Piketty Crossing the Delaware
Like lots of other readers of Thomas Piketty’s Capital, my big concern is not with the accuracy of the diagnosis and prognosis but with the feasibility of the prescription. Piketty’s proposal for a global wealth tax requires an end to the capacity of capital to escape taxation by exploiting the limitations of national taxations system, through tax havens, transfer pricing, artificial corporate structures and so on.
Given the limited record of success in past efforts to control global tax evasion and avoidance, Piketty is reasonably pessimistic about efforts in this direction. But the latest news from the OECD is remarkably positive. All members of the OECD (notably including evader-friendly jurisdictions like Austria, Luxembourg and Switzerland) have agreed to a system of automatic information exchange for tax purposes. Moreover, the “too big to jail” status of major banks engaged in facilitating tax evasion and money laundering, may finally be coming to an end.
On the face of it, the oft-repeated, but so far unjustified claim that “the days of tax havens are over“, may finally be coming true, at least for all but the wealthiest individuals. But the crackdown on individual tax evaders only points up the ease with which corporations (and individuals with the means to establish complex corporate structures) can avoid tax through a mixture of legal avoidance and unprovable evasion (for example, by illegal but unprovable internal transfers).
At the core of the problem is the ability to establish corporations in ways that make their true ownership impossible to trace. And, the jurisdiction most responsible for this is not a Caribbean island or European mini-state, but the “First State” of the US – Delaware, which has long been the preferred location for US incorporation by reason of its business friendly laws.
For a long while, most reference to Delaware as a tax haven came in the form of a tu quoque from the pro-haven side of the debate. Since any challenge to Delaware’s role in the corporate sector seemed unthinkable, it was argued, any US criticism of Switzerland or Luxembourg was mere hypocrisy. The same point was made about the UK and France, with reference to their various offshore dependencies (the Channel Islands, Caymans and so on). But now the argument has turned around. As the various tax havens have fallen into line with OECD agreements and US legislation like the Foreign Account Tax Compliance Act (FATCA), they now have an incentive to turn attention on to Delaware. Having a corporation registered in Delaware is starting to look somewhat like possession of a Swiss bank account: not necessarily illegal or even improper, but certainly something that arouses suspicion. Here are a few straws in the wind
* A New York Times story on corruption and money laundering in Europe gives a prominent mention to the role of “US states like Delaware and Wyoming”. There’s an internal link to an Op-Ed I’d missed, entitled “Delaware: Den of Thieves?”
* In the course of the recent election campaign in Quebec, a prominent supporter of the Parti Quebecois was attacked for apparently owning companies registered in Delaware
* US Senator Carl Levin’s long-stalled attempts to bring in a “Stop Tax Haven Abuse Act” is restarting, including a focus on Delaware shell corporations. It’s unlikely that this will pass any time soon, but it’s still an encouraging development.
None of this would have much impact on the really big tax dodgers, like Apple and Google. But even here, things are moving. The era of untraceable and untaxable capital movements may come to an end sooner than we expect.