Tax Havens - only little people pay taxes

The complexity of the tax code reminds me of one of the most intractable problems of 19th century diplomacy – what to do with the Schleswig-Holstein Question, in which a number of countries laid claim to the German duchies.  Lord Palmerston said that only three people understood the Schleswig-Holstein question: one was dead, the other had gone insane and the third was himself, but he had forgotten it.

Many tax officials, when assessing corporate tax returns must feel a bit like Lord Palmerston. They invariably face a bewildering labyrinth of subsidiaries and tax write-offs.  Moreover, they need to interpret thousands of pages of tax legislation, made complex through the efforts of lobbyists.  Trying to extract a reasonable amount of tax from transnational corporations, under these circumstances is impossible.


To avoid going mad, most poorly-paid tax assessors simply throw up their hands at the complexity of tax returns knowing that if they challenge the self-assessments in front of them, they will, without fail, find themselves in court facing some very expensive lawyers and judges who struggle to understand the minutiae of the tax code.

There is an apocryphal (even possibly true) story of Lord Vestey goes like this: The beef baron, who created a global empire in the early years of the 20th century, was presented on year with a tax bill of £12. He reacted by sacking his accountant.

I have little doubt that the people who run the corporate leviathans today would have much sympathy for Lord Vestey outrage at being forced to pay any tax at all.

It is a sad fact of modern corporate life that CEOs spend more time extracting profits through avoiding tax than they actually earn through honest labor.  They spare no expense employing smart accountants and lawyers, who are often able to generate more profits than investments in productive activities.

In peddling the benefits of tax havens, a popular method of avoiding taxes, CEOs argue that tax competition between countries is a good thing, in that it drives governments to become more efficient.  Looking a little bit more carefully at the self-serving argument, tax havens such as Liechtenstein or a sunny island in the Caribbean provide those services to these corporations, while being grateful for whatever fees they get from tax avoiders. At the same time, all profits are generated in high tax countries, which also provide the infrastructure that makes these companies profitable. So, while transnational corporations happily use their services – courts and other benefits that come with operating in high tax countries – they are strongly averse to actually paying for said services.

Take Rupert Murdoch’s News Corporation as an example. In 1995, the Independent newspaper reported that News International had paid just under £12 million on its profits of almost £980 million, in the previous ten years. This is a tad over 1% compared to the corporate tax rate of 33%. In a report, the Economist found that in 1999 News Corporation paid just £146 on profits in excess of £2 billion.  The reason is that profits are funneled through a complex structure of 60 incorporated tax havens, such as the British Virgin Islands and the Cayman Islands, a web so opaque ton confound the UK tax department.

In the US, 30 multi-million dollar corporations spent more on lobbying Congress than they paid in federal income taxes between 2008 and 2010, according to a new report from the non-partisan Public Campaign.  The report also found that despite making combined profits totally $164 billion in that three‐year period, these companies paid tax totaling nearly $11 billion.  The really interesting figure is how much they invested in lobbying to keep existing loopholes open and create new ones.  A respectable $475 million.  But with the normal corporate tax rate of 38%, lobbyists earned their keep by saving their tax-avoiding companies around $50 billion.

Perhaps, rather than charging corporations tax (or at least trying to), governments should simply charge them a fee for services provided. In this way, corporations would at least be forced to pay their share maintaining the court system, laws and the security provided by the police force and army to protect their in-country assets while covering the costs for the education system that supplies them with the highly qualified employees they use to create profits.

What is clear is that we couldn’t do any worse than what we are doing at the moment.