Treasure Islands - Nicholas Shaxson [133]
A lot of innovation that corporations do—I’m talking about useful innovations to make better and cheaper goods and services, not the financial innovations that simply shift wealth upward and risks downward along the social scale—happen in small and medium enterprises. But the offshore system works directly against this.
First, it subsidizes multinationals by helping them cut their taxes and grow faster, making it harder for the innovative minnows to compete. And when small innovative firms do emerge they becomes targets for predators who seek to “unlock value” from “synergies” created by bringing the small firm into the bigger, more diversified one. Some synergies may be useful—economies of scale, for instance—but too often the predator can “unlock value” simply by being better at squeezing out these abusive, unproductive offshore tax privileges. Some make their best profits by seeking out and harvesting those small, genuinely innovative companies that haven’t yet been abusive enough on offshore tax avoidance to “unlock” those abuses for themselves.
This harvesting then removes nimble, competitive, and innovative firms from the marketplace and relocates them inside large corporate bureaucracies, curbing competition and potentially raising prices. Debt rises, and ordinary people pay more tax, or see their schools and hospitals fall into disrepair. And if the predators leave their earnings offshore they can “defer” tax on them indefinitely. Deferred taxation is, as the accountant Richard Murphy puts it, “an interest-free loan from the government, with no repayment date.” In other words, more debt.
Consider what happens when this multinational corporation is a bank. Like multinationals on steroids, banks have been particularly adept at going offshore to grow fast: by using it to escape tax, to dodge reserves requirements and other financial regulation, and to gear up their borrowings.
Banks achieved a staggering 16 percent annual return on equity between 1986 and 2006, according to Bank of England data,49 and this offshore-enhanced growth means the banks are now big enough to hold us all ransom. Unless taxpayers give them what they want, financial calamity ensues. This is the “too big to fail” problem—courtesy of offshore.
But even that is still not all.
This one takes a little bit of explanation. Many blame the latest crisis not just on deregulation but also on global macroeconomic imbalances, as funds have flowed from countries with export surpluses, like China, India, Russia, and Saudi Arabia, and into deficit countries like the United States and Britain. This has led to overconsumption and borrowing in the deficit countries.
Now look at Global Financial Integrity’s estimate that illicit financial flows out of developing countries has been running at up to a trillion dollars each year. Most has flowed out of large developing countries like China and Russia and Saudi Arabia and into large OECD countries like Britain and the United States. Illicit flows in the other direction are much smaller, so the net result is a flow worth hundreds of billions of dollars each year into rich economies and secrecy jurisdictions.50 The illicit flows, which are unrecorded and hardly noticed, add to those recorded imbalances.
Let’s look quickly at what happens on the ground. Imagine a Mexican company orders construction equipment from the United States and agrees to a price of $10 million. But the Mexican company asks for the commercial invoice to be drawn to read $12 million. The buyer does this because when he pays his $12 million, $2 million of that is secretly deposited into his Miami bank account. The missing $2 million is invisible to the numbers crunchers