The Real Problem With Offshore Tax Havens

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Gary Hershorn / Reuters

The logo of the Cayman National Bank is pictured on a branch in George Town, Cayman Islands on April 26, 2010.

Offshore tax havens are a hot topic these days – due in no small part to the Obama campaign’s attacks on Mitt Romney’s foreign holdings. But beyond that, governments across the globe are hard up for cash, as the global economic slump has eaten into tax revenues, and they would like nothing more than to get their hands on all that offshore wealth.

So when the left-leaning Tax Justice Network issued a report this week which estimated that somewhere between $21 to $32 trillion in wealth is unreported and shielded from taxation from various governments, and argued that this money could be used to shore up balances of debt-ridden sovereigns, people took notice.

According to the report:

“Assuming conservatively that global offshore financial wealth of $21 trillion earns a total return of just 3 percent a year, and would have faced an average marginal tax rate of 30 percent in the home country, the unrecorded wealth might have generated tax revenues of $189 billion per year – more than twice the $86 billion that OECD countries as a whole are now spending on all overseas development assistance.”

(MORE: Romney’s Tax Plan Would Save Him Millions — But Not As Much As Gingrich’s Would)

The study is one of the most comprehensive to date, using data from the World Bank, United Nations, International Monetary Fund and central banks around the world to measure how much wealth is sheltered from the taxman globally.

That the global elite are using whatever means at their disposal to hide their money from governments isn’t exactly surprising. But the term “offshore” — which brings to many minds sun-drenched islands ruled by corrupt governments in cahoots with felonious plutocrats — is misleading, according to the report.

In fact, efforts by developed nation governments to crack down on efforts to impede their own tax collections have forced many governments, like the Swiss, to move away from their traditional banking protections that allow foreigners to evade taxation. So a tax haven these days is less a function of one country with laws that allow for low taxation and secretive banking policies, and more an extension of a large and complex global financial system that is inherently secretive. According to the report:

“The term “offshore” refers not so much to the actual physical location of private assets or liabilities, but to nominal, hyper-portable, multi-jurisdictional, often quite temporary locations of networks of legal and quasi legal entities and arrangements that manage and control private wealth – always in the interests of those who manage it, supposedly in the interest of beneficial owners, and often in indifference or outright defiance of the interests and laws of multiple nation states.”

(MORE: Why U.S. Tax Evaders Can No Longer Count on Swiss Secrecy)

In other words, one doesn’t necessarily have to fly to the Channel Islands with a bag of cash to stash ill-gotten gains or evade the taxman anymore. The past 30 years have seen the evolution of a mainstream financial system that is global in scope and that through secrecy and complexity has enabled itself to profit handsomely off of the tax evasion of the world’s richest citizens. Evidence of this sort of behavior was illustrated earlier this month, when London-based HSBC was sanctioned for aiding terrorists, drug cartels and other criminals in money laundering schemes.

The other aspect of the report that Americans might find surprising — given all the talk of Mitt Romney’s finances — is that this tax evasion is disproportionately a problem for developing countries. According to the report, somewhere between $7.3 trillion and $9.3 trillion in offshore wealth comes from a subgroup of 139 low to middle income source countries. Given that the U.S. alone accounts for 25% of the world’s total wealth, the idea that poor countries account for somewhere between one third and one half of the total offshore wealth is somewhat unexpected.

This last fact is perhaps the most unsettling in the report for two reasons. First, because it’s hard not to suspect that much of the shielded money sourced from developing countries rightfully belongs in public coffers and not in private bank accounts. And second: Because even though $189 billion in new tax revenue would chip away only about a sixth of the U.S. government’s annual budget deficit, that money could certainly improve lives if it were used by developing governments for infrastructure or welfare programs.

MORE: How Lower Corporate Taxes and Infrastructure Can Save the Economy