumental in exposing the role of the Philippines Central Bank in enriching Ferdinand Marcos – is the crux: where Gabriel Zucman, Piketty’s protégé, estimated in this 2013 paper for the Paris School of Economics that the world’s wealthy were using tax havens to hide between $4.5 trillion and $6 trillion from the world’s tax collectors, Henry estimated in this 2012 paper for the New York-based Tax Justice Network that the real number was somewhere between $21 trillion and $32 trillion.
Sure, the current writer hasn’t met Zucman, which might go some way to explaining this article’s inherent bias: precisely because he has visited most of the countries he writes about, Henry can be a charming conversationalist. But then the aim of this piece is not to compare and contrast the methodology behind the two papers. The aim of this piece is rather to draw attention to the fact, mostly overlooked, that the developed world is willfully and secretly siphoning the lifeblood (read: tax revenues) out of the developing world – and to do so in a way that gets you, the reader, back in touch with your outrage.
Yes, ladies and gentlemen, in case you had forgotten it, the game is truly and properly rigged. As non-super-rich denizens of the developing bloc of nations we are, to use an ugly yet apposite phrase, a pond of fattened up frogs for a nest of ravenous snakes. The title of Zucman’s paper is, “The Missing Wealth of Nations: Are Europe and the US Net Debtors or Net Creditors?”… and the answer is implied in the question. Here’s how Paul Krugman of the New York Times explained it in this piece in 2014: “What Zucman points out is that we have international data on investment positions, with each country reporting its assets abroad and foreign-owned assets at home. But the numbers don’t add up: globally, liabilities are substantially larger than assets. That’s mathematically impossible, but Zucman shows that it’s what will appear in the statistics if a lot of money is run through offshore havens, so that the ownership doesn’t show up in anyone’s national statistics.”
Krugman, at the start of his opinion piece, proudly announced that the reason he was having lunch with Zucman (exactly!) was to discuss the latter’s “startling new paper showing that the concentration of wealth at the very top — the 0.1% — [was] fully back to Gilded Age levels”. It was Zucman, he said, who drew his attention to the earlier paper, the one that “flew under his radar”: the one that demonstrated that a big chunk of the wealth held by the 0.1% was hiding, so as not to incur tax, in offshore havens.
“I think this is telling us something important about how the world really works,” Krugman opined. “There was a flurry of interest in the offshore haven issue [with] Mitt Romney’s Cayman Islands accounts; a bit more interest when Cyprus hit the wall, and the question of what it was doing arose. But the issue keeps receding, I think due to a sense that it’s somehow trivial, a matter of a few Russians and maybe a handful of our own wealthy.”
Krugman ended his short column with the speculation that it was “a much bigger deal than that,” surmising, for those few individuals at the topmost peak of the US economy, that hiding wealth offshore was the norm and not the exception. Had he bothered to read the work of his countryman James Henry, he might have presented as a little less wistful and vague. Because here’s what Henry wrote on page 5 of his 50-page report, entitled “The Price of Offshore Revisited”, under the sub-header “key findings”:
“We have focused on a subgroup of 139 mainly low-middle income ‘source’ countries for which the World Bank and IMF have sufficient external debt data.
“Our estimates for this group underscore how misleading it is to regard countries as ‘debtors’ only by looking at one side of their balance sheets.
“Since the 1970s, with eager (and often aggressive and illegal) assistance from the international private banking industry, it appears that private elites in this sub-group of 139 countries had accumulated $7.3 to $9.3 trillion of unrecorded offshore wealth [by] 2010, conservatively estimated, even while many of their public sectors were borrowing themselves into bankruptcy, enduring agonising ‘structural adjustment’ and low growth, and holding fire sales of public assets.”
And thus, just as Zucman would conclude the following year, albeit coming at it the other way, the official numbers on global assets and liabilities did not add up. Henry had suggested in 2012 that the “supposedly indebted” source countries – “including all key developing countries” – were not actually debtors at all. He had calculated that the total annual developing nation losses in tax revenue of between $120 billion and $160 billion, just on the interest and other income generated by all unreported anonymous wealth, was more than the entire global total of foreign aid from OECD (Organisation for Economic Co-operation and Development) countries for 2007. After taking “flight wealth” into account, he added, “it became even clearer that developing countries as a whole didn’t really face a ‘debt’ problem, but a huge ‘offshore tax evasion’ problem.”
II. Tax Back-to-Work
The issue of a wealth tax in South Africa has come up for discussion every few years or so, but it returned fully onto the agenda at the ANC’s national general council in October last year, when the party’s economic transformation head Enoch Godongwana called for a feasibility study. Was it a coincidence that Godongwana’s call came just ten days after Piketty’s much-lauded Nelson Mandela lecture? Many observers thought not.
Then, at a question-and-answer session at Davos in January – which counted among the participants the aforementioned Martin Wolf – Finance Minister Pravin Gordhan, touching briefly on the notion of tax reforms, said this: “You need a different kind of sophistication, given the kind of discourse that’s taking place in the OECD and in the G20 about base erosion and profit-shifting. It’s a nice catch-all phrase, but it hides a lot of complex transactions that banks of lawyers and other professionals are working on full-time and affects both developed country fiscus and ourselves as well.”
Gordhan’s words were an understatement on two fronts – first, regarding the levels of complexity, on the OECD website the tax policy guidelines read as way more intricate and sophisticated than he let on; second, remembering Henry’s stunning point about “supposedly indebted” source countries, the international private banking industry, and the “agonising” structural adjustment programmes imposed on the world’s poorest nations, are we really expected to give a shit about the impact on developed countries?
Here’s how the OECD introduces the notion of base erosion and profit-shifting, which it helpfully shortens to BEPS, on its website: “In an increasingly interconnected world, national tax laws have not always kept pace with global corporations, fluid movement of capital, and the rise of the digital economy, leaving gaps and mismatches that can be exploited to generate double non-taxation…
“Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit these gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises…”
Today, at the first budget speech of his new term, if all goes as the analysts and experts predict, Gordhan will announce tax hikes across a range of categories. Personal income tax, value added tax and corporate income tax are expected to be at the forefront of the hikes, with a “supertax” – as per Nazrien Kader, head of taxation services at Deloitte – likely to be introduced for high income earners. Without actually mentioning the phrase “tax revolt”, Billy Joubert, Deloitte’s tax director, warned at the same budget roundtable that a hike in personal income tax would need to be balanced by a commitment to curb wasteful spending.
Which goes to the dark heart of the matter: if the ANC government, in an effort to generate revenues and redress inequalities, moves too far into tax hikes and not far enough into wastage and corruption busting, the corporations and the rich will start to obsess over the weather forecasts in Her Majesty’s overseas territories. Not that South Africa’s super-rich aren’t vacationing with their money on British soil already – take a bow Christo Wiese – just that after the budget speech there could be a whole lot more doing it, which means there’ll be a whole lot more work for the developed world’s bankers and lawyers, which means that the developed world will continue to pretend that we (the developing world) are in debt to them when in fact it’s them who are…
You get the picture. The game is rigged. And just in case you thought that as victims of the system we were entitled to a free moral pass, there’s something else to consider – something that not even the friendliest of tax haven investigators could help us out with. “Overall,” Henry told the Daily Maverick last week, “Africa’s key lost revenue source is still kleptocracy, not tax. Tax dodging by multinational corporations and the private elite is a bigger relative problem in RSA, but kleptocracy – bribes, outright theft, insider deals – is growing over there.” DM
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