The Closed-Door, Multitrillion-Dollar Chess Game

How the U.S.-UK “special relationship” extends to hiding wealth.

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One of the most inescapable realities of modern times is just how many people don’t bother paying their taxes anymore. 

For financial services providers living in tax havens like the Caymans, the Bahamas, Luxembourg, or Switzerland, keeping up with ever-changing tax rules is essential to maintaining a steady supply of well-heeled clientele, which, very importantly, includes multinational companies. It is also crucial to their survival, if they want to foster prosperous economies.

But what of the role of countries such as the U.S. and UK, which are both sponsors – and beneficiaries – of tax havens? They have many times acknowledged the problem, yet seem to have done vexingly little to rectify it. 

According to Tax Justice Network, a London-based tax advocacy group, this is by design. It turns out the U.S.-UK special relationship extends to concealing trillions of dollars of wealth, with the U.S. the “biggest loser” and the UK the single “biggest facilitator,” in shifting monies away from American coffers, out of sight, to far-flung secrecy jurisdictions.

When the U.S. gets into scrapes over the debt ceiling and deficit-spending and falls into political dysfunction that threatens the global economy, this taxation situation matters. When America’s credit rating gets downgraded by both Standard and Poor’s (during the 2011 debt-ceiling battle) and Fitch Ratings (this past week), due to what Fitch called the “a high and growing general government debt burden and the erosion of governance,” it also matters. 

Yet both the U.S. and UK have, in effect, been paying lip service to voters, while perpetuating the problem behind closed doors, to the enrichment of countless wealthy individuals and multinational companies, says Alex Cobham, economist and chief executive of Tax Justice Network. The siphoning of funds, he tells Power Corridor, is not only hurting the richest nations in the world by widening an already appalling wealth gap, it is causing untold harm to smaller nations who cannot afford to hemorrhage so much money. 

“Almost everyone is losing out due to tax abuse, but there is very little will to fix it, or visibility of what is going on, let alone resources to rein it in,” Cobham says. “When you think about somewhere like the Caymans, yes, it exists on UK territory, but it only operates the way it does because the U.S. condones it, along with global financial markets and Wall Street. This is happening because multinational companies and some of the most powerful countries in the world are fine with it – what does that tell you? Yet what they are doing is socially damaging and they should stop.”

Among the biggest tax havens of the British Empire are the Caribbean territories of Bermuda, the Caymans and the British Virgin Islands, and UK Crown Dependencies such as Jersey and Guernsey in the Channel Islands. 

Collectively, these jurisdictions house trillions of dollars of wealth, holding the funds offshore and away from the long arms of governments. While the exact figures are hotly debated – the Tax Justice Network estimates up to $4.7 trillion could be lost over the next decade due to tax havens, while other tax experts say it’s less – it is largely undisputed that the UK and its network of satellite tax havens are the world’s biggest enablers of global tax abuse.

As reported by Power Corridor in the run-up to King Charles III’s coronation this spring, the Tax Justice Network urged him to crack down on the tax havens within his realm, noting that the Crown dependencies and British overseas territories were “responsible for facilitating nearly 40 percent of the tax revenue losses that countries around the world suffer annually” due to profit-shifting by major corporations and “offshore tax evasion by primarily wealthy and powerful individuals.”

But tax-dodging by elites and illicit financial flows continue apace, with pressures increasing on both the Organization for Economic Cooperation and Development (OECD) and the United Nations to step up their efforts. 

The Tax Justice Network is calling on countries to move the conversation on global tax reforms from the OECD, a club of rich nations that has established global tax rules for the past 60 years, to the U.N., where it hopes countries might hash out a global tax convention.

“We’re on the cusp of a global democratic revolution in tax that could reclaim literally trillions of dollars in public money,” Cobham said in a statement last week. “For 60 years, global tax rules were decided behind closed doors at the OECD where a handful of countries and lobbyists saw tax policy as something to cater to the interests of the wealthiest corporations and billionaires. We now have a real shot at bringing this process into the daylight of democracy at the U.N., where all countries will finally get a real say and where governments will finally have to answer to their people on tax policy.”

The U.N. Secretary General is expected to present a report this September in New York on proposed options for a U.N. tax convention that the U.N. General Assembly will be able to debate, according to the Tax Justice Network. A resolution is expected by the end of the year on whether to proceed with negotiating a global tax framework, Cobham said.

John Chistensen, co-founder of the Tax Justice Network and chair of the organization until 2021, says after years of working with both the OECD and the U.N., he believes the OECD has the best expertise to solve the global tax problem. “I don’t see the U.N. being able to take on this role,” he tells Power Corridor, “whereas the OECD has extraordinary tax expertise and is making real progress.” 

Chistensen, who currently serves on the governance board of a joint cooperative agreement between the U.N. Development Program and OECD called Tax Inspectors Without Borders, says the two groups have been “marvelously successful” at working together to help developing nations retain and recover tax revenue. “It’s a great way to help developing countries, but from a policymaking perspective, I don’t think the U.N. will be able to get countries past the broader tax stalemate,” he says. 

What to do? Christensen says the global conversation needs to shift to taxing wealth, not just the earnings of the working class. 

“People have accumulated extraordinary wealth in recent years,” he says. “Taxation is hitting working class people hard, but it’s not hitting the wealthy, who can game the system and minimize their income and maximize their capital gains, and that applies to the U.S. as much as to the UK and Europe. It requires us to shift our emphasis to wealth taxes, but this hasn’t been discussed for decades.” 

By wealth, Christensen means capital gains, funds held in tax havens and other valuable assets. “If you’ve got millions offshore, then we need to impose a tax on it. When people have more than $5 million of assets, whether it’s gold or whatever, we should impose a tax. In the best of all worlds, we’d have a global tax authority, like the World Trade Organization, but we don’t have that,” he says.

America’s next presidential election will have an outsized role to play, as whichever party wins the White House – and Congress – will have the strongest sway over the fate of Donald Trump’s tax cuts, which are set to expire in 2025. 

The next slate of American elections also will impact international efforts to curb profit-shifting by multinational companies, as the OECD works to roll out a 15 percent global minimum tax agreed in 2021 by nearly 140 jurisdictions and brokered, in part, by U.S. Treasury Secretary Janet Yellen.

The minimum tax would allow governments to tax corporations based on where their goods and services are sold, rather than where they are “headquartered” to keep companies from arbitraging among the secrecy jurisdictions for the lowest tax rate – which, most agree, has become a race to the bottom.

The U.S. agreed to the minimum tax agreement, but the Biden administration failed to get Congress to rubber-stamp the deal last year – even with Democrats controlling both houses – and, with Republicans now controlling the House, progress has stalled.

Republicans have made no secret that they are furious about the OECD tax agreement, claiming that Yellen negotiated the terms unconstitutionally. In late July, George Callas, a former senior tax counsel to the House Republicans steamed on Twitter, “An American executive branch colluded with foreign governments to pressure the American legislative branch to raise taxes on American companies.”

As other countries forge ahead with the tax agreement, the U.S. stands to lose as much as $122 billion in revenue over a decade, according to the nonpartisan Joint Committee on Taxation.  

In light of the fact the U.S. is losing so much to the UK and other secrecy jurisdictions, why doesn’t it do more to stop it? Christensen, who was the former economic adviser to the tax haven of Jersey before co-founding the Tax Justice Network, says he believes the relationship between the U.S. and UK is just too lucrative to lose for the world’s wealthiest.

“The fact is, it is a very happy, symbiotic relationship, with lots of U.S. banks established in UK territory and the Channel islands,” he says. “They lose a great deal of tax revenue, but with the elites benefiting from it, they are incentivized not to do anything about it.”

As long as it remains de rigueur for banks, asset managers, hedge funds and multinational companies to rely on tax havens to minimize tax and maximize profit, the tax burden will continue to fall to those who can least afford to shoulder it. “We’ll know we’ve won the battle when basing your company in a tax haven starts to become anachronistic,” Cobham says.