The Pandora Papers is a leak of almost 12 million documents that exposes the hidden wealth of politicians, businessmen, artists, sports figures, members of royal families, religious leaders from more than 200 countries. In this note,the author, a Marxist economist working in Argentina, presents data (mainly taken from IMF publications) on these offshore accounts, and draws some conclusions. This article appeared originally on the author’s blog (https://rolandoastarita.blog) and was re-published in Correspondencia de Prensa. Translation by International Socialism Project.
Some data on tax havens
In 2019, the global gross product was $87 trillion. The amount of private wealth hidden in offshore financial centers was $7 trillion, or 8 percent of global product. Other estimates raised it to $8.7 trillion, which would represent 10 percent of the product. With a significant degree of concentration: 80 percent of these funds belonged to the richest 0.1 percent of households. In many countries this accumulated wealth represents a considerable part of national product. In 2017 it was estimated to be more than 30 percent of the GDP of Argentina and Greece; more than 40 percent of the product of Russia; more than 50 percent of that of Saudi Arabia; more than 60 percent of the product of Venezuela; and more than 70 percent of that of the United Arab Emirates. These are funds that escape tax authorities, and alsoescape financial or exchange regulations.
Or it is money laundered from illicit operations—trafficking in arms, people, drugs, corruption. For example, the IMF estimates that between $1.5-2 trillion in bribes changes hands every year.
As for the wealth held by multinational corporations and major financiers in tax havens, in 2018, it was estimated at about $12 trillion. This represented 40 percent of all global foreign direct investment. The phenomenon is global. In India, China and Brazil between 50 percent and 90 percent of out-bound foreign direct investment is through foreign shell companies. Between 50 percent and 60 percent in developed countries such as the USA and Great Britain.
This is phantom financial investment, most of which is made through tax havens, and goes to so-called “special purpose vehicles.” These institutions have legal registration subject to national law. They are owned by foreigners; have few employees; little or no production in the host country; and group financial or holding activities as their core business. Since the 2008-9 financial crisis, phantom investment has been growing at a higher rate than genuine FDI (foreign direct investment) and overall output.
We stress that the money is not necessarily placed in the country that functions as a tax haven. That is, a company based in a tax haven can have assets anywhere in the world. On the other hand, what appears as foreign direct investment in tax haven countries has no counterpart in real productive investment. For example, Luxembourg is a tax haven. It has 600,000 inhabitants and a foreign direct investment of $4 trillion. That amount equals that of the US and is greater than that of China. But this FDI does not reflect any productive investment in Luxembourg.
It is also noteworthy that the tax havens that concentrate the largest volumes of wealth are located in developed countries or in their territories. The first three are the Virgin Islands, Bermuda and Cayman Islands, all British overseas territories. Switzerland and the U.S. collect the most private wealth. Also, Luxembourg, already mentioned, and the Netherlands. Half of the Fortune 500 corporations (ranking of the world’s top 500 companies measured by revenue) isthought to use the Netherlands as a tax haven. Singapore, Macau and Hong Kong are also tax havens. In recent years, funds there have grown, while those in Switzerland have declined.
Annual losses in terms of corporate tax revenues range between $500 billion and $600 billion. Of this amount, some $200 billion would belong to underdeveloped countries. The dynamics: the growth of tax havens has contributed to the fall in average corporate tax rates from 49 percent in 1985 to 24 percent today. The profits of U.S. multinational corporations going to tax havens increased from an estimated 5-10 percent of gross profits in the 1990s to between 25-30 percent today.
Since the tax system tends to focus on multinationals’ headquarters, and since thoseare located in advanced countries, underdeveloped countries are the ones that suffer the most from tax evasion.
But multinationals can also manipulate “transfer prices” between their subsidiaries, so transferring profits from high-tax jurisdictions to low-tax jurisdictions. In theory transfer prices should reflect the market prices that would exist between two unrelated participants. But this is difficult to implement in practice.There are multiple loopholes to circumvent this, and the value ends up being what the company says it is.
Internationalization of financial and money capital
These developments are part of the internationalization of capital, in which multinationals, large financial institutions and states participate.
In the latter respect, sovereign wealth funds, or state funds, are illustrative. At the beginning of 2020, the 10 largest ones held wealth of $7.44 trillion. The largest, Norway’s Norges Bank Investment Management, held $1.365 trillion. A significant portion of these funds’ holdings is located in other countries.
These are therefore long-term phenomena, linked to the globalization of capitalist relations. It is not something that stems from corruption of some or many capitalists, or even to neoliberalism. That is why it also includes states and governments that claim to be “national” and even enemies of globalization.
It is within this framework that corruption, tax evasion or the laundering of illicit money should be understood. In Value, World Market and Globalization, we wrote: “Already in the mid-1970s Palloix argued that the internationalization of the money capital cycle (D-M-D’) was manifested in the growth of international financing and loans in dollars; in the growth of foreign banking activity; in the international mobilization of money capital and in the banking support for multinational companies. That is, he did not conceive the growth of international finance capital as an autonomous phenomenon, but organically linked to the internationalization of capital as a whole.”
On the other hand, periods of weak investment, a product of crises and a surplus of capital (capital gains that do not return to production and seek financial valorization) fed the growth of foreign debt, opening up of markets, and the transnational flows of liquid capital. This deepened capitalist relations and extended them to non-capitalist zones, with the imposition of the logic of capital accumulation on growing masses of wage earners. We emphasize that the growth of offshore funds, and the like, is part of the same process. The program and politics of socialism must start from these realities to offer a progressive alternative to the working masses.
Rolando Astarita is an Argentine economics specialist, teacher and writer with a Marxist orientation.
