I want to recommend a book that should be of interest to all IBS contributors/readers:
Nicholas Shaxson, Treasure Islands: Tax Havens and the Men Who Stole the World. London, 2011.
[editors note: zuludogm has also provided a review of this book]
FATCA and other US initiatives are meant to curtail tax evasion through off-shore tax havens. Or, so we are led to believe. Shaxson shows, with ample documentation, that the US and the UK are the biggest tax havens in the world. Foreigners (“non-resident aliens” in tax lingo) can maintain tax-free savings and investment accounts in the US. Anti-tax evasion measures taken by the US are chiefly aimed at preventing US citizens utilizing tax evasion strategies intended to attract non-US investment.
The best-known off-shore tax havens (Cayman Islands, Jersey, etc.), former British dependencies for the most part, far from being a problem for the US, are now useful for the laundering of dirty money destined for investment in New York or The City. After all, it wouldn’t do for an African cabinet minister or a South American drug dealer to walk into Chase Manhatten with trunks full of money.
Although he does not address FATCA (FATCA was passed after the book was written) Shaxson demonstrates the hypocracy behind US practice.
The book has a dedicated website:
@northerenshrike- I watched an interview that was conducted with this guy on Canada’s, Business News Network (BNN). During the interview he did a very good job of briefly stating just how entrenched tax evasion is in within nations like the U.S., Britain etc.
When it comes to tax evasion aren’t the words U.S. and hypocrisy synonymous?(lol)
I thought his book was a nice story, but pure utopianism.
The book starts with a useful framework to define tax havens (secrecy jurisdictions) followed by a very interesting history of their development. However, all along the read, there are little signs that we’re being taken for a ride.
The first off-note comes from Shaxson’s attributions that nearly all of the world’s woes lay at the doors of the tax havens. He goes so far as to say that they played a leading role in the financial crisis by hiding the leveraging. hmmmm, I’ve read about a dozen books on the financial crisis (the best being “All The Devils Are Here”) and that angle is not supported by anyone except Shaxson. The leveraging was well known and visible.
Throughout the book, he uses straw-man arguments to support his assertions. He references some of the most extreme libertarians to argue on behalf of tax havens and then eviscerates their points. So what? Anybody can do that – they’re kooks. The tactic was overused enough that it became a clear form of deception.
Gradually, the book moves from interesting argument to utopianism. He paints a picture of the world before tax havens as idealistic. He embraces the US Senator Carl Levin’s assertions that the tax havens are costing billions to the US Treasury and other governments without a challenge. The US Congressional Budget Office has shown Levin’s arguments to be false and this is out there for Shaxson to see.
On the positive side, Shaxson does a great job of exposing the hypocrisy of US and UK efforts to reign in tax havens, while maintaining their own leading positions as tax havens. There is a humorous moment involving 1209 North Orange Street in Wilmington, Delaware. But even then, he pulled punches … a disappointment.
He touched on one of the legitimate reasons that tax havens exist: Some governments resort to confiscatory tax schemes. He had no defense for these governments’ actions (good for him), but he argues that tax havens are to blame for this too – a logical contortion indeed. By his argument, havens hide these problems from the electorate’s scrutiny and deny the people the opportunity to demand changes to the laws. Naïve… More than that, it’s a dangerous naïvety.
It’s more likely that tax havens are a more effective response to such laws… and that’s a pity, but a lot better than no response at all. It is more likely that without tax havens, there would be a confiscatory tax specially designed for each weak and voiceless demographic. And this is just as true for developed democracies as it is for dictatorships.
Did you know that the US capital gains tax rates on the foreign pensions of Americans living overseas (0.5% of the US population) has exceeded 100% for the last ten years and will climb above 200% in 2013? More importantly – do you care? Do you think those laws will change?
The book comes down to utopianism dressed up as journalism.
@Zulu, how are US capital gains rates so high on foreign pensions for Americans? I realise that I will need to include my employer’s 5% contribution onto my wages to count as my taxable earned oncome, plus cannot deduct my 5% employee contribution to reduce my gross income. But if I were to claim the foreign earned income exclusion, wouldn’t this only be an issue if I were earning above the $95,000 exclusion amount?
Story from the UK – AIC (Association of Investment Companies) from a publication called IFAonline (Independent Financial Advisors) – in the article they’re suggesting that it may be better to pay the 30% withholding than comply if a firm has only a few US holdings or US persons. So they’re really talking about de facto disinvestment. The cost of paying the 30% is less expensive than complying with FATCA in the AIC’s eyes.
The US is in denial about the “FATCA effect” on inward investment. If many of the world’s smaller investment firms come to the same conclusion, this is an example where the loss of capital gains taxes offsets any revenue could gained via FATCA reporting.
The FATCA regime will actually cost the US money to run. But bloody minded senators like Levin know better!
Wake up Carl it takes only $53B of loss inward investment (held for more than a year 15% capital gains) to negate the $8B gain in tax revenue that FATCA allegedly provides per annum. $53B is less than a drop in the bucket – the maths say the US will lose out if it persists with FATCA.
Does FATCA give smaller investment firms any incentive to increase their holdings in the US – no.
http://www.ifaonline.co.uk/ifaonline/news/2172936/aic-hit-fatca
Also another quote from the FT concerning FATCA effect on US jobs from a Blackrock spokesperson –
BlackRock’s Ms Novick says: “We are particularly concerned about the impact of Fatca on the competitiveness of US funds, which will probably result in the contraction of US jobs, a shift in capital markets flows away from US products and securities, and an enormous administrative burden for retail investors and institutions around the world.”
FT link – http://www.ft.com/cms/s/0/297e6f84-92bc-11e1-b6e2-00144feab49a.html#axzz1uFB6yPkk
Is Carl Levin going to vote to extend the unemployment benefits for people who have lost their jobs via the “FATCA effect?”
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@Monalisa
A Switzerland based USPA invested 9000 Swiss Francs in her Swiss Pension in 2000. At the time, the exchange rate was 1.8 CHF = 1 USD. So, the IRS sees this as 9000/1.8 = 5000 USD deposited.
NOTE: She did not deposit that as US tax deferred. The US does not recognize foreign pensions under the rules of IRA or 401k, etc. So this is after-US tax money and pre-Swiss income tax.
The pension fund earns a measly 2% each year (but that is about as good as many 401k plans did over the same period). So, in 2012, the account is worth:
9000 X 1.02^12 = 9000 X 1.268 = 11,414 CHF.
She retires this year and draws down the pension. Now this is where it bites… The IRS then says : “ok, now the exchange rate is 0.9 CHF = 1 USD. So… you deposited 5000 USD in 2000 and it is now worth 11,414 CHF / 0.9 = 12,682 USD. That gives you a gain of :
12,682 – 5,000 = 7,682 USD
Congratulations on your excellent investing. Your capital gains tax will be 15% of 7,682 which comes to: 1,902 USD.”
But wait… my actual gain was 11,414 – 9,000 = 2,414 CHF which would be 2,682 USD. You are taxing me at 1902/2682 = 71% capital gains and the Swiss have not yet hit me with deferred income tax!
The IRS then says “Dear, you are lucky you are taking this out now. If you take it out on or after 1st of January 2013, the capital gains taxes will jump back up to the pre-TIPRA rate of 39% (or whatever) and your fair share would be 4,946 USD.” So, retire now or you will soon enough face 4964/2682 = 184% capital gains from the US alone or likely worse. Likely worse because the USD is only headed down and capital gains for rich people like you is headed up.
@Zulu, I see what u mean… I can’t keep losing sleep over all this… which is also why any extra money I’ll be saving will merely go into my local credit union rather than investments. I no longer have any incentive to invest due to all the compliance complications…
@zuludogm
Thanks for the book review. I think you summed it up pretty well.
Nicholas Shaxson and the Tax Justice Network is the antithesis of Daniel Mitchell and the Center for Freedom and Prosperity.
Progressivism vs. Libertarianism if you will.
FWIW: I’m one of those kooky libertarians.
@wilderness
many thanks – and by the way, me too. 😉