Treasure Islands - Nicholas Shaxson [66]
6
THE FALL OF AMERICA
How the United States Learned to Stop
Worrying and Love the Offshore World
EARLY IN 1966 A YOUNG ECONOMIST WORKING at the New York headquarters of Chase Manhattan Bank was riding a company elevator when a former State Department operative handed him a memo. It isn’t clear if Chase management knew of the memo: This came from Washington, not from Chase. But the young economist, Michael Hudson, was astonished by its contents.
Hudson had gotten into banking by chance: After studying economics at New York University in 1960 he took a job in real estate banking, and later, when an opening came up at Chase to look at what are called balance-of-payments issues, he was the only applicant. Now a respected (if controversial) American economic commentator, Hudson said his time at Chase—during which, incidentally, he fired a “nasty little twit” called Alan Greenspan1—taught him most of what he ever learned about international economics.
In those days Chase was the oil companies’ preferred bank, and it had asked Hudson to study the petroleum industry’s impact on the U.S. balance of payments to provide ammunition that would help the oil companies claim they were “good for America” and help them lobby for special government perks. One of his tasks on this project was to find out where the oil companies made their profits. At the producing end? At the refineries? In the gas stations? David Rockefeller, Chase’s president, arranged for Hudson to meet Jack Bennett, Treasurer of Standard Oil of New Jersey, now part of the ExxonMobil empire.
Bennett gave him his answer. “The profits are made right here in my office,” the oilman said. “Wherever I decide.”
He was talking about transfer pricing, the practice I explained in chapter 1, where banana companies trailed their accounts around the world’s tax havens in order to shift paper profits into the low-tax countries and the costs into the high-tax countries. Bennett showed Hudson exactly how large, vertically integrated multinationals could shift profits around the globe, apparently without breaking the law. The company would sell its crude oil cheap to a shipping affiliate registered in zero-tax Panama or Liberia, which in turn sold it on at a high, nearly retail price to its refineries and marketing outlets. In the high-tax countries where the oil is produced and consumed, the subsidiaries buy at a high price and sell cheap, so they are unprofitable and pay little tax. But in the middle, in zero-tax Panama or Liberia, the subsidiaries buy cheap and sell dear, making vast profits. But these havens levy no tax on those profits.2
To this day, accounting standards effectively hide this kind of trickery, letting companies shovel results from different countries into a single category (often called simply “international”) that cannot be unpicked to work out who takes what profit where. “Only the immense political power of these extractive sectors,” said Hudson, “could have induced their governments to remain so passive in the face of the fiscal drain.”
This kind of offshore leakage was relatively restrained in the 1960s if compared to today. Capital flows were strongly regulated, taxes were high, and the offshore system, though alive, was still a fairly modest phenomenon, and the British offshore spiderweb was in its infancy. With the golden age of capitalism in full swing, American households, and particularly the poorest, were seeing tremendous improvements in wealth and welfare; Germans were basking in their Wirtschaftswunder; France was in the midst of its Trente Glorieuses; Italy was installing the springboard for its Il Sorprasso moment, to come twenty years later, when its economy would outgrow Britain’s; and Japan was unleashing its own economic miracle. In large swaths of the developing world, infant mortality was falling, economies were growing, unemployment was tumbling, and hungry children were