Tax havens: Can promises to shut them down be believed?
G-20 nations pledge to address this subject at meeting in London next month. Analysts are skeptical.
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The issue is bigger than just a bunch of millionaires trying to reduce their tax burden. In the US, the "effective" federal income-tax rate (what is actually paid after all deductions) for the wealthiest 1 percent was 19.4 percent in 2005. In some European nations, the burden on the rich is higher.
Mr. Baker estimates that half of global trade and capital movements, legal and illegal, move through what he calls the world's "shadow financial structure." This system, expanding for half a century, consists of tax havens, secret jurisdictions, disguised corporations, anonymous trust accounts, and fake foundations. This murky setup contributed to the difficulty of appraising the quality of assets held by financial institutions. So major US and European banks no longer trust one another and do less business.
Last week, a task force on "Economic Transparency" from Baker's organization estimated that $1 trillion a year of illicitly generated money is shifted abroad from developing countries through this shadowy framework. This, the report says, constitutes "the most damaging economic condition hurting the poor, undermining poverty alleviation, and delaying sustainable growth." (That sum far exceeds all foreign aid that rich nations send to poorer nations.)
Both the task force and the Tax Justice Network this month have proposed reforms. For instance, the task force urges automatic cross-border exchange of tax information on personal and business accounts, and confirmation of beneficial ownership in all banking and securities accounts (who owns what).
Last Tuesday, Sen. Max Baucus (D), chairman of the Senate Finance Committee, held a hearing on a bill "to detect, deter, discourage offshore tax evasion." If passed, it would greatly damage tax havens.
Considering this legislation, and a possibility of G-20 action, some major depositors in Swiss accounts have been taking out money, reports Harald Malmgren, a Washington consulting economist. They are encountering resistance from banks to these withdrawals, making depositors "fearful" about the safety of their money.
Interestingly, both Baker and Christensen reckon Switzerland could remain a banking giant in the world without secrecy because it has so many qualified economists, accountants, and lawyers.