Tax Black-Holes & Tax Loop-Holes

Just this week, the Tax Justice Network published a report claiming that between $21 and $31 trillion of global financial wealth is “invested” in tax-free havens. That’s more than the GDP of the United States, China, and Japan combined. The report concludes: wealth doesn’t trickle down — it just floods offshore as if there were a “black-hole.”

Whether or not that is true, unrecorded capital outflows obviously result in a lack of domestic reinvestment and reduced tax revenue — a double whammy for any economy. On this topic, Eric Jackson of Forbes magazine writes that “lowering taxes on the ultra-rich” will make America a more attractive place. Really? Why has “offshore wealth” more than quadrupled in the last 26 years despite falling marginal tax rates? Jackson’s logic confounds me, and we’re fortunate that what he advocates, and perhaps the resultant “race to the bottom,” hasn’t taken place yet.

Rather than tax disparities driving capital outflows, technology, and growing private bank involvement in “pirate banking” — hiding and managing offshore assets for the world’s elite — are largely responsible for capital flight. As I wrote two months ago, “the problem lies instead in a tax code that is ill-equipped to combat today’s highly mobile capital caused by technological advances.” Washington is well aware of this problem, and from January 1 next year the IRS will enact the Foreign Account Tax Compliance Act (FATCA). The legislation is a sort of declaration process for both individuals with assets in overseas accounts and foreign financial firms with American account holders. This will potentially raise $8.7 billion dollars in new tax revenue.

Unfortunately, the problem of “offshoring wealth” seems to have no solution in sight. Multilateral institutions and global bank regulators have published little on this subject, and it is difficult to imagine any global body with enough clout to change banking regulations around the world. A tiny worldwide asset tax would work great — but is there any chance of that happening? No.

Let’s look at some tax policies that may perhaps ameliorate this problem. Adam Davidson of NPR’s “Planet Money” writes that several economists polled “agreed that the overly complex taxation of rich people and corporations … all guarantees that those people and companies will spend an inordinate amount of money figuring out how to game the system rather than come up with new ideas that improve the economy.” Simplifying the tax code, while keeping similar rates, is a widely supported policy that can potentially raise large amounts of new tax revenue.

Sitting in the opposite corner are the lobbyists which represent the entrenched elites and large corporations. Davidson adds: “The big problem, of course, is that many of the people and corporations with the most influence over Congress don’t want [a simplified tax code].” Their lobbying is likely to continue; many large firms spend inordinate amounts on lobbying and campaign contributions. Since lobbying leads to massive corporate profits, who can blame them?

Looking forward, questions over tax revenue will continue to be raised with little progress — even a trip over next year’s “fiscal cliff” is unlikely to break the tax impasse.