By Richard Wolff
“Hiding money in the ways and amounts lately revealed by the International Consortium of Investigative Reporters is a deep kind of social corruption,” writes Wolff. “It goes beyond questions of legality to the heart of modern political economy.”
[Photo: Jason Unbound / Flickr.]
Recent revelations of hidden money by the International Consortium of Investigative Reporters (ICIR) have embarrassed governments, large and small, and exposed many rich businesses and individuals. They used places like Lichtenstein, the British Virgin Islands, the Cayman Islands, Switzerland and, of course, Cyprus. Those countries’ private banks wanted the money much as their governments wanted the revenue benefits of hidden money inflows. The rich around the world took advantage of those banks’ services to launder money with some illegality attached to it, to evade or avoid taxes, to hide business deals from government scrutiny, and so on.
Reasonable estimates, based on ICIR and other reports, suggest that many trillions of dollars sit in such hidden money accounts. It follows that debates in most countries about rates of taxation are missing the point. Many among the rich long ago found ways to avoid taxes, whatever the rates. They just needed and used that one “loophole” in the tax law that allows them to hide their money (or “offshore” it) in either personal or corporate accounts or both.
By these means – eagerly abetted by banks competing for their lucrative business – many of the rich avoid whatever taxes the people in their countries of origin tried to impose. How progressive can a tax system actually be when the upper echelons can and do hide so much money from tax authorities? Moreover, so many competing countries and banks and so many easy ways to hide money provide incentives for illegal money-making. Laundering money to cover up its illegal origins has long been so very easy to do.
ICIR’s recent exposés have also shown that not only little countries and their local banks launder tainted money and facilitate tax avoidance schemes. Major money-center banks have recently paid huge fines when caught doing such things. Many of the corporations chartered to do financial business in places like the Cayman Islands turn out to be local subsidiaries of money center banks seeking to “service high net worth clients with special needs.”
Hidden money represents the old problem of private financial behavior that deprives societies of tax revenues they need while encouraging and abetting illegality. We could try some new laws and impose some new regulations. That was done often in the past when similar revelations provoked action. Yet we know the inevitable result. The rich seeking to escape taxation and the rich criminals seeking to skirt legality will pay well for the best minds (lawyers, accountants, financial advisors, etc.) to devise ways around new laws and regulations. They have done so repeatedly, successfully and often quickly.
One logical solution would be to change any economic system that confers on the top 1-5% such inordinate wealth and income that they can easily afford the expensive professionals usually required to “legally” evade the taxes everyone else pays. With a far less unequal distribution of wealth and income, we would not depend upon or even need the absurd, repetitive theater in which governmental regulation is established, then evaded; new regulation is imposed, then circumvented – and so on. Moreover, consider the huge deficit-reducing potential: With significantly less income and wealth inequality, tax evasion schemes would be less affordable and attractive to more people, resulting in higher tax revenues, while regulation and enforcement costs for the IRS would correspondingly drop.
Another logical solution would be to socialize banking, at least the biggest, money-center banks. Given the already highly developed internationalization of those banks, this would be an international socialization. It would parallel the international efforts to confront another set of problems confronting the world, namely environmental degradation. Major private money-center big banks would become owned and operated by agents directly responsible to political leaders. Their activities would have to become publicly transparent. As state institutions, such socialized banks would have no interest in (and be strictly prohibited from) practices that deprived the state of its proper tax revenues. Because European and US money-center banks are so large, if socialized they could easily “persuade” big banks elsewhere to join for fear of otherwise being boycotted by the socialized combination of dominant European and US banks. Such a solution would win the support, now, of clear majorities of people in many parts of the world. They blame the financial industry – and big banks in particular – for much of the crisis as well as the subsequent bailouts (for the banks) and governments’ austerity policies (for the people).
Hiding money in foreign accounts to escape detection and/or taxation has become a routine “financial strategy” for many of the richest people and businesses in the world. Partly protected by special legislation and partly by the refusal of compromised officials to investigate or prosecute, the hiding of money has deprived most countries of huge amounts of desperately needed tax revenues that could have helped their economies grow while lowering their national debts. The heads of the worlds major banks – those who demanded and got trillion dollar bailouts and who now demand austerity programs to balance government budgets – preside over institutions that make money helping the rich escape taxation.
Hiding money in the ways and amounts lately revealed by the ICIR is a deep kind of social corruption. It goes beyond questions of legality to the heart of modern political economy. Capitalism is a system that fosters deepening economic inequality inside most nations across the world today – unless and until popular revulsion and counter-movements stop or undo that deepening. After a certain point, the inequality provokes and enables the super rich to further expand – in a Midas-like frenzy – their already prodigious wealth. Laws become mere obstacles they have the money to evade, rather than binding social agreements. Then deep corruption sets in. The ICIR report and documents make us all see the gory details of the vast holdings of hidden money. The real question is whether the people hurt by this behavior will change the system that promotes and rewards it.
Richard D. Wolff is Professor of Economics Emeritus, University of Massachusetts, Amherst where he taught economics from 1973 to 2008. He is currently a Visiting Professor in the Graduate Program in International Affairs of the New School University, New York City. He also teaches classes regularly at the Brecht Forum in Manhattan. Earlier he taught economics at Yale University (1967-1969) and at the City College of the City University of New York (1969-1973). In 1994, he was a Visiting Professor of Economics at the University of Paris (France), I (Sorbonne). His work is available at rdwolff.com and at democracyatwork.info.