Treasure Islands - Nicholas Shaxson [79]
Step forward, the United States of America.
7
THE DRAIN
How Tax Havens Harm Poor Countries
BY THE EARLY 1980S THE MAIN ELEMENTS of the modern offshore system were in place and growing explosively. An older cluster of European havens, nurtured by old European aristocracies and led by Switzerland, was now being outpaced by a new network of more flexible, aggressive havens in the former outposts of the British empire, themselves linked intimately to the City of London. A state within the British state, the City had been transformed from an old gentleman’s club operating the financial machinery of empire, steeped in elaborate rituals and governed by unspoken rules about what “isn’t done,” into a new, brasher, deregulated global financial center dominated by American banks and linked intimately to this new British spiderweb. A less complex yet still enormously important offshore zone of influence had also grown up, centered on the United States and constructed by U.S. banks. The stateless Euromarkets linked all these zones with each other and with the onshore economies, helping free banks from reserve requirements and other democratic restraints on their behavior.
While the old European havens were mostly about secret wealth management and tax evasion, the new British and American zones were increasingly about escaping financial regulation—though with plenty of tax evasion and criminal activity thrown in, of course. Players in each zone were warmly welcomed into the others, in true laissez-faire style, and as the offshore system became more interconnected it grew stronger too, as states competed with each other in races to the bottom on lax financial regulation, tax, and secrecy in order to lure financial capital. This competition also helped force offshore practices steadily onshore, making it harder to tell the two apart.
The Bretton Woods system of international cooperation and tight controls over financial flows had collapsed in the 1970s, bringing to an end the so-called golden age of capitalism that followed the Second World War. The world had entered a phase of much slower growth, punctuated by regular financial and economic crises, especially in the developing world.
And as all this happened, and the offshore system grew and metastasized all around the global economy, a new and increasingly powerful pinstripe army of lawyers, accountants, and bankers had emerged to make the whole system work. Offshore, in partnership with changing ideologies, was driving the processes of deregulation and financial globalization. In particular, the London-based Euromarkets, then the wider offshore world, provided the platform for U.S. banks in particular to escape tight domestic constraints and grow larger again, setting the stage for the political capture of Washington by the financial services industry, and the emergence of too-big-to-fail banking giants, fed by the implicit subsidies of taxpayer guarantees, plus the explicit subsidies of offshore tax avoidance, that continue to hold western economies in their stranglehold today. The emergence of the United States as an offshore jurisdiction in its own right attracted vast financial flows into the country, bolstering bankers’ powers even further. The old alliance between Wall Street and the City of London, which collapsed after the Great Depression and the Second World War, had been resurrected.
Many people supposed that by eliminating double taxation and creating nearly frictionless conduits for financial capital, the offshore system was promoting global economic efficiency. In reality the system was rarely adding value, but was instead redistributing wealth upward and risks downward, and creating a new global hothouse