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Pirate Banking

Avast, ye dogs!  So you live on a small rock with no resources and a pretty hard life.  Ships loaded with treasure go past all the time, hardly protected by anything other than a navy which you can spot over the horizon.  What do you do?  For big hunks of the Caribbean and many other parts of the world, the answer for many was to turn to piracy, or at least turn a blind eye to it.  Rich nations could afford to give a little bit to the cause and, as long as the gunships were far away, life was pretty easy.

Those were the good old days.

Some tiny nations that used to be havens for pirates have found a new, more lucrative way of making a living out of nuthin’.  Rather than prey on the wealthy, they help hide their wealth – not under the “X” on a treasure map, but in a real bank operated far from prying eyes (and taxing ledgers).  An estimated $32 trillion (as of 2010) is hidden away in the tiny nations on the fringes of civilization.  It’s an issue which is becoming as hot as the Caribbean sun in most of the developed world, especially the UK.  But what can be done about it?

piratesThe estimate of how much is hidden away came from a Tax Justice Network (TJN) study in 2012.  It included a warning that got everyone thinking.   “On this scale, this ‘offshore economy’ is large enough to have a major impact on estimates of inequality of wealth and income; on estimates of national income and debt ratios; and – most importantly – to have very significant negative impacts on the domestic tax bases of key ‘source’ countries” The estimate is twice the size of the US GDP and almost entirely unknown and untaxed – until now.

In the shadow of a G8 summit that pledged to do something to find this hidden tax revenue, the International Consortium of Investigative Journalists released a vast database of all this hidden wealth that is notable for one particular reason – it is vast.  Over 2.5 million shadow companies and their estimate worth are listed in locations like the Cayman Islands, British Virgin Islands, and even Singapore.  There is no “smoking gun” to implicate any one big company because, simply, everyone does it.  That’s the main reason why there is little new outrage in the US – there’s no one in particular to blame, so the story is far from sexy.

The UK, however, is going after this.  Chancellor of the Exchequer (Finance Minister) Alistair Darling is on a “Blame and Shame” campaign to identify companies one at a time and get them to sign a pledge to stop avoiding taxes.  It’s already gotten Starbuck’s to chip in £5M where they paid nothing for five years as an estimate for … well, it’s a round number.  Whatever.  Some other big companies are going to own up to the shame and cough up random amounts in the near future.

As a solution, however, this is ridiculous.  For a better fix, there is almost certainly going to be a push for some new cooperation between developed nations and new pressure on the tax havens.  Like piracy, the practice of hiding money only works when you are far away from scrutiny (and the threat of guns).


G8 Summit in Ulster – tiny leaders under big, dark clouds

But how could this possibly work?  The G8 punted on the issue for now for the simple reason that the existing global free-flow of money and trade makes it impossible to really do anything about the problem without a concerted effort.  And that has never been in the works.  As the TJN noted:

In principle, institutions like the World Bank, the IMF, the US Federal Reserve, the Bank of England, and the Bank for International Settlements not only have ample analytic resources, including scores of economists. They also have much of the data needed to estimate this sector more carefully.  For reasons of their own, however, they have tolerated the growth of the offshore sector far too long.

We can guess what those reasons are.  But the issue is finally reaching the point where the institutions are willing to do something about the problem.

It’s a matter of fairness.  If only big companies can evade taxes, small companies will wind up paying more.  It’s being made into a big issue in the UK – and may yet be a big story in the US.  Like piracy, the real story needs a flashy figure like Blackbeard before it’ll catch public attention.  And all those people working places like Miami to push the money offshore aren’t very romantic swashbucklers in any sense of the word.  But the principle is the same – even if it’s only the very rich that benefit from this form of Caribbean lawlessness.


9 thoughts on “Pirate Banking

  1. So the government gets more money diverted from useful purposes to create more programs and hire more government workers. Maybe it slows the deficit for a minute and a half and then those companies find a new way to hide their money and now we’ve got bigger deficits than we currently have because the amount of spending went up on the promise of more tax revenues.

    It seems to me that one reason big corporations hide their money is that the corporate tax rates in the US and the UK are too high, which is only going to go up because we keep spending beyond our means.

    Wouldn’t it be simpler to cut government spending to a reasonable level? It’s currently at half of all the known taxable income in the United States. That’s not sustainable! Cut government spending and use the excess to pay down the debt and in 10 years, you can lower tax rates so that corporations will want to repatriate. This action is just going to cause them to move further away from the United States and get better at hiding their money.

    • The Federal government is at about 20% of the economy, which I do think is high (especially given how state and local taxes are half that) but it’s not totally killing us. I would like to have a reasonable debate about what we really need to be doing as a Federal government, but without that it’s going to keep on as it is through sheer momentum (and not because an actual budget was passed, Lordy, no!)
      PM David Cameron said something like, “If you want low rates you have to make sure everyone pays their share of it.” I support that. I think the long term deal has to be low, simplified business taxes and make it very hard to hide money. Unlike individual taxes, there is no solid reason why business taxes on profit have to be progressive – so why not make them flat? Why not get some of the business tax money from a trading tax on the stock market, as we’ve discussed before?
      This will take international cooperation, however, and it won’t be easy.

      • With due respect, I think the offshore banking is a symptom of a abusive system. There is a feeling among the producers and the wealthier incomes that they are expected to carry the load for the whole country. Spending keeps going up. In reality, that 20% figure is misleading. We’re spending about 3 1/2 trillion dollars a year while taxable income (not GDP, but what is taxable) is slightly less than 7 trillion. We all out to be paying about 60% taxes to support the current spending, but that’s not sustainable, so we borrow, which is also not sustainable in the long term. Eventually, if we don’t do something to change our course, the “rich” will go back to paying over 90% of their income to the federal government. Will the “poor” (those just above the poverty line) ever pay anything toward the federal government. NO! They won’t. They will continue to vote for a credit that exceeds what they actually put into the system. So those of us with an actual tax burden will continue to feel royally shafted and those who can afford it will increasingly hide their money through tax evasion and off-shore accounts.

        We need to reduce spending, first and foremost. I think individual taxation is about as high as it can reasonably go without causing people to find ways around it. If you start a trading tax on the stock market, isn’t the risk that people will pull their retirements, etc., out of the market? With the ups and downs in the market, my accounts aren’t doing bang-up business now and if the federal government starts taking a cut of the action, maybe I need another investment vehicle.

        When you see a symptom of people evading taxes, it might be better to figure out why rather than trying to figure out how to make them stop. Because if you can figure out why and fix that, they might stop voluntarily. My guess is that we’re charging our corporations too much in taxes. We go much higher on income tax rates and we’re going to see a lot more individuals doing it too. That’s what built Zurich after all,.

      • I don’t really want to argue with you about details given that we agree on the most important things. I do agree that the system of corporate taxation is abusive.
        We have the highest corporate tax rate in the developed world, at 39%. Yet we have much lower effective rates, down around 21%, because of all the deductions allowed. That seems to me to be the worst of both worlds. A much flatter, simpler system would make evasion harder – and lower rates all around. I favor that.
        The reason a trading tax is desirable is to take the “casino” element out of the stock market and make manipulation harder. A level of just 0.2% would raise enough to cut the corporate tax rate in half, and that may not be a bad idea all around. Imagine a relatively low 10-12% corporate tax that was hard to get out of – that seems reasonably fair.
        A trading tax wouldn’t hit seniors unless they took up day trading, which I think is strongly not recommended anyway.
        That’s my plan, at least. I do agree that the marginal rate on corporations is ridiculous, especially since we riddled the system with holes rather than just reform it properly.

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