2011 October » Tax Research UK

A Bloomberg editorial says it’s time for Swiss banking secrecy to go

Switzerland, Tax evasion, Tax Justice Network 1 Response »

Oct 252011

Switzerland’s bank secrecy laws and anonymous numbered accounts have a long and shameful history: They have been used to help criminals conceal illicit gains, to deny Holocaust survivors their stolen inheritances and to help the world’s wealthy hide taxable income.

So it’s a welcome sign that 11 firms may be on the verge of agreeing to pay billions of dollars in penalties and reveal the names of Americans who used Swiss bank accounts to evade U.S. taxes, according to a Bloomberg News article yesterday.

As they note:

U.S. prosecutors held out the threat of criminal indictments, which is tantamount to a death sentence for a bank.

And the add, importantly:

Finance Minister Eveline Widmer-Schlumpf said that the country wants to reach an agreement with the U.S. so that Switzerland isn’t confronted “with the same issue time and again.” If that’s the case, Switzerland shouldn’t assume the U.S. will accept deals like those reached earlier this year with the U.K. and Germany, allowing the identities of customers with untaxed assets to remain secret.

There’s good reason for that: as they say:

Unfortunately, Switzerland has cooperated only grudgingly in meeting international banking standards, agreeing to do so in 2009 under threat of sanctions and being named as a tax haven by the Organization for Economic Cooperation and Development. Even so, the country this month was ranked at the top of a financial secrecy index developed by the London-based Tax Justice Network.

Switzerland should do itself a favor and abandon the financial opacity that has made it the world’s No. 1 destination for offshore wealth. It has no place in a globalized world where money can be electronically whisked from one place to another, except as a cloak for financial wrongdoing.

This is one of the biggest financial news networks iin the world and it is arguing the UK is wrong, Switzerland is wrong and the Tax Justice Network is right to take its position.

Times are changing, at least a bit.

EU to come down very hard on the UK – Swiss tax deal

EU STD, Europe, Secrecy jurisdictions, Switzerland, Tax evasion, Tax Havens, Tax Justice Network 2 Responses »

Oct 252011

Europolitics has reported today:

The European Commission is planning to attack the tax agreements concluded by Switzerland with Germany and the United Kingdom, on 25 October in Strasbourg. It finds that Berlin and London have encroached upon the Union’s powers by negotiating bilateral arrangements with Berne that interfere with savings taxation rules.

Taxation Commissioner Algirdas Semeta will answer that evening an oral question by British Liberal Sharon Bowles, on behalf of the EP Committee on Economic and Monetary Affairs (ECON), which she chairs.

MEPs question the compatibility of these Rubik agreements, set to enter into force in 2013, with EU rules on taxatin of savings income, which provides for a 35% withholding tax at the source (not in full discharge of liability) on interest earned on savings. More generally, they wonder whether states have the power to negotiate such bilateral tax agreements and whether the Rubik system may present an “obstacle” to revision of the EU savings taxation directive and of the EU’s agreements in this area with Switzerland, Liechtenstein, Andorra, San Marino and Monaco. Will not Rubik agreements “have the effect of halting the move towards an automatic exchange of information for tax purposes,” they ask.

The question answers itself. Luxembourg and Austria have already seized the pretext of Berne’s arrangements with London and Berlin to hold up the savings taxation issue in the EU.

Keen on being treated equally with Switzerland, in order to prevent any capital flight, they refuse to be obliged to switch from the system of withholding at the source to the automatic exchange of information between tax administrations, and to abolish their banking secrecy in the process.

In the context, Commissioner Semeta plans to take a very hard line, on 25 October, and to denounce an abuse of power by Germany and the United Kingdom – except no doubt for the amnesty operation, which the Commission does not have the competence to prevent.

And as they note this is in the context of:

The global network Tax Justice will publish, on 25 October, a study that pillories London and Berne. Its conclusions will doubtless be identical to those of a tax specialist based in Zurich, who is consulted regularly by the Commission and prefers to remain anonymous.

So not only are the UK incompetent in their dealings with Switzerland, they’re also incompetent in their dealings with Brussels who have rumbled exactly what Osborne and Hartnett are doing – which is to undermine any effective challenge to tax havens.

It’s good news that the EU is fighting back. So they should. The promotion of tax haven abuse is unacceptable anywhere - including in London.

George Monbiot attacks advertising – as I do in the Courageous State

Courageous State, Economics 8 Responses »

Oct 252011

George Monbiot wrote this today in the Guardian:

The power and pervasiveness of advertising helps to explain, I believe, the remarkable figure I stumbled across last week while reading the latest government spreadsheet on household spending. Households in the UK put an average of just £5.70 a week, or £296 a year, into savings and investments. Academic research suggests a link between advertising and both consumer debt and the number of hours we work. People who watch a lot of advertisements appear to save less, spend more and use more of their time working to meet their rising material aspirations. All three outcomes can have terrible impacts on family life. They also change the character of the nation. Burdened by debt, without savings, we are less free, less resilient, less able to stand up to those who bully us.

I agree, wholeheartedly.

The corrosive power of advertising and its link to the financial crisis is a major theme in the Courageous State. I’m told it should now be on sale by 14 November. You can get a copy here.

Jersey plans to use its ‘rainy day’ fund as it slips towards inevitable bankruptcy

Jersey 29 Responses »

Oct 252011

I have long forecast that as a result of continuing financial deficts arising from Jersy’s decision to impose a 0% tax rate on companies it would eventually go bust. I havenever seen reason to change that opinion and although the latest budget for Jersey shows it almost breaking even that is stated before the impact of the latest decision on its tax system from Europe, before the impact of LVCR going and after using the most optimistic assessment of growth and likely tax revenues – which the budget itself shows could be massively overstated.

Now BBC Jersey reports:

Jersey’s treasury minister is urging that £40m in government funds to help Jersey through the recession must be used.

Senator Philip Ozouf wants to make sure the cash for capital projects, from the Fiscal Stimulus Fund, is spent in 2012.

With high unemployment and the economy shrinking by 5% in 2010, the minister said it would be a boost for business.

No Philip: that’s not true. What this says is you know your books aren’t balancing and you’ve got no choice but use the rainy day fund now before the inevitable faliure I forecast happens.

It’s actually quite sad to see what I so accurately forecast as long ago as 2007 panning out in reality largely because it is so unnecessary. There is a Plan B for Jersey – but it’s always been ignored.

It is possible to have a flat tax, or to have democracy, but not both

Flat tax 7 Responses »

Oct 252011

I seem to have reignited some debate on flat taxes this morning, so let me mention this old theme of mine in a little more detail.

Back in 2006 the ACCA published a report they commissioned from me entitled “A flat tax for the UK? The implications of simplification”. The report was paid for by ACCA research funds and as such had to meet strict, objective academic research standards, including (as is essential for a professional institute) a neutral approach. But I am not subject to those constraints here, and I can therefore be more straightforward about what the evidence I uncovered when writing that report revealed.

There are no flat tax states

The first conclusion I reached was that there are no “flat tax states”. Those countries that claim this title in Eastern Europe have tax systems that are nothing like the flat tax model as laid out by Alvin Rabushka and Steve Forbes in the USA, who are the main political promoters of this idea. At best they have single rate income tax, capital gains tax and corporation tax systems with all the resulting complexity that flow from retention of such structures. In fact, Russia, Lithuania and Serbia even manage multiple rates of income tax, which somewhat negates the claim to have flat tax systems.

So-called flat tax states have complex tax systems

Secondly, the tax systems that these states operate are not simple. They all retain complex rules for calculating income, the treatment of capital allowances and the consideration of capital gains. They also have a wide variety of allowances and reliefs available for ordinary citizens to claim against their personal income including, in most cases, relief for pensions, mortgage interest, education costs, home to work travel, union and other dues, charitable contributions and so on, and on (in some cases).

Flat taxes increase admin burdens

Next, these systems do not appear to reduce the administrative burden on the tax payer, as is claimed. In Estonia 84% of adults submit a tax return each year; in the UK it’s 16%. And in the same country details of benefits in kind supplied by an employer to their employees have to be made monthly, which makes the annual P11D routine in the UK seem like a positive panacea in comparison.

Flat taxes do not deliver increased tax revenues or growth

These departures from the myth that is promoted around flat taxes might have been acceptable if the claims for their economic performance had been shown to have any support. Unfortunately that was not the case either. It is widely claimed that tax revenues increase when flat taxes are introduced. No evidence was found to support this claim. Income tax revenues fell in countries introducing flat taxes if other obvious factors (such as Russia’s oil boom, the creation of which can hardly be attributed to a tax change) are taken into account. Indeed, if tax revenues did increase it was almost entirely of VAT and NIC, as was he case for example in Slovakia and Romania, where income tax revenues fell.

Nor can this increase in indirect tax be attributed to economic growth resulting from the adoption of a flat tax. Indeed, the Estonian Ministry of Finance specifically warned against making an assumption that this was possible. Their spokesman when interviewed for the report said of flat tax “it’s a tax; it’s not a medicine for the economy.”

And the IMF and Institute for Fiscal Studies did not find the rich in Russia were more tax compliant after the introduction of a flat tax, as its proponents claim they should have been. But curiously though those on low pay who actually saw flat taxes increase their tax burden in that country were more tax compliant, counter intuitively to the claims of those who propose such taxes.

Flat taxes undermine democracy to benefit the rich

Finally, although the UK’s leading exponent of flat taxes, Richard Teather of Bournemouth University claimed that his proposals for a flat for the UK would not help the rich in the UK and would only benefit the less off, my work showed that the data he used when coupled with HMRC data could not support that view. In fact, those earning less than £22,000 might save an average of about £200 a year (before NIC changes, which are likely to increase their bills based on the precedent of other flat tax states), those between about £22,000 and £74,000 would see their tax bills rise by up to £2,000 whilst those earning over £74,000 might see their tax bills reduce by over £7,000 an average. This is a clear indication that this system will favour the rich, as all other surveys in the UK and the range of data I reviewed for other countries also showed to be true.

So, the evidence failed to support any of the claims made by the flat tax lobby. In which case I concluded that those promoting flat taxes wished to promote these four things:

1. Reduced taxes for the rich
2. Increased taxes for working people
3. Reduced tax on companies
4. Reducing the role of government.

As some indication of this two quotes from Alvin Rabushka, the man who invented flat tax are illuminating. Both come from the interview with me for this research, which he consented to be published. About the redistributional effects he said:

The only thing that really matters in your country is those 5% of the people who create the jobs that the other 95% do. The truth of the matter is a poor person never gave anyone a job, and a poor person never created a company and a poor person never built a business and an ordinary working class guy never drove economic growth and expansion and it’s the top 5% to 10% who generate the growth for the other 90% who pay the taxes to support the 40% in government. So if you don’t feed them [i.e. the 5%] and nurture them and care for them at the end of the day over the long run you’ve got all these other people who have no aspiration for anything more than, you know, having a house and a car and going to the pub. It seems to me that’s not the way you want to run a country in the long run so I think that if the price is some readjustment and maybe some people in the middle in the short run pay a little more those people are going to find their children and their grandchildren will be much better off in the long run. The distributional issue is the one everyone worries about but I think it becomes the tail that wags the whole tax reform and economic dog. If all you’re going to do is worry about overnight winners and losers in a static view of life you’re going to consign yourself to a slow stagnation.

I think that pretty much supports my first two claims, and since the third is part of the same metric, it’s covered by the same evidence.

As for the role of government he said:

I think we should go back to first principles and causes and ask what government should be doing and the answer is “not a whole lot”. It certainly does way too much and we could certainly get rid of a lot of it. We shouldn’t give people free money. You know, we should get rid of welfare programmes, we need to have purely private pensions and get rid of state sponsored pensions. We need private schools and private hospitals and private roads and private mail delivery and private transportation and private everything else. You know government shouldn’t be doing any of that stuff. And if it didn’t do any of that stuff it wouldn’t need all of that tax money so that’s the fundamental position and as long as you’re going to have government do all that stuff you’re going to have all those high taxes.

As he also made clear, that then let’s you have a flat tax. In other words: privatisation is pre-condition of flat tax. Public service and flat taxes are incompatible in his opinion. But in that case what I wrote for the Guardian last year is true:

Flat tax is not a serious attempt at taxation, but is instead an exercise in social engineering. That is why its innocent appeal is so dangerous.

That ‘social engineering’ process is designed, as Rabushka himself say, to ‘take the tax code out of the economy’. In other words, it leaves people wholly dependent upon market forces. The consequence happens to be that politics is neutered on the way because as anyone who follows general elections knows, at the end of the day politics is about the economy. Rabushka and the right wing want to stop that. And if you don’t believe me, John Meadowcroft who writes for the Institute of Economic Affairs, a think tank Margaret Thatcher still supports, said recently when asked if he thought democracy a ‘market institution’ (when undertaking an interview on www.transformingbusiness.net) that :

Democracies and free societies tend to go hand in hand. Having said that, democracy tends to lead to socialist policies, such as protectionism. If democracy leads to property rights and the rule of law, then yes, you need democracy. But otherwise, democracy is not a prerequisite for a market economy. Democracies tend to create very large states. In most European countries, including the UK, nearly half of GDP goes to the state. This is not good for the creation of free markets.

It seems fair to conclude that some in the mainstream the right wing now think democracy can be sacrificed to the market, and I believe that promoting flat taxes is part of that process. Which leads to the conclusion that two writers (Hettich and Winer) have put forward that:

It is possible to have a flat tax, or to have democracy, but not both

I agree.

The US demands tax justice for its Swiss tax evaders: the UK settles for 30 pieces of silver

Corruption, Secrecy jurisdictions, Switzerland, Tax evasion, Tax Havens, Tax Justice Network Comments Off

Oct 252011

The UK has signed a tax haven deal with Switzerland it won’t even come near to raising the money claimed for it, whilst perpetuating bank secrecy. So says the Tax Justice Network this morning, and rightly so.

In the meantime the USA has taken a different approach. As Bloomberg report:

Swiss banks will probably settle a sweeping U.S. probe of offshore tax evasion by paying billions of dollars and handing over names of thousands of Americans who have secret accounts, according to two people familiar with the matter.

U.S. and Swiss officials are concluding negotiations on a civil settlement amid U.S. criminal probes of 11 financial institutions, including Credit Suisse Group AG (CSGN), suspected of helping American clients hide money from the Internal Revenue Service, according to five people with knowledge of the talks who declined to speak publicly because they are confidential.

Switzerland, the biggest haven for offshore wealth, wants an end to new U.S. probes while preserving its decades-old tradition of bank secrecy, the people said. The U.S. seeks data on Americans who have dodged U.S. taxes and a pledge by Swiss banks to stop helping such clients, according to the people. The Swiss reached accords this year with Germany and the U.K. on untaxed assets.

“The Swiss would like to get out of this by paying money, and they’ve done that with other countries,” said tax attorney H. David Rosenbloom of Caplin & Drysdale Chartered in Washington, who isn’t involved in the talks. “For the U.S., it’s not primarily a money question. It’s a matter of making sure the laws apply fairly among taxpayers.”

And that’s it in a nutshell. The UK has done a tawdry deal with Switzerland that lets it continue to operate as a tax haven and demands no names of those active, habitual and large scale criminals who have used it to evade tax.

The US demands justice and puts cash second.

Who has the priorities right? Clearly the US has. And what’s more, I have no doubt it will also raise a great deal more money, even in relative terms, as a result.

But then, Hartnett, HMRC and Osborne all support tax havens. No other explanation for their behaviour is possible.

The Vatican’s got it: why hasn’t St Paul’s?

Courageous State, Economics, Ethics, Uncategorized 6 Responses »

Oct 252011

As the Guardian reports this morning:

If Vatican cardinals have yet to join the Occupy Wall Street protesters, a document released by the Holy See calling for a “world authority” to crack down on capitalism suggests some are considering it. Written by the Vatican’s Pontifical Council for Justice and Peace and released on Monday, Towards Reforming the International Financial and Monetary Systems in the Context of a Global Public Authority, suggests a beefed-up United Nations could police the financial markets and inject a dose of ethics to replace rampant profiteering and reduce inequality.

The pamphlet claims that in combination with a “central world bank”, such an authority would help restore “the primacy of the spiritual and of ethics”, as well as “the primacy of politics – which is responsible for the common good – over the economy and finance”. Financial transactions would be taxed to promote global development and sustainability, while “virtuous” banks helping out the “real economy” would qualify for state subsidy should they need it.

The council’s secretary, Bishop Mario Toso, said the 1944 Bretton Woods accord had failed, while the G20 was unable to rein in markets.

The document also says the International Monetary Fund is no longer up to the job of stabilising the global financial system.

So, as I argue in The Courageous State, we need courageous politicians who will put finance back in its place, cooperate internationally to ensure that this is the case, and who work to ensure each and every person can achieve their potential.

Rome gets many things wrong – like abortion and contraception – but this one it has got right. And I’m happy to say it has.

Through the eyes of Thomas

Richard Murphy, Uncategorized Comments Off

Oct 252011

It’s half term, so my son Thomas set out to use his time creatively, drawing a cartoon of his father talking at #occupylondon on Sunday:

Ouch!

I should clearly have paid more attention to shaving.

Cameron’s opponents aren’t just anti-EU, most are also pro-flat tax – and that’s all about making the rich richer

Conservatives, Europe, Flat tax, Tax justice, Uncategorized 19 Responses »

Oct 252011

Cameron faced his backbenchers yesterday on the EU, and lost.

But the EU was not the whole reason for this. Polly Toynbee had what was, without doubt, the best line on this issue:

But the “in or out” debate was never just a dry calculation of national interest. The two sides stand for profoundly different visions of the good society. A few Labour mavericks straddle the divide, but most anti-Europeans are from the far right for good reason. To them EU red tape, health and safety, human rights and labour regulations throttle British business.

Their vision is of a Britain thriving by undercutting basic protection of the workforce – working hours, maternity rights, holidays, sickness, security at work, equal treatment of agency workers. Read the sceptics’ outpourings to see their vision of our island as a low-tax, maybe flat-tax haven for the super-rich, free to treat employees as “flexibly” as they like. This is a fine distraction from the real cause of our worsening economic crisis – this government’s extreme austerity choking demand.

She’s right. Those voting against Cameron weren’t just anti-EU. They’re anti society as we know it in the UK and want to throw it all over in favour of radical transformation that will hasten the flow of funds from the poor to the rich; something flat taxes are designed to do.

If in doubt look to their inspiration across the pond: Rick Perry is proposing a flat tax. There is only one explanation – and that is that these taxes push governments to the very margins of existence – which is exactly what their proponents want. If in doubt look at the detailed analysis of the proposal by my friends Citizens for Tax Justice in the USA. They say Perry’s plan would give:

- Enormous tax cuts for the richest five percent of taxpayers and of $209,562 for the richest one percent in 2010.

- Tax hikes for all other income groups. The bottom 95 percent of taxpayers would pay an average of $2,887 more in federal taxes in 2010.

That’s what the Tories oppising Cameron really want.

There’s going to be a role for those in favour of tax justice for a long time to come.