[amazon_link id=”0099541726″ target=”_blank” ]Treasure Islands[/amazon_link] – it sounds rather upbeat and enticing, but the subtitle of this bestseller by Nicholas Shaxson sets us right: Tax Havens and the Men Who Stole the World. It was published last year but I’ve just read the paperback. The central message of the book is this:

“The offshore world is not a bunch of independent states exercising their sovereign rights to set laws and tax systems as they see fit. It is a set of networks of power and influence controlled by the world’s major powers, notably Britain and the United States.” (p20)

The book sets out to establish this claim by describing the evolution of tax havens ranging from the Turks and Caicos or Caymans to Jersey, Hong Kong, Switzerland, Liechtenstein, and the US and UK themselves. It links the development of offshore finance such as the Eurobond market with the arms race towards ever-lower corporate tax rates and financial secrecy. There is an impressive amount of detail in the book. Personally, I would have preferred footnotes that did not rely so heavily on secondary sources, other books about this subject, and there is the odd tendentious assertion that strays away from the factual into the political, which weakens the impact. Having said that, I don’t want to quibble with the details.

The reason is that for many years, since I wrote a couple of chapters in Sex, Drugs and Economics (pdf file) about the illicit underground economy, the scale of this activity has appalled me. But so too has the fact that it is never discussed – with a few exceptions such as Misha Glenny’s [amazon_link id=”0099481251″ target=”_blank” ]McMafia: Seriously Organised Crime[/amazon_link]. One missing dimension from Treasure Islands is that it never quite makes the link between the large-scale global economic activity of major criminals (be they Latin American or Afghani drugs firms or the Russian or Italian mafias) and the “offshore” finance industry.

Because the criminal multinationals are operating at such a scale that, even though suitcases stuffed with large-denomination bills still abound (as Dave Birch has repeatedly pointed out, see this for example), they must as a matter of logic be accessing the formal financial system as well. From time to time the authorities force banks to freeze the assets of a particularly dreadful dictator, but most of the time the anti-money laundering rules merely stop unemployed people from opening bank accounts. They do not seem sufficiently powerful to stop funds from multinational criminals and tax evaders and avoiders finding their way into the formal financial system.

‘Offshore’ also helps explain the downward ratchet in corporate taxation (although there are other contributing factors). We are often told that corporate taxes must be kept low because capital is so mobile and will go elsewhere otherwise. The ‘elsewhere’ it will go is offshore – just look at the structure of holding companies in the Virgin Islands, Bahamas and so on set out in the accounts of virtually all major listed companies. That this kind of tax reducing structure has become so much taken for granted was illuminated when Barclays recently expressed just mild surprise that the Treasury was going to prevent its avoidance of £500m in tax.

So although I would take issue with some of the arguments in Treasure Islands, including its portrayal of the Bank of England, I applaud the way it speaks out about these matters. Immoral globalisation is driving out the potential benefits of actual economic globalisation. There is a deeper problem, too. Legitimate governments need to retain their monopoly on violence, in order to provide an ordered society ruled by law, with a high level of trust and economic transactions underpinned by enforcable contracts. They are losing this: power follows money, and it is being enforced by violence that is a challenge to democratic states. I wish more people would talk about this.

[amazon_image id=”0099541726″ link=”true” target=”_blank” size=”medium” ]Treasure Islands: Tax Havens and the Men who Stole the World[/amazon_image]