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Tax havens and Currency Speculation
#1
TAX HAVENS AND CURRENCY SPECULATION
http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=4491
November 20, 2009


Sony Kapoor is the Managing Director of Re-Define (Rethinking Development, Finance & Environment), an international Think Tank promoting financial system reform. A prominent expert on international finance and development, he started his career in investment banking and derivative trading. In 2003 he quit to work on reforming the financial system and promoting international development. Kapoor has been a leading advocate for debt cancellation, action against tax havens, and promoting innovative sources of financing. He is a key adviser to several governments, international agencies, political parties, unions, and NGOs on helping shape a more progressive society. Kapoor has worked in a policy advisory and strategy consulting capacity for international organizations such as the World Bank, UN, and UNDP, international NGOs such as Oxfam, and Christian Aid, financial institutions such as the Industrial Credit and Investment Corporation of India, and Lehman Brothers, and governments including that of Norway. He has studied at the prestigious Indian Institute of Technology, University of Delhi and the London School of Economics.
Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay, coming to you today from Washington. Ignacio Ramonet, the editor of the French magazine Le Monde Diplomatique, wrote these words: "The globalization of investment capital is causing universal insecurity. It makes a mockery of national boundaries and diminishes the power of states to uphold democracy and guarantee the wealth and prosperity of their peoples." He went on to recommend this: "The time has surely come to put a stop to these destructive movements of capital. There are three ways to tackle the problem: close down the 'tax havens', increase tax on unearned income, and levy a tax on financial transactions." These proposals aren't, I don't think, original from Ramonet, but it's very interesting that these recommendations of Ramonet were written in 1997. Of course, they could have been written yesterday. Now joining us in Washington is Sony Kapoor. Sony is the managing director of Re-Define, Rethinking Development, Finance & Environment, an international think tank promoting financial system reform, and he used to be an inmate of Lehman Brothers and worked on Wall Street in some of the other institutions. Thanks for joining us, Sony.

SONY KAPOOR, MANAGING DIRECTOR, RE-DEFINE: Thank you for having me.

JAY: And congratulations for escaping the asylum. Sony, the NGO you work for is fighting for reforms more or less precisely like these. Ramonet talks about this in 1997, as did others. Tell us about why these proposals are important.

KAPOOR: The financial crisis has had several strong impacts. And we know we see unemployment as a very visible aspect, etc. But the biggest impact is around distribution, which is that every time a crisis happens, those who already do not have enough, who are at the margins of society, suffer disproportionately and suffer the most. And as we are seeing, for example, in the case of Goldman Sachs and bonuses, those who have benefited from the booms are actually less likely to lose from the busts. And what a crisis like the current one we are having does is it reinforces inequality. And, of course, those who miss out and lose out during the crisis, those lives in the developing world that get lost, those people are not going to come back alive. The people who get fired and lose their jobs are going to get traumatized. The people who are having physiological, psychological impacts because of the crisis and the insecurities are going to bear them out for the rest of their lives. So think of it as strong policy needs from a social perspective. The first idea around the Tobin tax, or financial transaction tax, is extremely important for three reasons. The first is that the crisis has imposed thousands of dollars of debt and taxpayer liabilities on all of us, most of us who actually were not complicit in the crisis. And a very critical need, to get out of the crisis and to make sure it doesn't happen again, is to make sure that the costs of the crisis are recovered, at least in part, from the finance sector and imposing a tax on financial transactions, which is an extension, a broadening of the Tobin tax idea, which was only taxes on currency markets. But extending it to taxes on bond transactions and derivatives transactions and share transactions is a very important way of trying to raise money to recover some of the costs of the crisis from those who have actually brought us here, which is the finance industry.

JAY: In an interview series we just are publishing with Jane D'Arista, she explained one of the forms this speculation takes place, which was, for example, you could go and buy yen for one point and come to the United States and buy T-bills and earn three or four points on what you had just turned around and borrowed. And I assume one of the reasons for the Tobin tax is, if you could tax that kind of speculation, you could almost tax it out of existence in the sense if you tax it enough, you could stop this kind of currency speculation.

KAPOOR: That is theoretically possible, of course. And Brazil has just imposed 2 percent tax on investment flows going into Brazil, because it is finding that the currency is being inflated and its trade is suffering exactly because people are borrowing at a low cost in the dollar and trying to invest in these assets. This is the so-called carry trade. But the level of tax that is being discussed in general, for example, as proposed by Prime Minister Brown of the United Kingdom, is a much lower one, and its impact would be to discourage this kind of carry trade or speculation, but it will not actually wipe it out. And so there is different reasons for trying to implement such a tax. If your primary objective is to kill this carry trade, you need to implement a much higher rate of tax, of the order of 1 or 2 or even 3 percent or something.

JAY: This would give states at least a mechanism—even if it started low, you would have—at least the instrument would be there to raise it if they found it necessary, which is, I suppose, why the finance sector doesn't want it at all.

KAPOOR: That is a very strong reason. People think that there is an idea that policymakers want to go in under the radar screen, and that gives them an additional policy tool, at a time when, for example, a currency is under attack or there is this carry trade happening, to try and increase the rate. It is much simpler to do that once you have the infrastructure in place. So even if you had a tax of 0.01 percent, which is one of the numbers that is being talked about, it's much easier to increase it to 1 or 2 percent if there is a potential problem.

JAY: As we go through these different proposals, I think it's going to be rather obvious these are kind of no-brainers. They're so obvious it would be good for the majority of people. I guess it all comes back down to what the real political power is and the dynamics of trying to get something in the public interest passed. But let's go further. Let's go on to one of the other recommendations in the importance—. Tax havens is something you've been working on. And how big a problem is that?

KAPOOR: It's very serious, not just in terms of the distribution, where the people who are at the margins of society, the people who get salaries, the workers, are forced to pay their fair share of tax, whereas those who actually—.

JAY: That's because it's taken right out of their paycheck through source deductions.

KAPOOR: Exactly. So they have no choice but to pay their full share, whereas those who can make most of their money through capital gains, the unearned incomes, those who make most of their money through corporate income, etc., are much—and those who earn a lot of money have tools at their disposal which allows them to use tax havens and international finance arbitrage to avoid most of their tax burden. So what it does is the existence of tax havens significantly makes the tax system far less equal, far less fair than it would otherwise be.

JAY: We've heard some people suggest that it could be as much as a third of the world economy or capital flows are actually offshore, unregulated, going through these tax havens. Do you think it's that big a number?

KAPOOR: I think that's about a fair estimate of that kind of flows. Yes, absolutely, I think that's an accurate number.

JAY: We know from people that have worked on Wall Street that many of them, when they get started there, they're actually recommended by their firms to open up bank accounts in the Cayman Islands, and that this offshore banking is just a part of the culture of Wall Street. Is that true?

KAPOOR: Absolutely. And there have been several instances in the past where, for example, bonuses have been paid in the form of vintage wine bottles or in the form of shares in offshore companies or loans in fast-depreciating currencies like the Turkish lira, low-interest loans in those currencies, which are all ways of using tax havens to avoid the taxation on bonuses. So it's not just that they get these inflated, massive bonuses which pose a risk to the rest of society, but also that they don't even then pay their fair share of tax on those bonuses. So it's a double problem. But the biggest problem with tax havens is not the taxes that people are able to avoid at an individual level; it's what it does to the structure of financial institutions. So if you look at Citicorp and if you look at some of the other large banks and financial institutions, they have hundreds of subsidiaries. Citicorp has something like 2,400, and many more special purpose vehicles, so-called special-purpose vehicles, which are all located more or less in tax havens. And the reason is that these are not just tax havens; they're also regulatory havens. It's not just that the tax rate is low or nonexistent, but also that the regulation—financial regulation, capital adequacy, etc.—requirements are much weaker.

JAY: We have an example of that in—McClatchy Newspapers did an investigative piece on Goldman Sachs and the real estate boondoggles, and they broke down one deal that Goldman ran through the Cayman Islands at essentially $2 billion packages of mortgages, which go not just, as you say, untaxed, but there's—not that there was much regulation in the US anyway, but there was zero regulation in the Cayman Islands when it came to what really made up that mortgage package.

KAPOOR: Absolutely. So it's extremely critical, this issue of tax havens, not just from a fairness perspective, not just from the perspective of trying to balance the books of the United States government and not have a massive fiscal deficit, but extremely crucial to the whole discussion on financial stability. The existence of these tax and regulatory havens allows risks to build up unseen and allows financial institutions to have too little capital and earn inflated profits, while at the same time imposing risks of potential failure on the rest of society. And, again, when trouble happens, as it has now with the financial crisis, the taxpayers, the small, little people who actually get their taxes deducted when they get their salary checks, are the ones who are liable. So this tax-haven discussion is crucial to the whole regulatory agenda.

JAY: It's an excellent gamble the finance sector plays: heads we win; tails you lose. The issue of the rate of taxation is also something Ramonet raises, that unearned income does not get taxed at the same level of earned income. So not only do ordinary people get taxed at source at a relatively higher rate for earned income, but people making these kinds of speculations actually have a lower tax rate on the consequences of it. Can you talk a bit about that?

KAPOOR: Absolutely. There has been a big discussion, for example, in the field of private equity where, if I remember right, both private equity chief in the United Kingdom as well as Warren Buffett have said something to the effect of, in a world where the cleaners in the office or the office assistant pays a higher rate of tax than I do, that world is not sustainable. And that goes right to the heart of the problem. What you have is society somehow, by having capital gains taxes much lower than income taxes, is passing a judgment that it's much better to sit on your proverbial butt and have inherited wealth or invest passively, and then you only pay a 10, 15 percent tax, than if you are slogging it day in, day out, in a car, factory floor, working, sweating it out, working eight-, ten-hour days, earning very little money, in which case your tax rate effectively is much higher. There is also a financial stability element to this, which is one very large part of banking business has been trying to convert income into capital gains so as to lower the rate of taxation. And what this does is it creates a very strong incentive for banks to put more money into assets, which inflates asset prices, for example the property bubble, etc. And if you sell your house, the tax rate that you pay on the profit is much lower than if you earn the same amount of money if you were working on a factory floor. And what that does is it causes a very strong asset price bubble, which actually leads to financial instability.

JAY: So three recommendations are pretty straightforward: tax these international speculative transactions; two, tax unearned income, at the very least at the level of earned income; three, close down tax havens. Now, it all seems rather obvious. So in the next segment of our interview, let's talk about why it's not being done. Please join us for the second segment of our interview with Sony Kapoor.

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