Foreign Dirty Money in the U.S.

March 18th, 2011
in Op Ed

shaxson Guest Author:  Nicholas Shaxson is author of a new book "Treasure Islands" and the acclaimed 2007 book "Poisoned Wells: the Dirty Politics of African Oil."  He is an Associate Fellow of Chatham House (the Royal Institute of African Affairs in London) and a full-time writer and researcher for the Tax Justice Network, an expert-led group focused on tax and tax havens. Since 1993 he has written extensively on global business and politics for the Financial Times, Reuters, the Economist and its sister publication the Economist Intelligence Unit, International Affairs, Foreign Affairs, the American Interest, the BBC, Africa Confidential, African Energy, and a wide range of others. 

I have found a number for the amount of dirty money that is attracted into the United States on account of the secrecy facilities it provides: US$3 trillion. Yes, three trillion dollars. Which goes quite some way to explaining why the United States came top of the Tax Justice Network’s Financial Secrecy Index.

Follow up:

The number comes from a letter to Tim Geithner, US Treasury Secretary, sent by every single member of the Florida Delegation to the House of Representatives. They are whinnying about new proposed IRS regulations for the United States to be more transparent about what foreigners earn there. Currently, almost all foreigners can bank in the U.S. in complete secrecy, and evade taxes they owe their own governments. These excellent proposals would see the U.S.  co-operating with other countries to help them tax their own citizens properly.

The key section of the letter says:

“Because of the privacy laws of the United States, nonresident aliens are estimated to have deposited over $3 trillion in U.S. financial institutions . . (the United States has) refrained from taxing the interest earned by them or requiring their reporting).”

That is unequivocal. This is not a measure of non-resident deposits, they are saying: it is a measure of how much money foreigners stash in the United States “because of the privacy laws of the United States.” Nearly all the money deposited in Florida banks, by the way, is drained out of Latin America.

Let’s now play with numbers here. Imagine US$3 trillion earning a conservative five percent annually: that’s $150 billion in income. Let’s say those foreigners (nearly all wealthy) ought to pay an average 35% top rate of income tax, but that tax is evaded. That’d be over $50 billion in lost taxes per year.

Which would be, on these numbers, twice the size of total U.S. official development assistance.

Make no bones about it: this is very, very dirty tax haven business that these Congresspeople are defending. And some Latin American governments are angry about it. Take this letter, again to Tim Geithner, by Agustín Carstens, Mexico’s Secretary of Finance, in 2009:

“We do not exchange information on interest paid by banks from one country to residents of the other country. . . . I truly believe that we should enhance our cooperation and strengthen our capacities to protect our peoples and wealth. The [automatic] exchange of information on interest paid by banks will certainly provide us with a powerful tool to detect, prevent and combat tax evasion, money laundering, terrorist financing, drug trafficking and organized crime.”

Now take this quote from Robert Goulder of TaxAnalysts, cited in Time Magazine:

“Replace the nationalities mentioned in the letter, and you’ve replicated the UBS affair point for point,” says Robert Goulder, international editor in chief at Tax Analysts, a nonprofit publisher about taxes worldwide, which first reported on the Carstens letter. “If you are a Mexican drug lord, you can put as much money as you want into U.S. banks. We ain’t going to tax it, and the Mexicans can’t tax it because they are never going to know about it. It’s the financial equivalent of ‘Don’t ask, don’t tell.’ “

All this dovetails neatly with three main points I make in Treasure Islands.

First, there is a two-way flow going on here. U.S. taxpayers are seeing money flow out and tax revenues lost to tax havens (or secrecy jurisdictions) elsewhere – but there is money flowing in the other direction: dirty money from other countries, particularly developing countries, is flowing into the U.S., and tax revenues lost on that money too.

Second, the dirty money flowing in to Tax Haven USA absolutely does not compensate for the money flowing out. These hot-money inflows are one of the big reasons why Wall Street is so powerful. The money flows in large measure into real estate, pushing up property bubbles; it also flows into government bonds, worsening the macroeconomic imbalances that contributed to the global economic crisis.  This stuff not only harms developing countries – it harms the United States. The outflows are a cost to U.S. taxpayers, while the inflows are a benefit only to Wall Street, and indirectly a cost to U.S. taxpayers too.

The third point I’d make would be to repeat a section of the latest press release from the Center for Freedom and Prosperity (led by my old friend Dan Mitchell, whose arguments I eviscerate in the chapter  “Resistance”) that this letter was signed by

“all members of the Florida Delegation to the U.S. House of Representatives.”

That is – every single last one of those Floridans defends this criminal business.

What we have here is something I describe in Treasure Islands as the Captured State syndrome: one of the big telling markers for tax haven business. I think the best illustration of that comes in a chapter “Ratchet” where I compare two episodes, one in Delaware in 1981, and another in the Channel Island of Jersey in 1996, where I show how financial interests effectively write each jurisdiction’s laws, and find that any democratic discussion of this measure — that is, any potential opposition — is effectively neutered. The two episodes, despite being 15 years and a continent apart, were stunningly similar.

We all know of Wall Street having captured politicians in Washington. Well here we have a more granular story: the politicians of Florida captured by tax haven interests.

It’s a horrible, horrible story, and just goes to underline what’s laid out in my book.

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