The imperative for strengthening international tax co-operation.

Author:Langmore, John


When delivering the eighth WIDER Annual Lecture on rethinking growth strategies in 2004 Dani Rodrik explored means of building the rate of economic growth in poor countries and suggested 'trying to identify the most binding constraints on economic growth. What we should be after are the distortions that hurt the most at any point in time'.

One vast distortion which official agencies refuse to study is international tax evasion. We have been dependent on skilful NGOs and a few scholars for the best available estimates. The most recent study, published in July is by James Henry, former McKinsey chief economist who was commissioned by the Tax Justice Network to measure long-term unrecorded cross-border private financial capital flows and stocks, which erode national tax bases, especially in developing countries. (1)

Henry estimated the overall global offshore financial assets at between US$21 trillion and US$32 trillion, of which US$12 trillion was managed by the 50 top global private banks. This latter figure had grown at an annual rate of 16 per cent during the previous five years. Total global wealth was estimated at US$231 trillion in mid 2010, so these 'invisible' assets are about ten per cent of total global wealth. (2) Furthermore, Henry estimated that nearly half of all offshore wealth is owned by the world's 91,000 richest people, just 0.001 per cent of the global population. Almost all of this 'offshore' wealth has been managed so as to avoid all income and estate taxes, involving a revenue loss of almost US$200 billion a year for states around the world.

Henry also estimates that at least 25-30 per cent of these funds have come from developing countries at levels averaging several hundred billion a year since the 1970s. To put this calculation in context it might be helpful to remember that the OECD overseas development assistance (ODA) totalled around US$134 billion in 2011. Not all of these flows are to the well-publicised tax havens in tropical islands or European statelets. Much is to OECD countries, perhaps partly to increase personal security but also because some of them give elaborate income and estate tax preferences to 'non-resident aliens' or 'non-domiciled foreigners' who are allowed to reside there while paying very low taxes. This is one reason why London is a tax haven. Other legal subterfuges offering secrecy and tax advantages (called 'limited liability corporations' or 'asset protection trusts') have...

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