Tax havens and Corruption You Can Count On

August 2nd, 2010

From the Tax Justice Blog:

François Valérian, the head of private sector programmes at Transparency International (TI) in Berlin, has an excellent article on the Financial Task Force blog taking to task a recent story in the Wall Street Journal entitled Corruption You Can Count On. (We can’t find the WSJ story anywhere for now; will bring you a link when we can – though the WSJ isn’t alone in making these points, so it’s worth addressing.)

Valérian is writing mostly about bribery and TJN has had its disagreements in the past with TI over definitions and scope of corruption – see here, for instance. But what this article makes clear to us is how similar our concerns about secrecy jurisdictions/tax havens are, at heart, to those of TI.

One of the pro-corruption arguments goes like this, as Valérian puts it:

“Corruption may be a way to circumvent bureaucratic inefficiencies, and to set a business or export goods more quickly, if not to simply survive like in the former USSR.”

This is analogous to an argument routinely put forward by tax havens: that these places serve as useful platforms that allow businesses bypass the “inefficiencies” of dealing with mainstream nation states. Valérian rightly points out why the WSJ argument is bogus as regards bribery.

“Circumventing bureaucracy is clearly a powerful motive for corruption, but it is obvious that any individual paying a bribe does so in order to gain profit from that payment. It is therefore not enough to say that corruption brings benefits to the bribe-payer; we have to ponder the respective merits, for the general population, of a system plagued by corruption. . . . in the title of the WSJ article, “Corruption You Can Count On”, the You certainly does not refer to the local population, but rather to some, not all, foreign investors.

Well said. Now let’s unpack the word “inefficiencies” that we used above. What that word means, from the point of view of the user of the bribe-giver (sorry, user of tax havens) is a set of things – notably tax, financial regulations and transparency. Democratic nation states put all of these things in place for very good reasons. “Inefficiency” for the business in question absolutely does not mean inefficiency for the system as a whole. And this point is underlined by what Valérian says next:

“A dynamic business person may find a civil servant inefficient because his application for a license is subject to extensive analysis, whereas a parliamentarian will find the same civil servant efficient on the same subject because of the time devoted to considerations of law compliance and public good.”

Indeed. Now let’s repeat Valérian’s sentence above that almost word for word, but replacing a couple of key words (in italics).

“Circumventing bureaucracy is clearly a powerful motive for using secrecy jurisdictions, but it is obvious that any individual using a secrecy jurisdiction does so in order to gain profit from that payment. It is therefore not enough to say that using secrecy jurisdictions brings benefits to the user; we have to ponder the respective merits, for the general population, of a system plagued by offshore abuse, and of a system with reduced or minimal offshore abuse.”

TI and TJN are talking, at heart, about the same thing, but from different angles. In February 2007 TJN wrote a long series of blogs reacting to a survey of tax havens by the pro-offshore magazine The Economist, in which we noted the corruption analogy directly:

“The survey argues that tax havens make tax havens wealthy (and make nearby economies wealthy too,) and concludes that tax havens must therefore be a good thing. . . . The Economist’s argument is analogous to an argument that presents the evidence of private jets, yachts and palaces owned by a rich dictator and his cronies and their families, and uses that evidence to argue that corruption must therefore be a good thing.”

Read Valerian’s article in full – it’s worth it. He concludes:

“There is no good corruption.”

Indeed. For those interested in TJN’s approach to viewing corruption differently, see our corruption page, or our long article in The American Interest, co-authored by Raymond Baker of Global Financial Integrity.

Written by Nicholas Shaxson

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