TREASURE ISLANDS

Tax havens’ arguments in their defence – and why they are wrong

Treasure Islands is highly critical of the offshore system and will inevitably be attacked by users and supporters of tax havens. I tackle some of the commonest myths about tax havens in Chapter 10, but this is a wide-ranging area and there wasn’t nearly enough space to do justice to the array of issues that need to be addressed. So I am expanding on these arguments here.

Still, the book isn’t just a set of arguments, not at all. It is a gripping story: a tale of real people and the blood and guts of the offshore, which explains at last what the world has failed to see.

This page shows why every one of the major arguments put up in defence of tax havens, bar one, are wrong. One has to understand, before reading any of this, two things. First, tax havens aren’t just about tax. In my book I define a tax haven as:

“a place that seeks to attract business by offering politically stable facilities to help people or entities get around the rules, laws and regulations of jurisdictions elsewhere.”

Second, the world’s biggest tax havens aren’t the Caribbean islands of the popular imagination, but include the United States, United Kingdom, the Netherlands, Luxembourg and Ireland: powerful OECD countries. I explain why in Treasure Islands.

They say: bank secrecy is dead. The OECD has ushered in a new era of transparency.

I say: This is entirely, utterly false. The OECD has delivered a whitewash. A lot of journalists have bought into the lie. But as Treasure Islands explains, the offshore system is as strong as ever.

They say: tax havens are outposts of freedom.

I say: For the majority of the world’s citizens, the exact opposite is true. Tax havens, or secrecy jurisdictions as I prefer to call them, provide financial freedom to wealthy and powerful élites but this is – to quote from the popular French book Indignez-Vous! – the uncontrolled freedom of the fox in the henhouse. Free for the fox – not quite so free for the chickens. And, as I show in the chapter The Life Offshore, many tax havens, and particularly the small ones where it’s easiest for financial interests to capture the policy-making apparatus, are in fact rather repressive places, intolerant of criticism.

They say: Tax havens are pro-free markets and pro-business.

I say: tax havens corrupt and distort global markets. They give advantages to multinationals over their smaller, more locally-based competitors, which have nothing to do with the quality or price of their goods and services. They distort and corrupt markets – as Treasure Islands describes in grisly detail.

They say: tax havens help companies avoid getting taxed twice on the same income.

I say: this is indeed a key role that tax havens play. And it’s right that a company shouldn’t get taxed twice on the same income. But that’s not the whole story.

First, you don’t need tax havens to achieve this: you can sort this out with appropriate tax treaties and tax credits. Because their companies do so much of this via tax havens, countries have often not bothered signing appropriate tax treaties with each other.

But there is something else. Tax havens not only help prevent so-called double taxation – but they create something else entirely: double non-taxation. Not only do the corporations avoid getting taxed twice – they avoid getting taxed at all! This is a problem for all countries – but particularly developing ones. And those who run the secrecy jurisdictions simply don’t care. They get rich off the fees the multinationals pay them: and taxpayers elsewhere be damned.

They say: we shouldn’t tax corporations anyway, because it’s inefficient, or because the burden of the tax falls on employees, or it amounts to double taxation.

I say: For my answer to this, see my Guardian article on the subject, entitled 10 reasons we should tax corporations. Also see Citizens for Tax Justice on why corporate taxes do not represent double taxation (see point 4) and this document on why the incidence of corporate taxes falls largely on capital, rather than on labour.

They say: company directors act to serve shareholders, and that means minimising tax by all lawful means

I say: Three things. First, we need to get away from this idea that tax is simply a cost. Tax is a distribution to society, out of profits. It is a payment in exchange for services provided that allow them to make those profits – the healthy and educated workforces, the infrastructure, the guarantee of contracts and the rule of law – and so on. Second, those companies that engage in tax avoidance are engaging in economic free riding – they are taking the benefits from a country without paying for it. This is not only unfair, but it is economically harmful, undermines respect for the rule of law, and distorts markets. Third, nowhere in the world does company law require directors to take actions that are not disclosed to their shareholders. But when companies are engaged in tax avoidance, they almost uniformly aren’t prepared to reveal what they are up to, to shareholders or the wider public. There is also no company law that says directors have a duty only to shareholders. I say it is a duty of directors to maximise distribution to all stakeholders in economic processes. Read more on this topic here.

They say: it’s not tax havens that drain developing countries, but rapacious despots pillaging their countries.

I say: the problems of governance in developing countries is a huge one, of course, and nobody is arguing that tax havens are the only reason for illicit financial outflows. However, we’ve now had 50 years of development aid, and myriad efforts to improve governance, with patchy results. To go from arguing that poor governance is a cause of illicit financial outflows, tax evasion and so on – which is correct – to arguing that we therefore should not even consider the other side of the coin (the recipients of all these outflows) is quite patently a ridiculous logical step. We’ve had quite enough decades of blame-the-Africans and mitigate-the-problems-with-charity arguments. Now it’s time for us in the developed countries to subject ourselves to some critical self-examination. What we find is not pretty.

Providing elites in developing countries with untaxed, criminalised financial bolt-holes actively and dramatically undermines governance in these countries.

They say: Offshore secrecy protects people victimised by criminals and despotic governments.

I say: This is only true in a very narrow sense: it depends what you mean by ‘people.’ Tax havens provide escape routes for the wealthiest and most powerful members of society. If there is an unjust law or bad government, then to provide an escape route for a small, wealthy and powerful elite – the only constituency with the political strength to drive reform – is to undermine pressure for change. Everybody else must then suffer in silence.

Now ask yourself: Who will be the main users of secret bank accounts or offshore trust?. The bloodied street protestor? The anti-corruption campaigner? The trade union official trying to put food on the family table? The brave investigative journalist? Or will it be their corrupt, brutal oppressors – the Obiang Nguemas, the Muammar Gaddafis, or the Kim Jong-Ils – who use the offshore sytem to underpin their unaccountable powers? The answer is clear. Tax havens protect despots and oligarchs and help keep them in power. (Read more here.)

They say: tax havens are well-regulated, co-operative and transparent

I say: I hear this a lot. From tax havens, and from academic researchers, sometimes. A few points are worth making here.

First, as I already noted – if you want to stash your secret money somewhere, would you put it in Luxembourg, or Lagos? In that sense, they are well-regulated. Of course they are. Secrecy jurisdictions generally won’t steal your money. As Treasure Islands explains, the world’s most important tax havens are stable OECD countries.

But that is only one side of the story. Although secrecy jurisidictions won’t steal your money – they will happily help you steal other people’s money, whether through tax evasion, sophisticated insider trading, complex financial dealings, or whatever. These places are all set up to promote the interests of insiders, at the expense of wider society. This is central to their business model. Their prime offering in this respect is secrecy. In that sense they are badly regulated.

They do pretend that they are well regulated even in this sense. They put all kinds of fantastic rules on their books, getting high marks from august international bodies like the IMF’s Financial Action Task Force – but then they put in place all manner of devious tricks and obstacles to make sure their laws won’t be applied. The information-sharing system set up by the OECD is worse than a bad joke – it gives the appearance of action, while doing almost nothing, as Treasure Islands outlines in appalling detail. The confessions of a private banker in Chapter 11, reveal just how deep the subterfuges go.

Now back to that first point. How many Nigerians stash their money secretly in London or its offshore satellites, or in Switzerland? I have no idea, but there may be hundreds of thousands. But how many British or Swiss residents will choose Lagos as the place to locate their secret stash? Who indeed. The point here is that secrecy, and “efficient” financial flows, tends to produce a one-way net flow: from poor and poorly governed countries, to rich ones. Global Financial Integrity estimates annual illicit outflows from developing countries at US$850 billion – US$1 trillion per year, and growing fast. That is a gross number, but the net flows are still huge. Any place that tempts money from elsewhere with secrecy is not a well-regulated, transparent and co-operative jurisdiction. See the Box.

They say: Tax havens are generally wealthy jurisdictions. So this is a good business model for countries to follow.

I say: Tax havens tend to be wealthier than other countries. But to say that this is a good thing is a bit like an argument that points to the wealth of a corrupt dicator and his cronies as evidence that corruption is a good thing.

These places make their money by extracting wealth from rich folk who want to escape the laws and rules of civilisation elsewhere. This is profoundly harmful. What is more, as Treasure Islands explains, hosting these financial activities harms many countries, even as money floods in. There is the economic harm, whereby massive growth in offshore financial services crowds out other sectors. One effect is severe growth in inequality. Another is that the financial sector achieves the complete or partial political capture of the state and emasculation of opposition, just as the City of London has achieved in Britain.

They say: financial secrecy is necessary to protect commercial confidentiality and personal privacy

I say: There is an important distinction to make here. Secrecy is not the same as confidentiality, though they are closely related. Exchange of information between governments about each others’ taxpayers penetrates bank secrecy and is entirely legitimate. But they do not break the ancient and admirable tradition of banker confidentiality. Banker confidentiality means a banker won’t plaster your details over the internet, or let your competitors know what you are up to – in the same way that a doctor won’t publicise details of your haemorrhoids or fungal infections. But they are quite right to communicate this information with your hospital and perhaps with your insurance provider, when necessary. Similarly, bankers can hand and should hand over relevant financial details to a foreign taxpayer’s tax authorities, without breaking confidentiality. Confidentiality is necessary; secrecy isn’t.

They say: Swiss bank secrecy legislation was enacted during the 1930s to prevent the Nazis from snooping on people.

I say: Oh no it wasn’t. The Swiss banking industry made that story up, and it isn’t remotely true. See here for a short summary of what really happened; here for the definitive academic article on the topic; and Chapter 3 of the UK edition for the full story.

They say: Tax havens are a legitimate refuge from unstable currencies, inflation and economic and political turmoil, and expropriation and confiscation of assets.

I say: There is nothing wrong with people placing their money overseas. But secrecy and other offshore attractions are unnecessary.

Imagine you are a Tanzanian, say, with a million dollars in a bank in France, earning five percent. Your income is $50,000. If Tanzania’s top income tax rate is 40 percent, you should pay $20,000 in tax, enabling Tanzania to pay its teachers and doctors and to wean itself off foreign aid. Even with full transparency, Tanzania’s government has no rights or powers to “confiscate” your million dollars in Paris: it merely knows it can charge you $20,000. Offshore secrecy has nothing to do with this equation.

They say: it is not tax havens, but high taxes, that cause tax evasion and avoidance.

I say: This one is repeated often. And it is, by and large, false. It is a bit like the argument that it was not financial deregulation, but financial regulation, that caused the latest global financial crisis.

Tax evasion has always been with us, and higher tax rates do certainly increase efforts to avoid and evade tax. But the great global tax evasion epidemic really took off from around the 1970s – exactly the period when the modern offshore system exploded onto the scene – and as tax rates have been plummeting around the world. This timing is no coincidence at all: tax havens and their associated pinstripe infrastructure of bankers, lawyers and accountants actively and aggressively promote tax evasion services, and make it happen.

One of the real results of tax havenry is higher taxes on the poor and the middle classes – to make up for those taxes the rich and powerful won’t pay.

They say: Tax havens are nimble and flexible, and have a business-friendly regulatory environment

I say: This is true. And it is a bad thing.

“Nimble.” “Flexible.” What do these words mean?. They mean that if a country elsewhere has rules against something, tax havens will help you escape those rules. Whatever the warts and failings of these rules – tax laws, inheritance rules, financial regulation, and so on – in general they are put in place for good reason, as part of society’s democratic bargain.

If someone said “we have a flexible approach to crime” – in other words, we don’t care if you are breaking someone else’s criminal laws – most people would be justly outraged by that. This is the same thing. And the entire business model of tax havens is built around this.

Secrecy jurisdictions are captured states: places where the politicians have been captured by financial interests – which are, in several cases, criminal interests. Democratic politics has been put on hold, in the “nimble and flexible” service of foreign finance.

They say: Tax havens make international finance and markets more efficient.

I say: They don’t. Or at least they do only in a very narrow, restricted sense – while generating inefficiencies that overwhelm those narrow efficiencies by an order of magnitude or more.

Efficiency is good. But you cannot look at efficiency from the point of view of an individual company: you must look at it from the point of view of the system as a whole. Bribery is “efficient” from the point of an individual company that wants to win a contract, or get its container quickly through a port. But that does not mean bribery is “efficient” in general terms.

Rules, laws and taxes are required if markets are to be efficient. And providing a corporation with escape routes from those rules, laws and taxes may seem “efficient” from the point of view of any individual corporation – but overall, it makes markets less efficient.

The users of offshore use lots of weasel words to describe what they do. One of the most pervasive is this term “tax efficient.” It sounds good – but again, what does it mean? It means efficient from the point of view of the tax avoider. Someone else, somewhere else, has to pay the taxes they won’t pay. The end result is one set of rules for the rich and powerful, and another set of rules for the rest of us. There is nothing remotely efficient about this.

Now consider how secrecy jurisdictions make markets less efficient:

They promote and create secrecy, far, far beyond any reasonable requirement of commercial confidentiality. Efficient market theory rests on an assumption that markets are, in the jargon, “informationally efficient.” Offshore secrecy works directly and aggressively against this: it helps information to flow only to insiders, helping them earn excess returns.

Tax havens also make societies more unequal, where the rich and large corporations can free-ride off the backs of those less able to pay. The “nimble and flexible” regulatory environments offered by secrecy jursidictions protect the interests of insiders against wider sets of stakeholders. This is distorting and inefficient.

The offshore system creates impunity for elites in developing countries and helps dictators stay in power. They are a gigantic hothouse for crime, mafia activities, drugs smugglers, and even terrorist finance. All this distorts markets and society and undermines governance. How is any of this “efficient?”

Tax havens have helped bankers escape and undermine financial regulations. How efficient is that?

Offshore secrecy protects and encourages all manners of crimes and frauds, insider trading, corruption, bribery, and any number of other things that distort markets and make them inefficient.

Tax haven incentives make company managers focus on tax and regulatory avoidance which frequently means they take their eyes off doing what they do best: making better, cheaper and more innovative products or services to supply to markets. This is highly inefficient.

Secrecy jurisdictions give advantages to large multinational corporations that help them out-compete their smaller, more locally based competitors on factors that have nothing to do with real productivity. And yet small and medium enterprises tend to be the real innovators and job creators. Offshore is effectively providing tax (and other) subsidies to the larger players which are typically less innovative, more bureaucratic and even more job-destroying. This makes markets less efficient.

Billions of dollars are spent annually by corporations on tax and legal advisers to cook up complex avoidance schemes to fox the tax authorities. This is a waste of resources and involves a tremendous opportunity cost – those are some of the world’s most highly educated minds that could have been put to use in a productive field.

Tax havens are instrumental in helping drain hundreds of billions of illicit dollars out of developing countries each year. How is this efficient?

Elites in developing countries have so often captured the proceeds of international borrowing, stashed their loot offshore, then left ordinary taxpayers and users of government services to pay for the resulting external debt service. The result has been, time and again, financial crisis after crisis. Who could argue that this is efficient?

They say: Tax havens had nothing to do with the latest global financial crisis.

I say: Many commentators have bought into this one. Treasure Islands exposes this claim as false.

First, understand what a secrecy jurisdiction (or tax haven) is. The offshore players want you to think that they are mostly Caribbean islands or wealthy Alpine nations, and that tax havens are mostly about tax. International lists of tax havens produced by the OECD, the IMF and others promote this fantasy. No, the most important secrecy jurisdictions are OECD countries, notably the United States and Great Britain, hosting offshore sub-jurisdictions such as Delaware and the City of London, and offshore satellites such as the Cayman Islands and Jersey. Luxembourg, Ireland and the Netherlands are major tax havens too. Until you understand the geography of offshore, you will never fully understand the latest crisis. It is also necessary to understand the core tax haven business model: to get rich by offering wealthy individuals and corporations escape routes from the laws, rules and regulations of democratic societies elsewhere. Armed with these two insights, the havens’ central role in the crisis comes into view at last:

They offered a “get out of regulation free” card to banks and other financial firms. Treasure Islands’ Chapter Nine (in the UK edition – Chapter 10 in the US edition) looks at two shocking episodes, from Delaware in 1981, and from the British tax haven of Jersey 15 years later, to explore in full, for the first time in world history, exactly how tax havens drive uncontrolled deregulation, entirely outside the scope of democratic restraint. It reveals tax havens as the secret battering rams of global financial deregulation. And until now, almost nobody noticed.

By providing an offshore playground where banks could get around reserve requirements, restrictions on investment banking, and other parts of the social contract (and by puffing them up further with massive profits from secrecy-driven private banking they helped major global banks grow far faster than their onshore competitors: eventually becoming too big to fail.

By playing the offshore card – “don’t regulate us or we will go to Switzerland!” – financial firms forced politicians to capitulate to their demands. So financial institutions became not only too big to fail, but also too hard to control and regulate.

The secrecy jurisdictions served as conduits for massive illicit financial flows from poor countries to rich ones – notably to the U.S. and Britain. These illicit flows, estimated at hundreds of billions of dollars per year but unmeasured by conventional statistics, added to the more visible global financial imbalances between countries that many economists blame for the crisis. Illicit flows in the other direction were far, far smaller. The net result has been . . . one big problem.

Corporations began to festoon their financial affairs through offshore jurisdictions for all kinds of reasons: for stronger secrecy, for lower taxes, to escape financial regulations – and this generated massive complexity in their affairs. When crisis hit, nobody could work out what was going on. Even worse, the offshore system helped corporations conceal hidden losses.

Corporations, and especially financial corporations, had huge offshore incentives to load up on debt: while income from lending racked up offshore, tax-free, the borrowing costs – the other side of the same equation – were charged against earnings onshore in the countries where most of us live – and thus deducted against tax. This debt-loading added to the crisis.

Worse still – these problems have not seriously been tackled. Just as tax havens were central to the latest crisis – so they will be behind the next one. And as if that were not bad enough – by helping wealthy individuals and corporations shake off their tax burdens, tax havens are taking away our ability to pay for the gigantic mess they have created. Read more here: http://www.taxjustice.net/cms/front_content.php?idcat=136

They say: Tax competition is a good thing. It disciplines spendthrift governments, forcing them to cut taxes and to compete with other governments to provide the best services for the lowest price.

I say: It sounds reasonable, doesn’t it? But it is nonsense. Despite sharing the same word ‘competition’ – tax competition between countries and tax havens is absolutely, utterly, nothing whatsoever like competition between companies in a market.

While market competition is generally good, tax competition is always bad. Think about it like this. When a company cannot compete in a market it goes bankrupt, and a better one takes its place. For all the pain involved, this “creative destruction” is, in general terms, a source of economic dynamism. But what happens when a country cannot “compete?” A failed state? This kind of ‘competition’ is a very different beast.

If there is a meaningful way in which countries compete, it is on things like good infrastructure, a healthy and educated workforce, the rule of law, and so on. All these things depend on raising tax: so it isn’t obvious, even in principle, that cutting taxes will make an economy more “competitive.” And for most businesses, these other good things matter more than tax rates when deciding where to invest. Would you site a car assembly plant in Equatorial Guinea just because it gave you a tax break?

And there is another thing. Take this sentence “Tax competition forces governments to cut taxes.” Now unpack that. This word “forces” says it all. Governments are elected by their people to look after the public interest. When they are “forced” to act differently, this undermines democracy and accountable government. And what applies to tax applies to financial regulation, safeguards against criminal money, and much more besides.

In short, the arguments in favour of tax competition are bogus.

They say: Tax competition doesn’t matter. Evidence shows that governments have preserved their tax revenues, in the face of tax competition: there is no race to the bottom towards a pared-back “nightwatchman state” as some suggest.

I say: the numbers appear, at least at first glance, to show that tax competition doesn’t matter. But the story behind the numbers is very different.

Tax competition affects each country differently – but in general terms, while OECD countries have generally preserved and in some cases even increased their absolute levels of their taxes as a share of their economy, their tax systems have become increasingly skewed in favour of the rich, who have steadily been shaking off their tax burdens, while leaving relatively poorer sections of society to take up the slack. The size of the pie has not shrunk – but tax competition means the rich get to keep a bigger share. Tax competition is real, it bites, and it hurts.

Take a look at what has been happening in the United States, for example:

(source: here)

You can see corporation taxes falling from a third of all U.S. taxes to about a tenth during the period, while employment taxes have risen sharply. The U.S. tax system has become less progressive over time – and sharply so*.

* In the words of two top academic tax experts: “the progressivity of the U.S. federal tax system at the top of the income distribution has declined dramatically since the 1960s. For example, the top 0.01 percent of earners paid over 70 percent of their income in federal taxes in 1960, while they paid only about 35 percent of their income in 2005. Average federal tax rates for the middle class have remained roughly constant over time. This dramatic drop in progressivity at the upper end of the income distribution is due primarily to a drop in corporate taxes and to a lesser extent estate and gift taxes.” From How Progressive is the U.S. Federal Tax System? A Historical and International Perspective by Thomas Piketty and Emmanuel Saez, Journal of Economic Perspectives—Volume 21, Number 1—Winter 2007—Pages 3–24

There is more. Corporate profits, as a share of national economies, have grown sharply in the period we’ve been looking at. Corporate tax receipts should have been soaring. But they haven’t. Tax competition has been keeping them down.

Tax competition has been forcing countries to cut tax rates on capital income, while it hasn’t been forcing countries to cut taxes on consumption or payrolls – because while money can relocate to other countries at the drop of a tax inspector’s hat, people don’t. So countries tax the people, and not the money. And as taxes on capital and corporate income fall, rich people shift their affairs so that they don’t earn wages any more – they earn capital income – which gets taxed less. So the corporate tax categories get puffed up artificially by rich folk’s tax dodges.

Even that is not all. Almost all the research work on this topic has covered rich OECD countries. All the evidence suggests that tax competition wounds developing countries more deeply. Read more in Chapter 10 of Treasure Islands.

They say: it is a myth that tax havens drain countries of revenue. Instead, they are conduits for money to flow into nearby countries, helping developing countries access scarce capital.

I say: First, some facts. They do indeed serve as conduits for money into other economies. The islands of Jersey, Guernsey and the Isle of Man alone provided over $330 billion in net financing to British banks in second quarter of 2009 – and that’s just one part of what they provide for the City of London.

But from here on, the argument falls down, on several levels.

First, many these claims rest heavily on work done by James Hines of the University of Michigan and a few others – research that is fatally flawed. One big reason is that they have ignored – for reasons known only to themselves – the issue of “round-tripping.” That happens when, say, a wealthy Indian wants to invest locally in India but doesn’t want to compete on a level playing field with other Indians. So they will take their money offshore to Mauritius, dress it up in offshore secrecy, then ‘round-trip’ it back into India, harvesting special tax breaks available only to foreign investors, and using the secrecy cover to get involved in insider trading, or building up secret monopolies in certain markets, or carrying out large-scale bribery, offshore, to get their way. See here, from the superb Africa-Asia Confidential, for some real examples. Nearly half of all foreign investment into India comes from Mauritius, a large share of which is not real foreign investment but in fact “round-tripped” Indian investment. The academic studies are measuring, to a significant degree, abusive round-tripping.

Second, look at the work of Global Financial Integrity, and see that the outflows drained from developing countries – $1.2 trillion in 2008 – dwarfs the inflows. The drain is real, and it is vast.

Third, much of the money that is routed via tax havens into developing and other countries would have happened anyway. But because it comes in via a secrecy jurisdiction, the investors will often pay less (or zero) tax, potentially leaving that country’s taxpayers worse off. And when it comes to corporate investment: good projects tend to get financed. You don’t need tax havens for investment to flow into developing countries.

That is still not all.

The offshore inflows frequently harm their recipients too. I have written a lot about mineral-rich countries in Africa (see my previous book, Poisoned Wells.) They suffer from a so-called “Resource Curse.” One of the reasons for this is something called the “Dutch Disease” where huge inflows of money from one sector make price levels rise and make other sectors – agriculture, say, or manufacturing – less competitive against imports. And these sectors wither. There is also a huge corruption effect from these easy inflows of money: something that economists call “rents.”

And so it is with finance. Money flows in, but in those countries that have been the biggest recipients – that is, the UK and the United States – the inflows have been harmful. Industry, agriculture, tourism and other such sectors in these places have been cut back savagely, leaving finance ever more dominant. This is what I call the Jersey Disease. Money flooding in due to offshore incentives has led to rising housing prices and rising debt. It has also puffed up the financial sectors in these countries, contributing to the Too Big To Fail problem of their banks, which have, also as a consequence, grown strong enough to capture the levers of political power in Washington and London.

They say: the offshore system is too big and powerful to confront. Capitulate!

I say: this is two arguments in one: first, that I (and others) define tax havens too broadly; second, that we should give up trying to fight it.  Both arguments are quite wrong, for several reasons. First, on the definitional issue. in Treasure Islands, I define tax havens (or secrecy jurisdictions) not in terms of specific tax or secrecy rules, but in terms of how they help people elsewhere escape rules and laws that they don’t like. This is quite a broad definition. But you will find, if you follow the analysis through properly, and without succumbing to political pressure from OECD countries that don’t like to be tainted with the tax haven label, that this is where the analysis will inevitably lead you. The problem is, quite simply, colossal – and it affects everything and everybody. I’m sorry if it’s inconvenient for people that the traditional stereotypes about tax havens don’t hold up to scrutiny, but that is the way the world is.

Second, on the idea of simply despairing and giving up – as advocated, for example, by Peter Preston in The Guardian, this opinion results from a lack of acquaintance with the facts. Take a look at the conclusion chapter in Treasure Islands, and you will discover that several of these approaches are already in the process of reform. Country-by-country reporting, for example, is already being adopted in some limited fora, and much wider acceptance is likely. The U.S. government is discussing a number of proposals for reform. Lobbyists will punch holes of course, but it is progress. The EU already implements widespread automatic information exchange through its Savings Tax Directive, and work is now being done to solidify and extend the scheme. The IMF’s Financial Action Task Force looks like it’s going to make tax evasion a predicate crime for money-laundering offences. And there is plenty more. So the ‘dream on!’ attitude towards reform, as I said, reveals a basic lack of knowledge.

What is more – these counsels of despair often seem to rest on some notion that we must somehow replace the entire system: ride in on a white charger and cut off the dragon’s head with one well-aimed blow. I am arguing for markets to become more transparent, and describing ways to tackle a system that supports crony capitalism, rigged markets, insider trading and so on. These are efforts to identify and tackle the fault lines in global markets. The potential constituency supporting that – and therefore the potential for change – is huge. Change requires first identifying where things have gone wrong, however. I think Treasure Islands has made a contribution there.

They say: The global outrage against OFCs is hypocritical. By OECD standards, the biggest tax haven is the US. In an exercise of gross hypocrisy, the OECD does not blacklist its own member nations.

I say: At last, an argument that is correct.

The French poet Charles Baudelaire once said that the greatest trick the devil ever played was convincing the world that he did not exist. The OECD has helped convinced everyone that tax havens are just a bunch of small islands or secretive Alpine redoubts. No. They are a diversion. The biggest tax havens are OECD member states and their dependencies. Treasure Islands reveals at last what is really going on in our globalised world.