Summary
Important: Tax havens are a $500B/year opportunity due to lost tax revenue. At least $5B/year is available for developing countries. In comparison, the world spends $2.7B/year on malaria control and eradication.
Neglected: The tax justice movement spends $100-200M/year; comparable to the World Wildlife Fund. Tax Justice Network's budget is under $2M/year.
Tractable: In the past 20 years, the OECD has partially implemented reporting and accounting standards to monitor and disclose tax haven activities. Full implementation has investor support. Before the pandemic, a majority of the public in Canada, US, and UK strongly approved of curbing tax havens. A UN Tax Convention covering tax havens is within reach.
Fit: Tax justice is a good fit for EAs concerned about inequality, comfortable with lower-quality evidence than RCTs (i.e. economic data) and interested in post-graduate studies in economics, accounting, law or international policy.
Recommendation: Tax Justice Network is a highly effective charity: consider donating. Tax justice is possibly a top career choice: consider exploring.
I'm particularly grateful to Hauke Hillebrandt for the inspiration, encouragement and not-too-brutal feedback. Most of the good ideas are probably his; all the mediocre ideas are definitely mine.
Here, I present a shallow review of tax havens. Tax havens are defined as "typically small, well-governed states that impose low or zero tax rates on foreign investors."[1] For the sake of brevity, I will defer illicit financial flows to a subsequent article.
1. Importance
Tax havens contain around $12T -- roughly 10% of global financial wealth[2]. They cost governments worldwide at least $500B/year in lost tax revenue[3]. They are extensively used by the rich and powerful as individuals, as part of corporate structures and via legal structures such as trusts. The Panama Papers and Paradise Papers data leaks and investigations confirmed the extent of their use.
How much of the $500B/year would accrue to developing countries?[4]
A very conservative estimate for India is $3B/year or an additional 1% of tax revenues; a similarly conservative figure for sub-Saharan Africa would be $4-6B/year[5]– roughly twice the total spent by all parties on malaria control and eradication.[6]
2. Neglectedness
Although tax havens feature in the press, books and even a 2019 film starring Meryl Streep, there are only a handful of tax justice NGOs operating with limited budgets which severely constrain their efforts.[7]
Tax Justice Network (TJN), founded in 2003, focuses on international taxation. Their aim is for governments in developing countries to deliver public services themselves without external debt — and external aid.
Except for GiveWell, tax havens, tax justice and domestic resource mobilization[8] have received minimal attention by the EA community:
- 2 EA Forum posts in 2015 and 2016 discuss tax havens
- An article on 80,000 Hours from 2016 mentions tax havens
- An interview on 80,000 Hours from 2018 briefly touches on tax havens
- Chapter 7, “Effective Altruism, Global Poverty, and Systemic Change” of Effective Altruism: Philosophical Issues (2019) discusses tax justice
- A Centre for Effective Altruism article from 2019 discusses tax revenues and domestic resource mobilization
Main points from these articles and interviews:
- Tax havens deprive developing countries of tax revenue for infrastructure, health and education.[9]
- The impacts of tax havens are misunderstood and misrepresented by blaming multinationals for domestic problems in developing countries.[10]
- Tax havens contribute to an unhealthy tax avoidance arms race.[11]
- More scrutiny should be paid to tax havens due to the flows of money out of developing countries into tax havens.[12]
- Tax justice is an example of “missing middle” systemic change: between low value/high confidence charities recommended by GiveWell and high value/low confidence longtermism (existential risk, AI).[13]
- Tax revenue is empowering to local decision-makers since they can spend the money on their own priorities.[14]
GiveWell interviewed Tax Justice Network in 2017 and 2019. Key highlights include:
- The impact of tax havens on developing countries like Kenya's tax revenue is net negative.[15]
- When a developing country's tax-to-GDP ratio rises above 15%, it passes a tipping point and can progress to middle-income status
- Public health spending financed by taxes is more effective and inclusive than aid-financed public health
- Effective taxation fosters accountable government. Citizens demand a higher level of effectiveness when government is primarily funded by their taxes instead of by natural resource wealth, aid or borrowing.[16]
Additional indicators:
- the Our World in Data page on Taxation does not mention tax havens
- the tax justice community has funding somewhere in the order of $100-200M/year[17] -- an amount comparable to individual, in-kind and other donations to the World Wildlife Fund [18]
- TJN's income is tiny: $1.7M in 2018.
3. Tractability
Tax havens have existed for at least 85 years; legislation built and can dismantle them. For example, in 1976, the US granted the manufacturing sector in Puerto Rico special tax haven status. In 1996, the US initiated a 10-year phaseout of this special status.
In the past 20 years, research into tax havens and tax justice has surged:
Source: Google Scholar[19]
Tax Justice Network has started changing the narrative on tax havens. For example, in 2007, with help from TJN, The Guardian published the first major story on multinational tax avoidance: the banana industry used tax havens to split taxes in both producing and consuming countries by half[20].
The tax justice community has pursued several policies:
- Automatic Exchange of Information
- Ultimate Beneficial Ownership
- Country-by-Country Reporting
Automatic Exchange of Information (AEOI)
Historically, jurisdictions were required to ask for tax information on a case-by-case basis. In 2007, TJN recommended AEOI to the UN[21]. To date, the OECD Common Reporting Standard has implemented partial AEOI: access to tax haven jurisdictions, such as Cayman Islands, is available for developed countries, but access for developing countries is limited. Countries can pick and choose which jurisdictions can access their tax data. Filling this gap with a UN Tax Convention is tractable[22].
Ultimate Beneficial Ownership
Disclosure of the real people behind companies and trusts is vital to curbing corruption and illicit financial flows. Tax havens inhibit transparency since ownership can be layered across numerous companies and trusts in various jurisdictions. Without knowing who the real owners and decision-makers are AEOI is less useful. I'll cover transparency and illicit financial flows in an upcoming article.
Country-by-Country Reporting (CbCR)
Under CbCR, multinational enterprises disclose key data such as sales, expenses, profits (before tax), tax accrued/paid, tangible assets and number of employees for every country in which they operate. When CbCR was recommended as an accounting standard by a TJN co-founder in 2003, the request seemed intractable.[23]
As of 2015, the OECD implemented CbCR for disclosure to tax authorities.[24] The EU went a step further and mandated public disclosure for large banks. Thanks to CbCR, more data is available to understand tax havens and evaluate tax justice[25]. There is more work to be done: CbCR data (GRI Standard 207-4)[26] should be public for all multinationals. Industry groups, professional service firms and multinationals themselves are dragging their feet:
Source: Tax Justice Network[27]
Future plans include:
- Using CbCR data to test the Finance Curse hypothesis: finance is a necessary element of an economy, but when it becomes central to an economy, such as a tax haven, it harms the overall economy.
- Build consensus on competition: real competition focuses on the best public services and infrastructure. Tax/regulatory competition damages both “winners” and losers and distorts real market competition.
- Change the story: replace “tax incentives are important for investment and growth” with “tax incentives distort markets impairing investment and growth”.[28]
TJN has inspired many key organizations in the broader tax justice movement:
- TJN Africa – a research and advocacy organization focused on Africa
- Global Alliance for Tax Justice (GATJ) – an advocacy organization
- Finance Uncovered – a media training organization
- Tax Inspectors Without Borders – an OECD/UNDP partnership to train and support tax inspectors in developing countries
Public polling shows strong support for curbing tax havens:
Sources: Environics Research (Canada 2017)[29], Christian Aid (UK 2017)[30], Hart Research Associates (USA 2013)[31]
Governments such as France, Denmark and Poland have banned firms with offshore tax havens from Covid-19 bailout funds[32]. Tax havens and tax justice will likely be very tractable during the on-going crisis and prolonged recovery. As stated by the UN Secretary-General, “A global consensus to end tax havens is essential.”[33]
4. Fit
Tax Justice is a good fit for EAs concerned about inequality, comfortable with lower-quality evidence than RCTs (i.e. economic data) and interested in post-graduate studies in economics, accounting, law or international policy.
5. Objections
Distraction
Tax havens are a distraction. The real issue is tax reform via simplification and base-broadening; however, this is politically difficult due to subsidies, concessions and complexity. In a similar vein, taxing land value and consumption avoids tax haven issues.
Response: As discussed above, the tax justice community is engaged in simplification and base-broadening efforts, such as AEOI and CbCR. In developing countries, direct taxes, such as property tax, are slightly preferable for more public health spending than indirect taxes, such as consumption.[34] Tax havens can be somewhat of a distraction – as I will address in future, legitimate uses hide illicit financial flows.
Developing Countries
Tax havens are necessary structures in encouraging investment in developing countries[35]. Similarly, problems in developing countries are domestic, not a result of multinationals using tax havens.
Response: Agreed -- developing countries need to build both legal and tax system capacity. Development Financing Institutes and other investors require developing countries to honour and enforce contracts and to refrain from arbitrary seizure of assets. Although many problems are domestic, multinationals must demonstrate they are truly delivering value and not simply extracting it. AEOI and CbCR help in this equation; likely, tackling illicit financial flows helps even more.
US Participation
Tax havens are an international issue. As seen with climate change, meaningful progress depends on US participation.
Response: Clearly, meaningful progress on tax havens is more difficult without US participation. Action on climate change, such as renewable energy, shows local and regional health and economic benefits absent US participation. Similarly, individual countries and blocs can still benefit from tax justice initiatives without the US.
Growth
Tax havens promote economic growth in high-tax countries, especially those located near tax havens. US multinationals' use of tax havens shifts tax revenue from foreign governments to the US by reducing the foreign tax credits they claim against US tax payable. As a result of the 1996 Puerto Rico tax haven phaseout mentioned above, employment by affected firms dropped not just in Puerto Rico, but in the US as a whole; affected firms reduced investment globally.[36]
Response: If curbing tax havens reduces growth and taxes in developed countries for the benefit of developing countries, that is likely a trade-off many EAs would be willing to make (see below). Abbott Laboratories and other multinationals affected by the Puerto Rico phaseout may have reduced global investment, but increased investment and jobs in developing countries such as India. Given that US dollars go a lot further in less developed countries, a reduction in global investment by specific firms could also reflect better value for money.
Government Spending/Incentives
Governments such as the US would spend extra revenue poorly. In contrast, billionaires have funded causes that have saved millions of lives[37]; thanks to tax-free investment growth inside tax havens, they have more money to donate to effective causes. Tax havens prevent governments from over-reaching on taxes to fund unproductive and counterproductive initiatives, such as military adventures. Higher taxes on the rich are also bad for economic incentives.
Response: As noted above, curbing tax havens may reduce government revenue in developed countries. Even if that is not true, democratic governments can use additional revenues from curbing tax havens to reduce other taxes or pay towards the costs of Covid-19 and the economic recovery. Higher taxes on the rich may reduce incentives, but may increase overall utility. Besides, the real beneficiaries of tax havens are the providers of professional and financial services and not investors who originally became rich from productive activity.
6. Conclusion
Even without delving into the role tax havens play in illicit financial flows, their value is questionable. Tax Justice Network is laying the foundation for developing countries to become self-sufficient. Based on their work on tax havens alone, TJN is a highly-effective charity. Once we consider their role in curbing illicit financial flows, we may see TJN rise to a top charity for poverty alleviation and governance.
Working on tax justice could be a top career – stay tuned!
Finally, increased tax revenue might increase funding for education and health, reduce inequality, stabilize society and thereby reduce risks from emerging technology. Interestingly, better taxation (i.e. curbing tax avoidance) might be a special case where higher taxation might actually increase growth. This is because if only some corporations are avoiding taxes (especially tech companies, which can more easily shift profits) while others are not, they have a distortionary disadvantage, which is economically inefficient.
7. Acknowledgments
Hauke Hillebrandt; Aaron Gertler; Rob Wiblin; Brandon Shumway; weeatquince; Mercer Shavelson; David Lawrence.
Colin, Rob, Giles, Daniel, Sebastian and all the other wonderful people of EA Toronto.
8. Further Reading
Short Articles
Covid-19 and the fight against tax havens: Opportunities and risks for developing countries
Uganda Case Study: Harnessing Domestic Resources through Improved Tax Compliance by Multinational Companies
Enhancing Domestic Resource Mobilization: What are the Real Obstacles?
Long Reads
Can Stopping 'Tax Dodging' by Multinational Enterprises Close the Gap in Finance for Development?
Why Development Finance Institutions Use Tax Havens
Tax Justice Network Annual Report 2018 (PDF)
An informal history of TJN and the tax justice movement
9. Notes
[1] Hines Jr. et al. (2016). "Multinational Firms and Tax Havens". The Review of Economics and Statistics. 98 (4): 713–727.
[2] Damgaard, Piercing the Veil
[3] Shaxson, Tackling Tax Havens
[4] Forstater, Exaggerating Multinational Tax Avoidance Does Not Help Africa
[5] In Exaggerating Multinational Tax Avoidance Does Not Help Africa, the TWZ method used gross surplus of all foreign firms of $15/capita for India resulting in potential additional tax revenues of $2/capita or $3B (presumably with a 10-15% tax differential). Using World Bank 2018 data, sub-Saharan Africa had a gross surplus of $50B ($45/capita) resulting in potential additional tax revenues of $5/capita or $6B. Tax systems in sub-Saharan Africa are possibly less efficient than India, so the rough estimate of $4-6B has been used.
[6] WHO, Malaria: Key facts, "Total funding for malaria control and elimination reached an estimated US$2.7 billion in 2018."
[7] Gabriel and McElwee, "Effective Altruism, Global Poverty, and Systemic Change" in Effective Altruism: Philosophical Issues, ed. Greaves and Pummer (OUP, 2019), 120.
[8] USAID, Domestic Resource Mobilization: DRM does not necessarily mean new taxes or higher tax rates. Governments often see their revenues rise though improved audits or simplified filing processes. Successful DRM programs are highly cost-effective; they return many times what is invested in them. One analysis showed revenue increases amounting to $20 or more for every assistance dollar invested.
[9] Wiblin, Should effective altruists work on taxation of the very rich?
[10] Hillebrandt, Some objections and counter arguments against global poverty/health interventions
[11] Wiblin, What are the 10 most harmful jobs?
[12] Wiblin and Harris, A year’s worth of education for under a dollar and other ‘best buys’ in development, from the UK aid agency’s Chief Economist
[13] Gabriel and McElwee, "Effective Altruism, Global Poverty, and Systemic Change", 123
[14] Zwane, Using Evidence for Smart Impact Investing
[15] Rosenberg, A conversation with Alex Cobham, July 14, 2017
[16] Snowden, A conversation with Alex Cobham and Will Snell, March 22, 2019
[17] Large NGOs active in tax justice such as Oxfam, Action Aid and Christian Aid have total budgets above $1.5B/year. Only a small portion (less than $100M/year) is spent on tax justice. Smaller NGOs such as TJN, Transparency International and Global Witness have total budgets around $100M/year and spend a larger portion (25-100% each) on tax justice.
[18] WWF, Financial Info lists $120M in individual donations and $81M in-kind and other donations for FY19.
[19] More general search terms, "tax" and "economics", are relatively stable over the same period.
[20] Lawrence and Griffiths, Revealed: how multinational companies avoid the taxman
[21] UN, Report of the Expert Group Meeting on “Tax Aspects of Domestic Resource Mobilisation – A Discussion of Enduring and Emerging Issues”
[22] Cobham, A UN Tax Convention – then a U-turn
[23] Murphy and AABA, A Proposed International Accounting Standard - Reporting Turnover and Tax by Location
[24] BEPS (Base Erosion and Profit Shifting) Action 13
[25] For example, see Bouvatier and Delatte, Banks in Tax Havens: First Evidence based on Country-by-Country Reporting
[26] GRI, New Reporting Standard GRI 207: Tax 2019
[27] Cobham, Investors demand OECD tax transparency
[28] TJN, Strategy 2018-2021
[29] Environics Research, Nine Out Of Ten Canadians Think It’s Morally Wrong For Canadian Corporations To Use Tax Havens: New Poll
[30] Pegg, Tax avoidance by big firms is morally wrong, say nine out of 10 in UK
[31] Hart Research Associates, Study #10840 Tax Reform Survey
[32] Bostock, France is barring firms registered in offshore tax havens from its government coronavirus bailout, following similar bans in Denmark and Poland
[33] Guterres, Tackling Inequality: A New Social Contract for a New Era
[34] Carter and Cobham, Are taxes good for your health?
[35] Carter, Why Development Finance Institutions Use Tax Havens
[36] Suárez Serrato, Unintended Consequences of Eliminating Tax Havens
[37] Alexander, Against Against Billionaire Philanthropy
Thanks for the effort that went into this post. However, I thought there was a conspicuous lack of any discussion of Optimal Taxation Theory.
Quoting from Mankiw's excellent review article, we can see why this part of economics is highly relevant to the issue: it is directly concerned with what type of tax system maximises utility:
I'm not sure I could put it better than he does, so I hope you forgive the repeated quotations. One of the main findings of this field is that taxes on capital should be zero:
Why? There are several reasons, and I encourage you to read the whole article, but the third justification he lists should be especially appealing to longtermist EAs: capital taxation reduces investment, which makes everyone poorer in the long run: even those who do not own any capital.
There has been a lot of work on the subject since then - for example here and here - but I think of Chamley-Judd as being a core result that the rest of the field is responding to. Some find that capital taxes should be positive or high, and some find that they should be negative - that we should subsidise investment - but the negative effects of capital taxes on investment, growth and aggregate welfare is clearly an important topic that can not be dispensed with without comment!
The above is concerned with capital taxation, but corporate taxes specifically are I think even worse. They essentially function as capital taxation, but typically allow interest expense to be deducted, hence distorting financing decisions away from equity and towards debt - contributing to systemic risk. (This problem was partly addressed in the US by the 2017 tax reform). To the extent that they only apply to legal corporations, and not other types of entity, they also distort organisational choice, which is also bad.
As a result, it seems that corporate taxes are harmful, and it would be better for the world (and the long term future) if they did not exist. Unfortunately they do exist - probably due to exactly the problems with institutional decision making that longtermist EAs are concerned about (e.g. short planning horizons, high discount rates, and capture by special interests). Fortunately, international tax competition provides something of a remedy, by encouraging countries to lower their corporate taxes to closer to the ideal level. Contra your suggestion that it 'damages both "winners" and losers', it acts as a beneficial check on the ability of countries to institute harmful policies. We should be supporting tax havens and praising their effects, not seeking to destroy them.
Despite having a section on 'Objections', the article does not really address this argument. You do sort of get at this issue here:
But the response misses the point:
Getting rid of tax havens degrades our ability to resist arbitrary seizure of assets. This is no small deal - many of the worst disasters in history have been intimately tied with governments' seizures of assets and resultant damage to productive capacity. If we get rid of one check on this problem, we should have something else in place that can serve a similar job. The mere threat of losing access to financial markets for a while is insufficient. There are possible alternatives - once upon a time the west used gunboat diplomacy to this effect - but we should not remove our current solution without first instigating a new one.
Indeed, I think this article actually showcases the problem to a small degree. You write:
It is true that current investments, if subject to a higher level of taxation, would lead to higher tax revenues for governments (in the short run). But these investments were made by individuals and companies who were expecting to pay lower taxes! If taxes had been higher, fewer of these investments would have been made. To point out now that there is a lot of capital out there that could be taxed more if we changed the rules is precisely the sort of ex post asset seizure that people are worried about.
This section also sort of hints at the problem:
But again the response misunderstands:
The problem is not so much that getting rid of tax havens will reduce investment in the west specifically, but that this will result in a global increase in effective tax rates, and as such will reduce investment globally.
Thank you!
Mankiw's review article on Optimal Taxation Theory is really great. This is exactly why EA needs more economists.
I find this intriguing:
Does "utility" as used by economists diverge in important ways from "utilitarianism" as used by moral philosophers? If the social planner optimizes for minimal negative utility, I assume that could change the optimal tax structure.
In the Mankiw article, the first justification of Capital Income Ought To Be Untaxed seems clear:
However, I'm not sure if capital income and capital equipment are interchangeable concepts. Perhaps they are.
The second justification seems a bit murkier:
I'm not clear how that logic would be different if applied to labour. Probably I need to read more about this to fully understand it. I assume the idea is I can reinvest capital income into more capital, but I can't reinvest labour income into more labour. The article mentions "human capital", so maybe I can reinvest my labour income into "human capital" such as education.
Finally, the third justification:
Has the premise:
I'm not sure how realistic it is for households to have an infinite planning horizon. Moreover, it seems undesirable and dangerous to optimize for what could potentially be a totalitarian dynasty. Perhaps I'm misunderstanding the argument here.
The Mankiw article made me curious:
The article raises democratic legitimacy as an important constraint:
Optimal Taxation Theory contains some really interesting ideas. Tax policy, in general, seems like a neglected area of EA.
Hey Alex, excellent post.
Two caveats:
(1) You said
And then
I think there is a part missing in the middle, because I couldn't find an argument why TJN is a good place to donate except this part,
which doesn't strike me as a strong reason. Maybe I missed something?
(2) Did you make the table that ranks the interventions. (AEOI, UBO, CbCR)? If yes, can you provide details on the methodology?
Thanks Sami!
Sorry, I should have been a bit clearer on this -- TJN is central to the tax justice community. The policies mentioned would have considerably less traction without TJN:
Organizations focused on developing countries wouldn't have been created (or created as soon) without TJN:
I attempted to answer "what would they do with additional funding?" in the future plans section. Concepts like Optimal Tax Theory (thank you again Larks!) are key to advancing the discussion, “tax incentives are important for investment and growth” versus “tax incentives distort markets impairing investment and growth”.
Hauke suggested building an expected value model of think tank funding. For example, how much would it cost to have a 10% chance of recouping 20% of the $5B/year in lost tax revenue? I haven't had a chance to do that yet, but if you (or anyone else) has interest in helping to build that, please message me.
I did, but the methodology was not very rigorous. After I finish with illicit financial flows, I'll revisit it properly.
Just wanted to flag a new development on the topic: it looks like US Treasury Secretary Janet Yellen is pushing for a global minimum corporate tax, which might be another good solution to the problem!
The international minimum corporate tax rate got finalised last month! After only 28 years of discussion.
https://www.oecd.org/newsroom/130-countries-and-jurisdictions-join-bold-new-framework-for-international-tax-reform.htm
Thank you! That sounds very encouraging. The exact details will be very important.
There a problem with your importance metric - the importance of malaria funding should be measured not by how much it costs but by how much good it does. $1B of malaria funding is much more important than $1B of , right? If we imagine that all the raised revenue gets used for fighting malaria, then it makes sense, but of course that is not a realistic assumption.
I think that raising tax revenue for the US (and maybe some other countries) is not as important as it seems at first glance due to our flexibility with the Federal Reserve and record low interest rates, allowing us to take out a lot of debt or print money.
But within the sphere of tax policy, I weakly feel that cracking down on tax avoidance and evasion (both tax havens, and domestic stuff like increasing IRS auditing) is the best I/N/T combination, as opposed to conventional tax policy issues like changing tax rates or considering wealth taxes/VATs/etc. It would be nice to look at this more carefully, seeing which reforms seem harder/easier and comparing how much revenue they would raise. But even if this kind of tax reform is not the easiest path for raising revenue, it may still be best due to the secondary benefits for fairness and law-and-order.
Anyway, good post. Thanks for the contribution.
There seems to be something wrong with your footnotes formatting. They all direct me to create a new post on the EA forum, as opposed to linking to the bottom of the page. E.g. `https://forum.effectivealtruism.org/newPost#sdendnote3sym`
Yes, sorry, I messed them up.