Book Review: Treasure Islands: Tax Havens and the Men Who Stole the World by Nicholas Shaxson

Treasure Islands: Tax Havens and the Men Who Stole the World should come with a health warning. It might read something like: “Warning: this book could induce high rage and raging blood pressure. Please check with your heart doctor before opening.”

The story it tells is not, on the surface, terribly surprising. We know that since around the 1970s the amount of tax paid by the rich and multinational corporations has plummeted, and the rest of us are paying the price, both in cut services and benefits and in the fallout from the financial collapse of 2008.

But the problem is that the ways in which this is done is often so complex, so wrapped up in acronyms, in technical financial terms and obscure places, that it has been easy for governments to shrug and say “it’s all too hard to deal with”, or fob us off with claimed reforms that have no impact.

The great achievement of this book is to spell out exactly what is happening, the mechanisms, the corruption of politics and the huge cost that the world economy (i.e. all of us) – but particularly people in the developing world – are paying. And this in terminology that anyone can understand, and in a lively style that I’ll guarantee will leave you gripped. It’s almost like a thriller, except you already know how it ends.

Here’s how Shaxson sums it all up in a sentence: “Imagine you are in your local supermarket and you see well-dressed individuals zipping through a ‘priority’checkout behind a red velvet rope. There is also a large item ‘extra expenses’ on your checkout bill, which subsidises their purchases. Sorry, says the supermarket manager, but we have no choice. If you did not pay half their bill, they would shop elsewhere.”

Perhaps the most striking conclusion, if you’re in the UK anyway, is the fact that the City of London acts as the grand-daddy of tax havens. And a defining characteristic of tax havens, Shaxson tells us, “is that local politics is captured by financial services interests (or sometimes criminals, and sometimes both) and meaningful opposition to the offshore business model has been eliminated”.

The flow of the book is broadly historical. It begins with the British founders of offshore tax avoidance, the Vesteys, who made their chief fortune with Argentinian beef.

Double taxation, Shaxson explains, became an issue after the First World War, as business taxes rose around the world. The question was: should a business be taxed where it did its business, often a poorer country, or where it was owned, often a richer one. The 1928 League of Nations treaty gave substantial tax rights to source countries, but after the Second, the OECD model, more favourable to richer states, held sway. In 1980 the UN produced a fairer model arrangement, but the OECD intervened aggressively to prevent it holding sway. And… “Elites in the poor countries don’t mind the poverty around them so much, because tax havens let them keep their loot offshore and tax free letting their poorer compatriots and foreign donors pay the bills.”

But the Vesteys anyway found a way around taxation – trusts, one of the mechanisms by which, as Shaxson quotes The Sunday Times as finding in 1978, that the family’s Dewhurst chain of butchers in Britain paid just £10 tax on a profit of more than £2.3 million, a rate of 0.0004%. Today, Shaxson says, on tiny Jersey alone there are $400 billion of assets in trusts, and worldwide the figure is several trillion.

So much of this book is a reminder that what we’re experiencing today is nothing new. In 1937 the US Treasury Secretary, Henry Morgenthau, wrote: “Legalized avoidance or evasion by the so-called leaders of the business community … throws an additional burden upon other members of the community who are less able to bear it, and who are already cheerfully bearing their fair share.”

But Shaxson explains, particularly under American influence, and that of Keynes, after the Second World War tight controls were put on the flow of global capital. “In a world of free capital flows, if you try to lower interest rates to boost struggling local industries, say, capital will drain overseas in search of higher returns, investors hold veto power over national governments and the real lives of millions of people are determined by what the Indian economist Prabhat Patnaik has called “a bunch of speculators”…. Freedom for financial capital means less freedom for countries to set their own economic politics: from this particular freedom, a form of bondage emerges.”

What effectively broke these controls, Shaxson says, was the Bank of England and its decision to allow a new, unregulated cash market in London in the late Fifties, known as the Euromarket or Eurodollar. “As the imperial basis of its strength disappeared, the City survived by transforming itself into an “offshore island”, servicing the business created by the industrial and commercial growth of much more dynamic partners.” The author traces the tale up to 1997, when “nearly 90% of international loans were made through this market”.

The Americans were gravely concerned about the tax losses and the risks of insecurity and collapse. The British hierarchy was unconcerned. “It doesn’t matter to me whether Citibank is evading American regulations in London,” Shaxson quotes one bank official as saying. “I wouldn’t particularly want to know. Additionally, there was a bizarre logic – if the Bank of England didn’t regulate the market, it didn’t have any responsibility to try to fix things if the market went wrong.

Given the power imbalance, why did the Americans tolerate this? Shaxson’s conclusion is that the market helped cement the dollars place as the key global currency. “Eurodollars helped America cement its exorbitant privilege, finance its deficit, fight foreign wars and throw its weight around. American bankers didn’t want to go through months of kerfuffle, convincing Congress to change the laws at home. Far easier instead to skip over to London.”

Kennedy tried to bring in controls in 1963 with the Interest Equalisation Tax, a levy of 15% on income Americans received from foreign securities. But more business flocked offshore, so two years later Johnson introduced limited controls on outward capital flows, but such was the furore that a compromise arose that Shaxson regards as critical to the advantages multinational companies enjoy today – deferred tax: “Corporations hold their profits offshore, indefinitely, and only when they they bring it back home to pay our dividends to shareholders does it get taxed … tax-free loans from the government, with no repayment date .. this gives them a huge competitive advantage against smaller, locally based firms. US corporations alone were believed to hold a trillion dollars’ worth of untaxed foreign profits offshore in 2009.”

Then, in 1981, the US fell before the tide, setting up international banking facilities to allow a thriving home-grown bond market. Shaxson quotes Time magazine: “America has become the largest and possibly the most alluring tax haven in the world.”

Some of the pure facts are stunning. More than 95% of share and bond purchases of the global market today are not new investents – productive investments, but secondary activity, a shuffling around of cash. “Shuffling ownership of bits of paper ought, in theory, to help capital flow to those projects that offer the highest risk-weighted returns…A little speculative trading in these markets improves information and smooths prices. But when the volume of this dealing is a hundred times bigger than the underlying volume of trade, the result has proved to be a catastrophe.”

Then there’s the overview: in 1980 the average corporate tax rate was nearly 50%; it is now just above 25%. However, “since 1965 personal income taxes in rich-world OECD countries have remained remarkably stable at 25-26 per cent of the total tax haul, and total corporation taxes have even risen slightly, from 9 to 11 per cent. Some say this proves that tax competition does not matter. But look behind the numbers … the rich have not only seen their wealth and income soar, but they have shifted their income out of personal income tax and into corporation tax, to be taxed at far lower corporate rates. … the richest 400 Americans booked 26 per cent of their income as salaries and wages in 1992, and 26% as capital gains. By 2007 they recorded only 6 per cent as income, and 66 per cent as capital gains… So falling corporation tax rates are being masked by rich people’s tax avoidance. In contrast, the working population has seen its personal income taxes and social security contributions rise over the last 30 years, as their wages have stagnated.”

Shaxson concludes with a “to do” list of ways to tackle the tax haven culture. It’s quite a short chapter, with an enormous hinterland. But in a way it scarcely matters. For the first thing that needs doing is to win the argument, to get citizens, voters, to understand the enormous damage being done to their interests, to global justices, to all of our futures, by the failure to tax the rich and multinational corporations. Only after that can real action be taken.