Marty Sullivan at Tax Analysts has been continuing his work on tax haven abuse, this time turning his attention to the use of hedge funds in the Caribbean by US investors as a way of avoiding and evading tax.

As he notes:

Previously we reported that tax evasion by individual investors in offshore hedge funds was a relatively easy undertaking. Information about investors flows only in a trickle from these institutions to onshore tax collectors.

In the latest edition he calculates that there were a total of $1.43 trillion in hedge fund assets under management at the end of 2006 and of that sum assets under management in Caribbean hedge funds amounted to $746 billion at the end of 2006.

He goes on to calculate that at the end of 2006, $262.8 billion has been invested by individuals in hedge funds domiciled in the Cayman Islands, the British Virgin Islands, the Bahamas, and Bermuda.

I stress, and he stresses, that there's nothing wrong with that. But, as he also notes:

it is a fact that if income is not independently reported by the source, the likelihood of voluntary compliance declines precipitously. IRS statistics indicate that income with little or no information reporting has a compliance rate below 50 percent ("Rap on Tax Gap - It's No Snap," Tax Notes, May 21, 2007, p. 711, Doc 2007-11600 , 2007 TNT 93-8 ).

This ratio is considered reliable. How much is lost then? Hard to know for sure, but whatever it is, automatic information exchange would stop it. Compliance rates then climb to rates in the high nineties.

That's why we favour such information exchange. And there is no reasonable argument against it (treat that as a challenge if you like: I don't believe it possible to actually argue the case).