Tuesday, July 10, 2012

507 Treasure Islands: Tax Havens caused the Financial Crisis

Treasure Islands: Tax Havens caused the Financial Crisis

(1) Britain's Offshore Finance Empire
(2) Nicholas Shaxson summarizes his book Treasure Islands
(3) Amazon reviews of the US edition of Treasure Islands. Tax Havens
caused the Financial Crisis
(4) Treasure Islands reviewed for LRB: many tax havens are former
British imperial outposts
(5) Buy Treasure Islands from Amazon USA, Amazon UK, or Abebooks

(1) Britain's Offshore Finance Empire


The third British Empire


POSTED: 30 MARCH 2012 15:06

London is considered the "capital of capitalism" allowing foreign
billionaires to stash tax free income offshore.


London, United Kingdom - Historians tell us that there were two quite
distinct British empires - the first an Atlantic empire built on North
American colonies and Caribbean possessions and the second an Asian
empire, built on control of India and coercive trade with China. These
two empires were deeply criminal projects, in the specific sense that
they relied heavily on profits from slavery and the sale of narcotics.
Empire on the British model was a moneymaking venture, where moral
considerations took second place to the lure of super profits.

"Having given up the appearance of empire, the British have sought to
reclaim its substance."

The first British Empire came to an end when the Americans fought a
revolutionary war for independence in the 1770s. The second British
Empire began to fall apart with Indian independence in 1947. Arab and
African nationalism progressively undermined British influence in the
years that followed. At some point, perhaps with defeat in Suez in 1956,
or when Britain withdrew from its last significant overseas possession,
Hong Kong, in 1997, the game was finally up.

Nowadays, if you believe what you're told by respectable historians and
broadcasters, Britain has turned its back on its imperial past and is
trying as best it can to make its way as an ordinary nation. The reality
is somewhat more complicated. One day, perhaps history will describe a
third British Empire, organised around the country's offshore financial
infrastructure and its substantial diplomatic, intelligence and
communications resources. Having given up the appearance of empire, the
British have sought to reclaim its substance.

Banking on billionaries

Two news stories from last week help us sketch the outlines of this
third, offshore empire. On Tuesday, March 20, a Russian banker was shot
and seriously wounded outside his flat in Canary Wharf. On Sunday, March
25, the co-treasurer of the Conservative Party resigned after the Sunday
Times claimed that he had been soliciting donations to his party from
what he thought was a wealth fund based in Liechtenstein. These two
apparently unrelated events together tell us quite a lot about
contemporary Britain.

The United Kingdom allows foreign residents to hold their funds offshore
and only taxes them on money they bring into the country. This approach,
a relic from the days of openly declared empire, makes the country a
popular place of residence for billionaires from all over the world,
from Africa, mainland Europe and India.

Once in London, a sophisticated legal and financial apparatus arranges
for foreign funds to be deposited in a network of offshore
jurisdictions. In his groundbreaking book, Treasure Islands, Nicholas
Shaxson describes London as the centre of a spider web that links to the
Channel Islands, the Isle of Man and the Caribbean. With impressive
frugality, the British have reinvented the scattered remnants of formal
empire as instruments for serving the needs of global capital.

When the Soviet Union broke up, those who secured control of the
privatised Russian economy flocked to London. They had little in the way
of a social base in their own country and their position was chronically
insecure. They needed a way to channel profits overseas, and London
offered them access to a world-class financial centre and favourable tax

The city also gave some of them a public profile outside Russia. In
buying Chelsea Football Club and the Evening Standard, Roman Abramovich
and Alexander Lebedev respectively have made themselves international
figures. Moves against them by opponents back home are thereby made that
much more difficult.

The British state does more than provide a hospitable, low-tax
jurisdiction and the means to acquire a higher profile abroad. It puts
its diplomatic resources at the disposal of favoured foreign residents.

For example, in July 2001, Tony Blair wrote a letter to Romanian Prime
Minister Adrian Nastase to support Lakshmi Mittal's efforts to buy up
the state-owned steel company, Sidex. Though Mittal had offices in
London, the company making the bid was registered offshore, in the Dutch
Antilles. But while Mittal did not employ many people in Britain, or pay
much tax there, he did make a significant contribution to the Labour Party.

In May 2001, two months before Blair wrote his letter, the Indian
magnate had given them £125,000 ($199,750). It is hardly surprising that
Peter Cruddas was happy to talk with financiers from Liechtenstein about
donations to the Conservative Party. Donations from foreigners are
illegal, but it is a relatively simple matter to set up a company
registered in the UK to handle the transaction. Offshore blurs the
distinction between domestic and foreign.

Capital of capitalism

All this is part of a much larger imperial project, whose full scale and
significance is difficult to appreciate. This is not an empire that
advertises itself widely. Indeed, it tries to hide the very fact of its
existence. But there is no doubting the ambition. For decades now,
Britain's rulers have sought to make London the capital of global

"The third British empire is not an industrial or military superpower.
Indeed, it is intensely vulnerable."

The state has reorganised itself to this end. Privatisation was tested
in the UK and then exported around the world. Deregulation brought
foreign banks to London. The financial sector, the intelligence
establishment and the political parties are committed to a project that
the major media can scarcely bring themselves to discuss. Elections
become ever more hallucinatory exercises, in which shallow differences
in tone and detail obscure a far deeper complicity.

Occasionally, the dynamics of the offshore empire become visible as
scandals or sensational crimes. Power struggles cause ripples that can't
be missed. A foreign businessman is shot in the street. The sheer
strangeness jolts us for a moment out of our obliviousness. A politician
is caught soliciting donations and resigns.

Rupert Murdoch, a significant figure in Britain's revived imperialism,
owns the Sunday Times, the paper that broke the Peter Cruddas story. One
faction in the empire is sending a message to another. For a moment what
cannot be discussed is mentioned, obliquely, as is the way of empire.

The third British Empire is not an industrial or military superpower.
Indeed, it is intensely vulnerable. The United States and the great
powers of Europe could do a great deal to hamper it, if they chose to do so.

The empire is a standing temptation to betray the local or the national
for the sake of membership of a far more exclusive and elusive entity -
an entity whose allure is intimately linked to its tact, its capacity to
avoid straightforward description. Empire prospers to the extent that it
can exploit, and where possible foster, corruption elsewhere.

Much of the old bombast is gone. There are fewer flags and trumpets. But
in other respects, the third empire closely resembles its predecessors.
Like them, it must do all it can to prevent effective democracy from
breaking out at home, as it profits from tyranny abroad.

The dedication to the needs of global capitalism benefits only a tiny
minority of the population. The rest face a future of steepening
inequality and shrinking prospects. Besides, as in previous centuries
the people at home must pay up when adventures abroad turn expensive.

And like the first two British empires, the current one is a criminal
enterprise. But having specialised in slavery and drug trafficking,
perhaps the empire's current, signature crime is tax evasion.

By Dan Hind

28 March 2012

@ Al Jazeera

Dan Hind is a journalist and publisher. He is the author of The Threat
to Reason and The Return of the Public. His new ebook on the Occupy
movement and deliberative politics, Common Sense: Occupation, Assembly
and the Future of Liberty, was published online on March 20.

(2) Nicholas Shaxson summarizes his book Treasure Islands


The Book

Millions of people have a queasy feeling that something is not right in
the global economy – but they struggle to put their fingers on what
exactly the problem is. Treasure Islands at last tells the real story of
where it all went wrong. This is the great untold story of globalisation.

Tax havens are not exotic, murky sideshows at the fringes of the world
economy: they lie at its centre. Half of world trade flows, at least on
paper, through tax havens. Every multinational corporation uses them
routinely. The biggest users of tax havens by far are not terrorists,
spivs, celebrities or Mafiosi – but banks.

Tax havens are the ultimate source of strength for our global elites.
Just as European nobles once consolidated their unaccountable powers in
fortified castles, to better subjugate and extract tribute from the
surrounding peasantry, so financial capital has coalesced in their
modern equivalent today: the tax havens. In these fortified nodes of
secret, unaccountable political and economic power, financial and
criminal interests have come together to capture local political systems
and turn the havens into their own private law-making factories,
protected against outside interference by the world’s most powerful
countries – most especially Britain. Treasure Islands will, for the
first time, show the blood and guts of just how they do it.

Tax havens aren’t just about tax. They are about escape – escape from
criminal laws, escape from creditors, escape from tax, escape from
prudent financial regulation – above all, escape from democratic
scrutiny and accountability. Tax havens get rich by taking fees for
providing these escape routes. This is their core line of business. It
is what they do.

These escape routes transform the merely powerful into the untouchable.
“Don’t tax or regulate us or we will flee offshore!” the financiers cry,
and elected politicians around the world crawl on their bellies and
capitulate. And so tax havens lead a global race to the bottom to offer
deeper secrecy, ever laxer financial regulations, and ever more
sophisticated tax loopholes. They have become the silent battering rams
of financial deregulation, forcing countries to remove financial
regulations, to cut taxes and restraints on the wealthy, and to shift
all the risks, costs and taxes onto the backs of the rest of us. In the
process democracy unravels and the offshore system pushes ever further
onshore. The world’s two most important tax havens today are United
States and Britain.

Without understanding offshore, we will never understand the history of
the modern world.

Poverty in Africa? Offshore is at the heart of the matter.
Industrial-scale corruption and the wholesale subversion of governments
by criminalised interests, across the developing world? Offshore is
central to the story, every time. The systematic looting of the former
Soviet Union and the merging of the nuclear-armed country’s intelligence
apparatus with organized crime, is a story that unfolds substantially in
London and its offshore satellites. Saddam Hussein used tax havens to
buttress his power, as does North Korea’s Kim Jong-Il today. Prime
Minister Silvio Berlusconi’s strange hold over Italian politics is very
much an offshore tale. The Elf Affair, Europe’s biggest ever corruption
scandal, had secrecy jurisdictions at its core. Arms smuggling to
terrorist organisations? The growth of mafia empires? Offshore. You can
only fit about $1 million into a briefcase: without offshore, the
illegal drugs trade would be a fraction of its size.

Private equity and hedge funds? Goldman Sachs? Citigroup? These are all
creatures of offshore. The scandals of Enron, Parmalat, Long Term
Capital Management, Lehman Brothers, AIG — and many more? Tax havens lay
behind them all. The rise of multinationals, the explosion of debt in
advanced economies since the 1970s is substantially an offshore tale.
Complex monopolies, frauds, insider trading rings — these corruptions of
free markets always have tax havens at their heart. As Treasure Islands
explains in vivid, thrilling, horrifying detail, every big financial
crisis since the 1970s – including the great global crisis that erupted
in 2007 – has been a creature of the tax havens.

These problems all have other explanations too. Tax havens are never the
only story, because offshore exists only in relation to elsewhere. That
is why it is called offshore.
Without understanding the tax havens, or the secrecy jurisdictions as I
often prefer to call them, we cannot understand the world. Treasure
Islands at last starts to fill this gigantic hole in modern history.

In short, it is the most important exposé of tax havens ever published.

(3) Amazon reviews of the US edition of Treasure Islands. Tax Havens
caused the Financial Crisis


Publication Date: April 12, 2011

A thrilling ride inside the world of tax havens and corporate masterminds

While the United States experiences recession and economic stagnation
and European countries face bankruptcy, experts struggle to make sense
of the crisis. Nicholas Shaxson, a former correspondent for the
Financial Times and The Economist, argues that tax havens are a central
cause of all these disasters.

In this hard hitting investigation he uncovers how offshore tax evasion,
which has cost the U.S. 100 billion dollars in lost revenue each year,
is just one item on a long rap sheet outlining the damage that
offshoring wreaks on our societies. In a riveting journey from Moscow to
London to Switzerland to Delaware, Shaxson dives deep into a vast and
secret playground where bankers and multinational corporations operate
side by side with nefarious tax evaders, organized criminals and the
world’s wealthiest citizens. Tax havens are where all these players get
to maximize their own rewards and leave the middle class to pick up the

With eye opening revelations, Treasure Islands exposes the culprits and
its victims, and shows how:

*Over half of world trade is routed through tax havens

*The rampant practices that precipitated the latest financial crisis can
be traced back to Wall Street’s offshoring practices

*For every dollar of aid we send to developing countries, ten dollars
leave again by the backdoor

The offshore system sits much closer to home than the pristine tropical
islands of the popular imagination. In fact, it all starts on a tiny
island called Manhattan. In this fast paced narrative, Treasure Islands
at last explains how the system works and how it’s contributing to our
ever deepening economic divide.

Editorial Reviews

“This book is a vigorous and well researched polemic against financial
deregulation…”—Richard Cooper, Foreign Affairs

“Shaxson’s story of offshore banking is nothing short of Shakespearean,
a drama full of secrecy, treachery and corruption in which wealthy
countries, companies and individuals collude to horde wealth in a
complex global network of largely unregulated tax havens. To realize
this end, they install corrupt leaders, exploit indigenous populations
and, ultimately, deny both developed and developing nations of vital tax
dollars. There is much here that should generate outrage…An admirable
job of both arguing the consequences of offshore banking and providing a
succinct history of the practice.”--Kirkus

“A blistering account of the role that tax havens play in international
finance. . . brilliant.”—London Review of Books

“Perhaps the most important book published in the UK so far this
year.”--George Monbiot, The Guardian ...

"Treasure Islands shines the light on some very dark places. It reads
like a thriller. The shocking thing is its all true."--Richard Murphy,
co-author of Tax Havens: How Globalization Really Works

“At last, a readable – indeed gripping – book which explains the nuts
and bolts of tax havens. More importantly, it lays bare the mechanism
that financial capital has been using to stay in charge: capturing
government policy-making around the world, shaking off such irritants as
democracy and the rule of law, and making sure that suckers like you and
me pay for its operators' opulent lifestyles.”--Misha Glenny, author of
McMafia: A Journey through the Global Criminal Underworld

“Trade and investments can play a profoundly productive role on the
world economy. But so much of the capital flows that we see are
associated with money laundering, tax evasion, and the wholesale larsony
(sic) of assets often of very poor countries. These thefts are greatly
facilitated by special tax and accounting rules or designed to “attract
capital” and embodying obscure and opaque mechanisms. Shaxson does an
outstanding and socially valuable job in penetrating the impenetrable
and finds a deeply shocking world.”—Nicholas Stern, former Chief
Economist for The World Bank

“The real challenge to America’s economy comes not from China – but from
the Caymans, the Bahamas, and a whole hot-money archipelago loosely
under the control of the City of London. If only as a civics lesson,
read this astonishing book to find out the true political constitution
of the world.”-- Thomas Geoghegan, author of Were You Born on the Wrong

About the Author

Nicholas Shaxson is a journalist who has written for the Financial
Times, The Economist Group, African Energy, and the insider newsletter
Africa Confidential. He is the author of the highly acclaimed Poisoned
Wells: The Dirty Politics of African Oil and an associate fellow with
the Royal Institute of International Affairs in London.
Most Helpful Customer Reviews

56 of 61 people found the following review helpful

Brilliant exposition of an arcane topic, April 23, 2011

5.0 out of 5 stars
By Z. Cohen

Before I get into my review, I wanted to point out that for someone
without a lot of financial knowledge, this could be a very difficult
book to read. I have a college degree in accounting, did some graduate
work in tax, and worked for one of the big four accounting firms for a
year in their international tax consulting department. I quit working
for them and left the field entirely after I realized in vague
generalities what they were doing, which was one of the reasons I was so
interested in this book. The international system Shaxson describes
coincides perfectly with what I saw in the accounting firm I worked for,
and some of the specific techniques he describes correspond exactly to
the tax structures I used to see discussed in trainings and other
meetings. Given that background, I found this book incredibly engrossing
and informative, but if you have low financial literacy, you may have a
tough time with it. However, it is incredibly well written, uses a
minimum of jargon, and tries its hardest to break down complex tax and
financial concepts into lay terms.

Treasure Islands does a really incredible job in shedding light on an
arcane, complex international financial system that has evolved mainly
over the past 100 years. Like most people, when I heard the term tax
haven, I would think of a few rogue Caribbean islands who helped a few
rich people and crime lords launder money or hide it from taxation.
Shaxson turns that conception on its head. While the term tax haven
sounds like it specifically refers to taxes, Shaxon defines it more
broadly: "Tax havens can be loosely described as a jurisdiction that
seeks to attract money by offering politically stable facilities to help
people or business entities get around the laws, rules, and regulations
of jurisdictions elsewhere."

Using that definition, Shaxson aggregates the international network of
such jurisdictions under the label "the offshore system". In this book,
he investigates the three main components of the offshore system, which
may surprise you. While the small island states are integral
fortifications of the offshore system, the main poles are actually the
United States, London, and a grouping of states in continental Europe
(mainly Luxembourg, Switzerland, Lichtenstein, and the Netherlands).
Considering that about one half of world trade passes through tax
havens, they are integral to the current global system. Also, while
terrorists and crime lords are significant users of the offshore system,
the primary beneficiary and architect is the financial services
industry. The bankers on Wall Street and in London have constructed a
system to help them undermine democracy, drastically boost profits,
destabilize the global markets, shape international regulation to their
liking, and evade taxes, and this very same infrastructure enables the
financing of international terrorism, corrupt third world rulers, and
greatly facilitates the illegal drug trade. One key takeaway from the
book is that all of these phenomena have their roots in the same
underlying financial network, and none of them can be addressed without
confronting the offshore system.

The main services that tax havens provides are secrecy, tax evasion, and
freedom from unwanted regulation. A very important consequence of such a
system is the creation of a race to the bottom in terms of regulatory
environments. Shaxson examines this process both in the United States
and internationally. While the US is an international tax haven
(offering secrecy to foreign donors, allowing banks to accept proceeds
from criminal activities as long as they were committed abroad, offering
tax breaks to foreign investors), there is also a tax haven network at
the state level. States such as South Dakota and Delaware, in an effort
to attract corporations to incorporate in their states, abolished
interest rate caps, giving birth to the credit card industry in the 80s.
Delaware also has a long history of offering the most permissive rules
of corporate governance, giving maximum power to corporate managers.
Barack Obama criticized the Caymans, where he alleged that there was a
building where 12,000 corporations supposedly had business offices.
Well, there is an office building in Delaware with about 219,000.

Internationally, the offshore system allows banks to exercise this
deregulatory leverage at the national level. The city of London, which
has long maintained an extremely lax regulatory environment for
fascinating historical reasons detailed in the book, began attracting
massive amounts of business from US banks chafing under the Bretton
Woods system of capital controls and Glass Steagall regulations
separating commercial and investment banking. London had no such
controls, so US banks were able to begin doing business there and use
the threat to relocate to London to eventually force the US to
deregulate in the late 90s and 2000s. As we know, this was a crucial
development in setting the stage for the financial crisis of 2008. In
addition, the unregulated markets that were based in London allowed
banks to set up investment vehicles that were free of reserve
requirements, allowing them to issue massive amounts of debt.

A final theme discussed in the book is the devastating effects of the
offshore system on poor countries. For every one dollar of foreign aid
that has flowed into developing countries over the past 30 or so years,
TEN dollars have left the country and into the offshore system, building
the portfolios and secret accounts of corrupt ruling elites. The
offshore system creates a neocolonial dynamic where western countries
back corrupt leaders and their allies, and provide the international
financial infrastructure for these corrupt elites to steal their
country's wealth and hide it abroad, free of tax. As pernicious as that
is, the real consequence to that is that poor populations are saddled
with the debt (the proceeds of which the rulers stole), which then of
course requires the IMF to come in and radically undermine democracy by
imposing harsh structual adjustment programs that mainly benefit rich
investor countries and cause great pain to average people.

In summary, this book details the most important aspect of the global
economy that you probably never knew existed. If you are interested in
understanding poverty, inequality, development economics, international
terrorism and the drug trade, and how corporations have amassed such
great political power, you are missing a huge piece of the puzzle if you
don't read Shaxson's epic work.

5 of 5 people found the following review helpful

Important and Disturbing, August 10, 2011

5.0 out of 5 stars
By Justmine

This book is both important and disturbing. Important because it clearly
and frankly describes the reality of "offshore" banking and it's effect
on society at large. Disturbing because of the dimensions of the system
revealed and the unbridled greed of the economic elite that exploits it.
Destroys the myth that tax havens are simply wealth protection for the
few and reveals them as a massive drain on the economies of nations
large and small, rich and poor.

A must read for anyone interested in social justice or, for that matter,
their own future welfare.

7 of 8 people found the following review helpful

The full information, June 30, 2011

5.0 out of 5 stars
By A. Johnson (Fleetwood UK)

Having spent the past 30 years in campaigns against the Debt, I thought
I was pretty well informed on the machinations of international finance.
The book proved how little I really kneow. It is an absolute must read
for anybody who wishes to understand and oppose the pauperization of the
world's people

(4) Treasure Islands reviewed for LRB: many tax havens are former
British imperial outposts


Treasure Islands: Tax Havens and the Men who Stole the World

by Nicholas Shaxson

reviewed for London Review of Books by David Runciman

Bodley Head, 329 pp, £14.99, January 2011, ISBN 978 1 84792 110 9

Simon and Schuster, 368 pp, £11.50, March 2011, ISBN 978 1 4165 8870 2

[...] The essence of offshore is the need to keep up a solid appearance
of respectability, while allowing money in and out with as little fuss
as possible. Tax avoidance (unlike tax evasion) is not a clandestine
activity, and tax havens don’t exist just to enable people to squirrel
their money away from the authorities. The money needs to be accessible,
and it needs to be liquid. For that reason, people prefer tax havens
where they can conduct their business relatively openly, and the most
successful offshore jurisdictions are the ones that ask no questions but
also tell no lies. Shaxson’s memorable phrase for this is ‘theatre of
probity’. The Swiss have always been the masters, with their formal
manners and careful paperwork. But it turns out that the other champions
of this way of doing business are the British. Shaxson’s book explains
how and why London became the centre of what he calls a ‘spider’s web’
of offshore activities (and in the process such a comfortable home for
the likes of Saif Gaddafi). It is because offshore is the offshoot of an
empire in decline. It perfectly suited a country with the appearance of
grandeur and traditionally high standards, but underneath it all a reek
of desperation and the pressing need for more cash.

As Shaxson shows, many of the world’s most successful tax havens are
former or current British imperial outposts. These include Hong Kong,
the Channel Islands and remaining overseas territories like the Cayman
Islands. What such places offer are limited or non-existent tax regimes,
extremely lax regulation, weak local politics, but plenty of the
trappings of respectability and democratic accountability. Depositors
are happiest putting their money in locations that have the feel of a
major jurisdiction like Britain without actually being subject to
British rules and regulations (or British tax rates). The Caymans, or
Jersey, make full use of their British connections to reassure people
that their money is safe (the Cayman national anthem is still ‘God Save
the Queen’), but when anyone complains to the authorities back in London
that these places are being used by criminals and dictators to launder
their assets, they are told that it is no longer Britain’s role to tell
its dependencies how to run their own affairs. It was a function Hong
Kong fulfilled before its handover to China in 1997: it could be
presented to the outside world as somewhere with British values but
without its unfortunate tendency to raise either taxes or regulatory
standards in response to political pressure. Strikingly, it plays the
same role for China today. After 1997 China preserved Hong Kong as a
‘special administrative zone’ autonomous of the mainland in all matters
except foreign relations and defence. As Shaxson puts it, ‘The
resemblance with the ambiguous Britain-Jersey link, or the
Britain-Cayman arrangement, is no coincidence. Chinese elites want their
own offshore centre, complete with political control and judicial
separation.’ So offshore suits empires on the rise as well.

The other thing most of these places have in common is that they are
islands. Islands make good tax havens, and not simply because they can
cut themselves off from the demands of mainland politics. It is also
because they are often tight-knit communities, in which everyone knows
what’s going on but no one wants to speak out for fear of ostracism.
These ‘goldfish bowls’, as Shaxson calls them, suit the offshore
mindset, because they are seemingly transparent: you can see all the way
through – it’s just that when you look there’s nothing there. Jersey is
the template: a nice, genteel place, with a strong sense of civic
responsibility and plenty of opportunities for public participation,
including elections to all manner of public offices (senators, deputies,
parish constables), but weak political parties, staggered ‘general’
elections, and never a meaningful change of government. ‘If you don’t
like it, you can leave’ is the basic refrain of Jersey politics. Dissent
is not obviously suppressed, as it might be under a dictatorship (which
is why dictatorships make bad tax havens: you never know when the whole
thing is going to blow up). Instead, dissent is simply allowed to wither
away. The same thing happens on the Cayman Islands, with its tiny
population (around 55,000), its elected legislature and its
governor-general appointed from London, who takes all the difficult
decisions but allows the locals to have their say. As one former
governor-general put it, ‘I think we are in the world of semantics here.
The more Caymanians we can put in positions of power, the better; they
will act as lightning conductors for political dissent.’

This is the web, but where is the spider? At the heart of Shaxson’s
story lies the City of London, itself a kind of island within the
British state. Again, the rise of the City as the favourite place for
foreigners to park their money, no matter who they were or where it came
from, is related to imperial decline. After the Second World War,
sterling still financed much of global trade, but the British economy
was no longer able to sustain the value of the pound against the dollar.
In the aftermath of Suez, which caused a run on the pound, the
government attempted to impose curbs on the overseas lending of London’s
merchant banks. The response of the banks, with the connivance of the
Bank of England, was to shift their international lending into dollars.
The result was the creation of the so-called ‘Eurodollar market’ – which
was effectively an offshore haven. Because the trade was happening in
dollars, the British saw no need to tax or regulate it; because it was
happening in London, the Americans had no means to tax or regulate it.
Among the first people to spot the advantages of this new system were
the Soviets, who wanted a secure place outside the US to hold their
dollars so that the Americans could not seize them if relations between
the countries deteriorated. They were soon followed by the Americans
themselves – that is, American banks and wealthy individuals – who saw
the London market as somewhere to do business free from the grasping
hand of the US authorities. The money started to pile in.

The Bank of England was happy: London was once again a lynchpin of
international finance. The American authorities, unsurprisingly, were
not so happy: they feared a balance of payments crisis. But when in 1963
President Kennedy tried to stem currency outflows by taxing the interest
on foreign securities, in an effort to reduce the incentive to export
dollars to more lucrative overseas markets, it had the opposite effect,
and produced what Shaxson calls ‘a stampede for the unregulated London
offshore market, free of tax and regulations’. US policy-makers were now
in a dilemma. They could try to face down the threat of offshore, either
with higher domestic interest rates, or with tighter controls on
currency outflows and a tougher regulatory regime requiring US banks to
share information about their overseas activities. Or they could copy
London by creating an offshore world of their own closer to home: in
other words, if you can’t beat them, join them. The second was the path
of least resistance – among other things it was a useful way of
reinforcing the dollar’s position as the global reserve currency – and
over time it was the one they took. Slowly in the later 1960s and 1970s,
and then much more rapidly in the 1980s and 1990s, America deregulated
its financial controls and allowed money to move in and out with fewer
if any questions asked, in the hope that more of it would stick to the

Once this process began, it also unleashed a new wave of competition
between individual American states to offer the most hospitable, least
intrusive regulatory environment for outside companies to work in.
Leading the way was little Delaware, which had always tried to
compensate for its lack of size by being open for any business. Since
the 1980s more and more corporations have moved to Delaware to take
advantage of the state’s extreme laissez-faire attitude to the rights of
shareholders and employees against company managements. If you took your
business to Delaware (and this was often just a question of establishing
a shell office and filling in some forms), it would be much harder for
anyone to prove anything against you, because the Delaware courts did
not think that much of what you did was any of their concern. Again,
other states faced a choice: they could try to isolate Delaware by
tightening up their own standards or they could try to compete for a
share of the spoils. Enough of them decided to compete to start a race
to the bottom. Offshore had moved onshore.

When officials from Delaware toured the globe in the late 1980s
advertising their services (and hoping, among other things, to provide a
haven for all the hot money that was expected to flow out of Hong Kong
in the run-up to the handover to China), they did so under the slogan
‘Delaware can protect you from politics.’ Shaxson defines a tax haven as
‘a place that seeks to attract business by offering politically stable
facilities to help people or entities get around the rules, laws and
regulations of jurisdictions elsewhere’. But this is the crux: where is
the politics? Why aren’t these moves more politically unstable, or at
least politically contentious? In the case of Delaware, as with other
goldfish bowl communities, size probably tells (for a long time Delaware
politics was shaped by the influence of the Du Pont family, whose vast
chemical operations dominated the local economy). What, though, about
Washington, where the shift to an offshore mindset at the national level
might be expected to run up against some serious political opposition?
What happened to the representatives of all those people who don’t have
lots of money to move around, who can’t relocate even if they wanted to,
and who have an interest in a fair, open and broadly progressive tax
system? Didn’t they notice what was going on?

This is the question that Jacob Hacker and Paul Pierson tackle in
Winner-Take-All Politics. They don’t spend much time talking about
offshore, but the story they tell has striking parallels with the one
laid out by Shaxson. One of the ways you can identify an offshore
environment, according to Shaxson, is that local politics gets captured
by financial services. In that sense, Washington has gone offshore: its
politics has been captured by the interests of a narrow group of very
wealthy individuals, many of whom work in finance. For Hacker and
Pierson this, more than anything else, explains why the rich have got so
much richer over the last 30 years or so. And by the rich they don’t
mean simply the generally wealthy; they mean the super-rich. The real
beneficiaries of the explosion in income for top earners since the 1970s
has been not the top 1 per cent but the top 0.1 per cent of the general
population. Since 1974, the share of national income of the top 0.1 per
cent of Americans has grown from 2.7 to 12.3 per cent of the total, a
truly mind-boggling level of redistribution from the have-nots to the
haves. Who are these people? As Hacker and Pierson note, they are ‘not,
for the most part, superstars and celebrities in the arts, entertainment
and sports. Nor are they rentiers, living off their accumulated wealth,
as was true in the early part of the last century. A substantial
majority are company executives and managers, and a growing share of
these are financial company executives and managers.’

Hacker and Pierson believe that politics is responsible for this. It
happened because law-makers and public officials allowed it to happen,
not because international markets, or globalisation, or differentials in
education or life-chances made it inevitable. It was a choice, driven by
the pressure of lobbyists and other organisations to create an
environment much more hospitable to the needs of the very rich. It was
even so a particular kind of politics and a particular kind of choice.
It wasn’t a conspiracy, because it happened in the open. But nor was it
an explicit political movement, characterised by rallies, speeches and
electoral triumphs. It relied in large part on what Hacker and Pierson
call a process of drift: ‘systematic, prolonged failures of government
to respond to the shifting realities of a dynamic economy’. More often
than not the politicians were persuaded to do nothing, to let up on
enforcement, to look the other way, as money moved around the globe and
up to the very top of the financial chain. This chimes with what Shaxson
says about the way the offshore system was allowed to develop over the
last four decades. Here too there was no real conspiracy, because there
was no real need. Instead, it happened because ‘nobody was paying

One of Hacker and Pierson’s complaints about the way we usually regard
politics is that we miss what’s really going on by focusing on the show
of elections and the competition between parties. This is the theatre of
electoral politics, to set alongside the theatre of probity. Too often,
they say, we reduce politics to the level of sport: ‘This is no doubt
why politics as electoral spectacle is so appealing to the media: it’s
exciting and it’s simple. Aficionados can memorise the stats of their
favourite players or become experts on the great games of the past.
Everyone, however, can enjoy the gripping spectacle of two highly
motivated teams slugging it out.’

I have to plead guilty here. I have often wondered whether I am
interested in politics because I am interested in sport, and sometimes I
have felt vaguely guilty about this, suspecting it means I don’t
actually understand what’s happening. Elections are seductive, and these
days the build-up is so protracted that they can drown out the real
business of politics: the way organised groups use pressure – money,
lobbying, threats – to squeeze whichever politicians happen to be in
power, in order to influence the shaping of policy. Elections also
suggest false historical turning points. It is easy to assume that if
the rich have been winning in recent decades, the process must have
started with the election of the pro-big business, anti-big government
Ronald Reagan in 1980 (and concomitantly, Margaret Thatcher in Britain
in 1979). But Hacker and Pierson argue that the real turning point came
in 1978, during the presidency of Jimmy Carter. This was the year the
lobbyists and other organised groups who were pushing hard to relax the
burden of tax and regulation on wealthy individuals and corporate
interests discovered that no one was pushing back all that hard. Despite
Democratic control of the White House and both Houses of Congress, 1978
saw the defeat of attempts to introduce progressive tax reform and to
improve the legal position of trade unions. Instead, legislation was
passed that reduced the tax burden on corporations and increased the
burden on their employees (through a hike in the payroll tax, a
regressive measure). All this happened because the politicians followed
the path of least resistance – as elected politicians invariably do –
and the better organised and better-funded resistance came from the
representatives of big business, not organised labour.

What took place in the 1980s was therefore an extension of the Carter
years, not a reversal of them. The process of deregulation and
redistribution up the chain accelerated under Reagan, who was broadly
sympathetic to these goals. Yet it happened not because he was
sympathetic to them, but because his sympathies were allowed free rein
in a political environment where the opposition was muted and the
expected coalition of interests opposed to the changes never
materialised. After all, as Hacker and Pierson point out, Richard Nixon,
who might have been expected to share some of Reagan’s sympathies, had
gone the other way in his actual policies a decade earlier, shoring up
the legislative framework of the welfare state and maintaining a broadly
progressive tax system. (Something similar happened in Britain under
Edward Heath.) He acted like this because he felt he had little choice:
the organised pressure ready to resist change appeared much too strong.
It was only during the Carter years – and to some extent the Callaghan
years in Britain – that this pressure turned out to be weaker than
anyone thought. The politicians of the Reagan/ Thatcher revolution did
what they did not because they were committed ideologues, determined to
stick to their principles. They did it because they found they could get
away with it.

So where did the resistance go? This is the real puzzle, and Hacker and
Pierson take it seriously because they take democracy seriously, despite
its unhealthy fixation on elections. Democracies are meant to favour the
interests of the many over those of the few. As Hacker and Pierson put
it, ‘Democracy may not be good at a lot of things. But one thing it is
supposed to be good at is responding to problems that affect broad
majorities.’ Did the majority not actually mind that they were losing
out for the sake of the super-rich elite? In the American case, one
common view is that the voters allowed it to happen because they minded
more about other things: religion, culture, abortion, guns etc. The
assumption is that many ordinary Americans have signed a kind of
Faustian pact with the Republican Party, in which the rich get the money
and the poor get support for the cultural values they care about. Hacker
and Pierson reject this view, and not just because they don’t think the
process they describe depends on there being a Republican in the White
House: they see strong evidence that the American public do still want a
fairer tax system and do still see it as the job of politicians to
protect their interests against the interests of high finance. The
problem is that the public simply don’t know what the politicians are up
to. They are not properly informed about how the rules have been
steadily changed to their disadvantage. ‘Americans are no less
egalitarian when it comes to their vision of an ideal world,’ Hacker and
Pierson write. ‘But they are much less accurate when it comes to their
vision of the real world.’

Why is no one paying attention? Perhaps it’s the fault of the internet,
which is making it increasingly hard for anyone to focus on anything for
long. Yet it is striking that Hacker and Pierson’s argument is really a
return to a much longer-standing critique of democracy, one that
flourished during the 1920s and 1930s but was supplanted in the postwar
period by expectations of rational behaviour on the part of voters. This
traditional critique does not see the weakness of democracy as a matter
of the voters wanting the wrong things, or not really knowing what they
want. They know what they want but they don’t know how to get it. It’s
because they don’t understand the world they live in that democracy
isn’t working. People aren’t stupid, but when it comes to politics they
are ignorant, lazy and easily satisfied with pat answers to difficult
questions. Hacker and Pierson recognise that it has become bad manners
to point this out even in serious political discourse. But it remains
the truth. ‘Most citizens pay very little attention to politics, and it
shows. To call their knowledge of even the most elementary facts about
the political system shaky would be generous.’ The traditional solution
to this problem was to supplement the ignorance of the voters with
guidance from experts, who would reform the system in the voters’ best
interests. The difficulty is that the more the experts take charge, the
less incentive there is for the voters to inform themselves about what’s
going on. This is what Hacker and Pierson call the catch-22 of
democratic politics: in order to combat what’s taking place under the
voters’ radar it’s necessary to continue the fight under the voters’
radar. The best hope is that eventually the public might wake up to what
is going on and join in. But that will take time. As Hacker and Pierson
admit, ‘Political reformers will need to mobilise for the long haul.’

Yet time may be one of the things that the reformers do not have on
their side. As Shaxson points out in his account of the rise of the tax
havens, one of the reasons for the drift towards deregulation is that
politics has been too slow to resist it. This, again, is one of the
traditional critiques of democracy: while decent-minded democrats are
organising themselves to make the world a better place, the world has
moved on. In a fast-moving financial environment, it is usually easier
to assemble a coalition of interests in favour of relaxing the rules
than one in favour of tightening them. Similarly, it’s easier not to
enforce the rules you have than to enforce them: non-enforcement is the
work of a moment – all you have to do is turn a blind eye – whereas
enforcement is a slow and laborious process. Shaxson, like everyone
else, is torn. On the one hand, he thinks the key to resisting the rise
of offshore is a more transparent system, based on what he calls
‘automatic information exchange on a multilateral basis’. This is the
equivalent of putting the experts in charge. On the other hand, he wants
national governments to be more active, dynamic, responsive to the
interests of their citizens. But a speeded-up national politics may go
against the international co-ordination needed for a fully transparent
system. If you reawaken democratic politics at the national level, it
will by definition be harder to co-ordinate it at the international
level. This is the catch-22 of globalisation.

Shaxson illustrates the problem at the end of his book, where he lists
his proposals for changing the culture of offshore. One example he gives
of how it can be done comes from the United States, where in 2001
Congress finally passed stronger anti-money laundering legislation and
clamped down on the spread of offshore shell banks, which hide behind
nominees and trustees so no one knows who their real owners are. But the
date is important: these measures were included in the Patriot Act, and
the reason they were passed was that national politics had been woken up
by 9/11. Yet no one could argue that the ultimate consequences either of
that act or the vitality of American politics in the aftermath of 9/11
was a better integrated, more transparent world. Another of Shaxson’s
demands is that governments do more to keep money onshore. One of the
drivers of the offshore world is what he calls the ‘tides of looted or
tainted oil money [that] sluice into the offshore system, distorting the
global economy in the process’. One radical solution is to get a
country’s mineral windfalls out of the hands of a few super-wealthy
individuals and into the hands of ordinary citizens, by redistributing
the money directly to every inhabitant. This may sound unrealistic but
such schemes have been implemented in a few places, including Alaska.
However, Shaxson doesn’t see fit to tell us the name of the politician
who spread the wealth there: it was Sarah Palin. So yes, dynamic,
quick-thinking democratic politicians can make a difference, but no, it
doesn’t follow that greater understanding between nations will be the
result. These two brilliant books are right to suggest that politics is
the answer. Still, politics is also, as always, part of the problem. or
rights and issues enquiries.

(5) Buy Treasure Islands from Amazon USA, Amazon UK, or Abebooks

Norte that the US & UK editions have different names.

UK edition:
Treasure Islands: Tax Havens and the Men who Stole the World [Paperback]:

US edition:
Treasure Islands: Uncovering the Damage of Offshore Banking and Tax
Havens [Hardcover]:

Buy via Abebooks:

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