The Internal Revenue Service and Congress have tried to convince the public that it is illegal to use non-U.S. banks and that tax havens are used by terrorists for money laundering. But in the past half-dozen years, repeated studies have shown that tax havens are not a source or destination of criminal or terrorist money. Independent studies by the U.S. State Department, the CIA and the IRS conclude that dirty money is most likely laundered in high-tax nations because bad people have found that money crossing a border increases probability of detection. The International Monetary Fund (IMF) estimates $600 billion is laundered globally each year – half within the U.S. – with $60 billion of it being drug money. The U.S. Treasury estimates that 99.9% of criminal money is laundered successfully. The U.S. Treasury also believes that all other Organisation for Economic Co-operation and Development (OECD) nations have an equivalently poor record of catching illicit transactions. So the IMF recently announced a project to assist nations in upgrading money-laundering laws. The U.S. is the number-one target, not the low-tax jurisdictions that are the common targets of politicians. As we learn in the next few paragraphs, demagoguery against tax havens took a new twist when some Senators found that American corporations use offshore banks extensively and earn approximately a third of profits in low-tax jurisdictions.
Senator Carl Levin (D-Mich.), with co-sponsors Barack Obama (D-Ill.) and Norman Coleman (R-Minn.), introduced S.681, The Stop Tax Haven Abuse Act. House companion-bill H.R.2136 is in the hopper from Congressman Lloyd Doggett (D-Texas), co-sponsored by 42 Democrats. These bills would change U.S. tax law to deter Americans from investing in low-tax nations described as “secrecy jurisdictions,” blacklisting states like Singapore and Hong Kong – two of the richest states on Earth – and authorizing sanctions on jurisdictions that do not change their privacy and tax laws to facilitate extraterritorial enforcement of U.S. tax laws.
A separate pending bill from Senator Byron Dorgan (D-N.D.), co-sponsored by Senators Levin and Diane Feinstein (D-Calif.), creates a blacklist of 40 nations and territories that must comply with U.S. desires that corporate profits be treated as U.S. source income. Levin implied in press releases (heavily laced with negative terms like schemes, secrecy, shrouded financial dealings and stiffing Uncle Sam) that U.S. tax revenues would increase $100 billion due to his legal genius. But he did not say that this legislation violates World Trade Organization rules, to which the U.S. is signatory. Mr. Levin also overlooked the Congressional Research Service estimate of a $40-$70 billion loss. This legislation would establish legal presumptions against validity of transactions involving offshore secrecy jurisdictions, impose restrictions on foreign jurisdictions, increase the IRS period for review of U.S. tax returns, require banks to report private information about owners of offshore bank accounts and disallow tax-advisor opinions validating transactions in offshore jurisdictions.
The arrogance of members proposing these changes, in addition to havoc created by such ill-advised intrusions, certainly highlights why public approval of Congress is at an all-time low. It is a well-established principle in U.S. law that tax evasion is illegal and that tax avoidance is legal. Attempts to criminalize cited tax-avoidance methods define a formula for many national problems. Members of the House and Senate that represent this readership should be contacted to urge them to kill these bad ideas.
Tax havens exist worldwide, and 60-90 nations participate in offshore banking. The U.S. State Department lists 52 regimes in this category, including the United States itself. Every day about 750,000 transactions occur involving about $2 trillion. The laws where these venues exist are constantly changing, so it is vital to oppose changes that hinder tax competition. This past January, for example, then-French President Jacques Chirac tried to cut corporate tax rates from 33% to 20% and to as low as 10% for some sectors, directly violating an OECD initiative to target low tax havens, a move Chirac previously led. History shows that regardless of fluctuations between nations in tax laws, corporate tax collections in OECD nations as a proportion of GDP have remained stable over the past decade at 3% (while money laundering is about the same at 3% of world GDP). In fact, a 2006 study by scholars at the University of Michigan and Harvard Business School has found that tax havens actually boost economic activity in nearby non-havens. Is it not curious that there are 1.1 million offshore banks and companies with U.S. participation but only 6,000 American taxpayers claim on tax returns to have offshore accounts?
Thinking about all this makes me believe that it is piggy politicians who want to squeeze the jelly bag one more time.IH