Financial Transparency Coalition

Joshua Keating posted some excellent information over at Foreign Policy today:

Research from Niels Johannesen of the University of Copenhagen and Gabriel Zucman of the Paris School of Economics looks at the result ofinternational agreements taken to prevent tax evasion in the wake of the global financial crisis. The results are not very encouraging for reformers:

First, treaties have had a statistically significant but quite modest impact on bank deposits in tax havens: a treaty between say France and Switzerland causes an approximately 11% decline in the Swiss deposits held by Frenchresidents. Second, and more importantly, the treaties signed by tax havens have not triggered significant repatriations of funds, but rather a relocation of deposits between tax havens. We observe this pattern in the aggregate data: the global value of deposits in havens remains the same two years after the start of the crackdown, but the havens that have signed many treaties have lost deposits at the expense of those that have signedfew. We also observe this pattern in the bilateral panel regressions: after say France and Switzerland sign a treaty, French deposits increase in havens that have no treaty with France.

Johannesen and Zucman suggests their finding lend support to a “big bang” multilateral agreement on tax havens rather than an incremental approach, though it seems like it would be nearly impossible to wrangle an agreement big enough to make a difference.

I think that Keating is underselling a couple of things here. First, we’ve seen very few meaningful treaties signed to combat tax evasion through tax havens in recent years.  The treaty signed between France and Switzerland did not include automatic exchange of tax information or FATCA-like information exchange, so we shouldn’t expect much progress to follow it. The truth is that the aforementioned crackdown has largely been political, rather than substantive, up to this point.

But political change is a real kind of change, and we’re looking closer to substantive policy change every day. When the G20 Finance Ministers start talking about automatic information exchange being the new global standard, they are at least talking about  a “big bang” multilateral agreement. The ten EU nations, led by the UK, who have decided to start a multilateral convention for FATCA-style automatic information exchange are very clearly labeling their efforts a pilot program. We don’t know how far they are planning to extend it, but it certain looks like a potential blueprint for a worldwide system.

The US has demonstrated with FATCA, particularly in Switzerland, that developed countries hold a great deal of leverage over banks in tax havens. Incentives are clearly aligned to use that leverage, as those same developed countries want to be able to fight tax evasion and the erosion of their tax base. A deal can get done here at the G8/G20 levels. Once a multilateral convention becomes the norm for a critical number of large, important economies, compliance with it will become necessary for any large jurisdiction to do business.

Keating’s reference to the whack-a-mole problem of tax havens, where illicit money is caught up in a never-ending race to the bottom and flight to secrecy, is a smart one. We’re not going to make meaningful impacts until we prevent a great deal more secrecy jurisdictions from allowing money to be hidden inside their borders. But this kind of policy change is not impossible, and indeed may be moving substantially as we speak.