Not Offshore but Inside Governments Is Where Problems Lie

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On July 23, The Guardian published the results of a report by the “Tax Justice Network” (TJN).1 The title – “Wealth doesn’t trickle down – it just floods offshore” – cannot remain unnoticed by the reading public. The main idea of the article and the report is that assets with estimated values from $21tn up to $32tn (as of 2010) have found shelter in the jurisdictions with low tax rates, i.e. have been “lost to global tax havens”. A sum, which “if taxed, that could have been enough to put parts of Africa back on its feet – and even solve the euro crisis”.

What is new to the readers is that the article and the report show estimates of the volume of transactions towards 139 jurisdictions with low taxation. The methodology is far from perfect, but is acceptable and is the only one designed specifically for the purposes of the report. This is how the big picture looks like. 

tabimeSource: TJN

Strangely enough the newspaper does not mention the period, which the estimates correspond to. Actually, it accounts for 40 years of data and spans from 1970 to 2010.

The major glitch of the methodology of TJN and its report is that they do not ask the question for the alternative uses of these assets and of the taxes, which would possibly be collected on them.

Here you can find an incomplete list of these alternatives:

  1. If the amount of money on hand had been effectively collected by the corresponding tax authorities of the governments of countries like China, USSR (Russia), Hungary, Poland, Ukraine, Turkey, Iran or Kazakhstan, the lifespan of communist and authoritarian regimes could have been prolonged. For example, it is unclear whether the reforms of Deng Xiaoping in China would have been initiated, albeit today it is sure, that because of them the proportion of the poor (who are entitled to $1,45 per day) in this country has dropped from 82% to 16% for the same period.

  2. It is very likely that these acquired funds would have been channeled towards:

  • Waging wars with local neighbours and annexing additional territories; for example, USSR could have attacked Afghanistan; Russia not only Ukraine or Georgia, but also other countries; China could have ravaged Taiwan; the same goes for Iran with respect to Saudi Arabia and Iraq;

  • Repressing the country’s population and eliminating the political opposition – true for the abovementioned countries, as well as for the countries from new Europe prior to 1989 and Ukraine and Kazakhstan – in a subsequent period up to today;

  • Financing pointless government programs and projects, such as the construction of unnecessary power plants, roads and bridges to nowhere – five years ago in Kazakhstan there was an idea to reverse the currents of the largest rivers, so that they would flow southwards and thus irrigate the steppes and deserts;

  • Supporting fraternal political regimes and parties in other countries;

  • Redirecting the funds to a “circle of friends” which is close to the government;

  1. According to this hypothetical list “Africa” becomes a priority only after the “fraternal” regimes of the former communist countries;

  2. If by chance this priority found a place in the list, funds from collected taxes would be assigned to UN programs, the governments of the “donor” countries or the EU and not a few of them would be spent on obscure, pointless or even harmful ventures;

  3. It is reasonable to assume that if jurisdictions with lower taxes did not exist:

  • The taxable income would probably not be accumulated at all;

  • It would never be invested in profitable ventures in the countries which it was exported from or in other countries and regions, such as Africa.

  1. Assuming that some of the funds in question have been accrued in a criminal way, by the so-called black economy, in the absence of jurisdictions with low taxes, these funds could have been invested in the same criminal activities. I.e. businesses, such as trading in human beings, arms and drugs, could only have been expanded, because the generated income would not have been “laundered”;

  2. Competition between jurisdictions with lower taxes causes them to track the “black money” by themselves much better than the governments of countries with high taxes which fight against them. Incidentally, the reason for the outflow of capital and the lack of liability for uncollected taxes should be sought in politics and more precisely among those countries labeled as “white” in economic terms;

  3. If the above is taken into account, the benefits of the so-called offshore areas will become apparent not only for the global economy, but also for the indigent in all parts of the planet, including the rich countries.

Incidentally, in the estimates of TJN, Bulgaria has the least “trickled-down” capital compared to the former Comecon countries and to countries with similar economies and population. This would mean that the economy is not very effective in this field as well.

1 You can find out more about the organization at . The report can be downloaded from .