Globalization from a Caribbean Beach

Here tax havens come back into the picture. Offshore production in a global economy creates new possibilities for reducing tax liabilities, that don’t exist if a company both produces and sells within its home country. To take advantage of this, when moving production offshore, it is typically accompanied by the establishment of a subsidiary in a tax haven to which ownership of the so-called soft assets, such as patent rights, brand names, and company logos, are transferred. The tax haven subsidiary will thereupon invoice the offshore manufacturer for the “right” to use these soft assets.  

This transforms the soft assets from balance sheet items into costs embedded in the products when they return to the home country. Since the tax haven subsidiary is fully owned and operationally controlled, the cost structure of the whole process can be geared up and down so that profits in the home country disappear no matter what sales prices can be fetched in the home market. Sometimes the process is refined by moving the main company—either as an empty shell registration or as a skeleton corporate headquarter—to the tax haven. This leaves a subsidiary with all the rest of normal corporate functions, such as design, marketing, distributing, and the majority of the corporate executive staff, in the original home country. 

A key aspect of the process is that it is tailored to corporate elites’ interests at the expense of ordinary shareholders. For example, the corporate elite can have part of their remuneration hidden as “consulting” fees paid to shell companies and bank accounts the executives have set up in the tax haven, with the money coming from the revenue accruing to the subsidiary that holds the soft assets. 

Interpolating from a sample of credit card transaction records, the IRS concluded that upwards of two million U.S. citizens access funds held in tax haven bank accounts by credit cards, while tax returns only reported 170,000 accounts. In the Cayman Islands alone, deposits totaled more than $800 billion, which equals one-fifth of all deposits within the U.S. A conservative estimate is that upwards of $70 billion in taxes are lost every year due to the hiding of income in tax havens. However, since the Bush administration cut the IRS’s auditing staff drastically, the IRS has essentially been reduced to the role of an onlooker. 

The growing problem of tax evasion occurring in tax havens spurred the Organization for Economic Cooperation and Development (OECD) into action in 1998, with the Clinton administration signing onto the process. Forty- three identified offshore tax havens were notified that they would have to comply with a certain level of information exchange, otherwise they would be the target of countermeasures. 

Despite the fact that both the OECD demands and the contemplated countermeasures were weak, they were too much for the Bush administration, who, in 2001, gave the activities in tax havens another free pass, declaring that the OECD demands were “not in line with this Administration’s priorities.”  

The OECD initiative had brought the market extremists behind the Bush administration out on the war path, with Tom DeLay leading the charge. According to him, tax “planning,” as everything else, should be left to free, unregulated market forces. Let the chips fall where they may. That we are talking of forces exhibiting asymmetries of almost incomparable proportions doesn’t matter. Forget about the fact that a large, developed country burdened with upholding a sophisticated socio-technical infrastructure must raise taxes to pay for it. 

On the other hand, a tax haven like the Cayman Islands (with barely 40,000 inhabitants, many of them expatriates connected to tax haven activities) has as its main responsibility keeping the golf courses green, burdening it with no serious need for levying taxes. It is not hard to figure out where the “market” choice for having their taxable income show up is for everybody with a billion dollars in income and no concept of social responsibility. 

In this case, the market extremist logic is barely a fig leaf for the culture of free riders prevailing among the current elite. The reality is that outsourcing profits and income to tax havens is another nail in the coffin for the dying principles of the welfare state. As the rock singer Perry Farrell coined it: “Your true nature is how you treat the weak.” Using that measure, there is not much doubt about the true nature of the crowd that took over the White House during the Floridian coup d’état of 2000.