Task Force Blog

Posts by Ann Hollingshead

About the Author:

Ann Hollingshead is a Financial Transparency Coalition blog contributor, whose posts appear weekly. Formerly a Junior Economist at Global Financial Integrity, Ann is now pursuing a Master of Public Policy (MPP) from the University of California Berkeley. Follow her on Twitter: @AnnHollingshead.

Happy Cyber Monday! (More Bitcoin Problems)

December 1, 2014

Happy Cyber Monday! In case you are from a country that doesn’t observe holidays devoted to consumerism: “Cyber Monday” is a marketing term for the Monday after Thanksgiving, created to persuade people to shop online.

To those of us interested in banking and financial transactions – Cyber Monday is a fitting symbol for the emergence of online shopping and digital transactions. Over the last few years, e-commerce sales have grown by a stunning 20% annually around the world, and in the United States, e-commerce sales have increased by a steady 5% per year since 2005.

Meanwhile, recent massive data breaches in major retailers like Target and Home Depot have left many shoppers feeling uneasy. After the holiday season last year, Target experienced a data breach that affected about 70 million customers and 40 million credit and debit cards. Earlier this year, about 2,000 of Home Depot’s stores came under attack, affecting about 56 million customers.

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Transparency and Post-2015 Sustainable Development Goals

November 28, 2014

About fifteen years ago, the leaders of the world convened at the Millennium Assembly of the United Nations. In the year 2000, at the turn of the century, the world’s leaders adopted the United Nations Millennium Declaration, a commitment to dramatically reduce poverty worldwide. All 193 member states of the United Nations and 23 organizations agreed to achieve the following set of goals:

  1. Eradicate extreme poverty and hunger;
  2. Achieve universal primary education;
  3. Promote gender equality and empower women;
  4. Reduce child mortality;
  5. Improve maternal health;
  6. Combat HIV/AIDS, malaria, and other diseases;
  7. Ensure environmental sustainability; and
  8. Develop a global partnership for development.

The nations set a deadline for these goals: 2015. With that year only a few weeks away, it is now time to ask: how well has the world fared in trying to achieve these lofty goals?

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How Shell Corporations Undermine Schools in California

September 30, 2014

California spends about $8,500 per year to educate its public school students. That’s about $3,300 less than the national average. In fact, according to Education Week in a national ranking of states and D.C., California ranks near the bottom, at 49th, in terms of per-pupil spending. There are reasons to believe that one cause of this problem is the system of property taxation in California—and its loopholes.

The biggest player in property taxation and its policy in California is Proposition 13. Approved by California’s voters in 1978, Proposition 13 sets limits on the annual increases of assessed value of real property by an inflation factor. Proposition 13 also prohibits the government from reassessing a property’s new base year unless that property changes ownership. Broadly speaking, this means that in California, unless you sell your home, your property taxes cannot increase by more than a fixed percentage each year.

In fact, the market value of properties in California has significantly outpaced this fixed percentage, leading to a discrepancy between what Californians would have paid in property taxes without Proposition 13 and what they actually pay.

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How Tax Evasion and Avoidance Undermine a Good Tax System

September 22, 2014

In the United States, the overall noncompliance rate for all federal taxes and individual income taxes stands at about 14 percent. According to studies by the Taxpayer Compliance Research Program and the National Research Program, about 1 percent of wages and salaries are underreported and about 4 percent of taxable interest and dividends are misreported. A study of Germany found that the corporate tax base would have increased by 14% if no income-shifting had occurred. Developing countries lose about $900 billion in illicit outflows per year, which severely undermines these nations’ abilities to effectively raise revenue.

These activities are not merely an inconvenience for citizens and policymakers, but rather they undermine the very core of tax systems around the world. There are many things a good tax system should do, but all tax systems should have the three key goals: provide revenue, distribute costs fairly, and promote growth and efficiency. Tax evasion and avoidance, whether via an offshore tax haven or an anonymous corporation, undermine the world’s ability to achieve all of these goals.

Goal 1: Provide the appropriate level of revenue in a timely manner. The first and most obvious goal of any tax system should be generate revenue. Of course, the level of revenue produced by a tax system should not be arbitrary. The tax system should generate enough revenues to meet the needs of the nation with the appropriate level and in a timely manner.

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Why Are So Many Tax Havens Islands? The View from Economics

September 15, 2014

We often think of tax havens as tropical islands or tiny nations nestled in the mountains. We know most of them are geographically and demographically small. Very small. Given their huge reputations, just how small they are just might surprise you.

Ireland, which is well known for its emerald hills and low tax rates, is about the same size as South Carolina. Luxembourg, a tax haven nestled in Western Europe between France and Germany, is about 2,500 square kilometers, or about a third of size of Rhode Island. Bermuda, a group of islands off the coast of South Carolina, is just over 50 square kilometers. That’s about one third of the size of Washington, DC. Singapore has about the same land mass as El Paso, Texas. Hong Kong is about the same size as Suffolk, Virginia. The notorious Cayman Islands have the same land mass as Shreveport, Louisiana.

These statistics might be surprising. How can nations so small garner such strongly negative reactions in the international community? Any why are so many tax havens so small? Is it coincidence? Or is there something else going on?

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Is Thomas Piketty Right About Tax Havens?

September 2, 2014

If you have had much contact with the disciple of economics in the last year, you’ve heard of the book Capital in the Twenty-First Century, written by French economist Thomas Piketty. And Capital concerns two subjects that are very near and dear to us at the Financial Transparency Coalition: inequality and taxes.

Piketty’s book is all the rage among economists and policy wonks. Perhaps for good reason. In a unique exploration of a new dataset, Piketty parses through literally centuries of tax data to discern long-term trends in inequality and wealth. His conclusions are broad and many, but one of his main findings is this: wealth inequality was high before World War I, it fell after and for much of the century, and it has been on the rise again since the 1980s.

That income inequality is already extreme (and getting worse) should come as no surprise to readers of this blog. We’ve heard that the richest one percent of Americans earn about a fifth of the nation’s income. Central to Piketty’s thesis, inequality is even starker in terms of wealth, rather than income. By contrast to the top earners who make one-fifth of the nation’s income, the wealthiest one percent of Americans hold about one-third of the nation’s wealth.

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Why Tax Inversion Is Wrong

August 22, 2014

This week the Treasury Department began assembling administrative options for deterring or preventing U.S. companies from inverting—or reorganizing overseas to avoid paying federal taxes. This move follows on the heels of a strong statement from President Obama who accused inverting firms of “cherry-picking the rules.” As he put it: “My attitude is I don’t care if it’s legal, it’s wrong.”

Particularly common among pharmaceutical and life-sciences companies, inversions are primarily a means for U.S. companies to avoid corporate taxes. In an inversion, a smaller foreign company “acquires” a large U.S. firm, allowing the domestic firm to reincorporate overseas and pay a lower foreign tax rate. Usually, this process does not change the operational or functional structure or location of the company – it just changes the way that company has to pay taxes.

Historically, these tax inversions haven’t been all that common. In fact, according to the Congressional Research Service, only been about 76 companies have inverted or planned to do so since 1983. The practice has become much more frequent, however, which is why inversion has garnered the spotlight from Treasury. Of the 76 inversions since 1983, 47 occurred in the last decade, and 14 occurred just this year.

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The U.S. Africa’s Leaders Summit and Illicit Financial Flows

August 14, 2014

Last week the White House wrapped up the three-day U.S.-Africa Leaders Summit, which President Obama convened to strengthen and enhance relations between the United States and African nations. One of the stated missions of the Summit was to advance America’s “commitment to Africa’s security, its democratic development, and its people.”

As such, a core promise of the Summit was more American investment in the African continent. Specifically, the Summit set the stage for more than $33 billion in new commitments to support economic growth across Africa. President Obama pledged $7 billion in new financing; U.S. companies announced $14 billion in deals in a variety of sectors, including energy and construction; and alongside the World Bank and Sweden, the United States also promised an additional $12 billion in investments for the President’s Power Africa initiative.

Foreign investment can play an important role in economic development. One study, for example, found that foreign direct investment (FDI) promotes economic growth in developing countries by increasing the transfer of advanced technology and creating higher productivity in those nations. Other studies suggest that recipient nations of FDI can also benefit from increases human capital as their residents receive employee training through the investing company. Finally, and perhaps most importantly, several studies note that host nations benefit from FDI to the extent that it contributes to increased corporate tax revenue.

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Recent Efforts to Regulate Bitcoin Fall Flat

July 31, 2014

This week several analysts reported that the European Union is considering regulating and taxing the digital currency, Bitcoin. Specifically, the EU is looking to impose a Value Added Tax (VAT) on trades in bitcoin. Meanwhile, its plans to regulate the digital currency—whether imminent or not—are still unclear.

Bitcoin presents short- and long-term risks to financial crime. Like tax havens and other jurisdictions with lax laws on beneficial ownership, Bitcoin presents criminals with an opportunity to keep their money and their transactions secret. Specifically, Bitcoin users don’t need to present an ID to receive a Bitcoin address—or key—so they are not necessarily tied to a flesh and blood person. This means Bitcoin transactions unidentifiable as long as the user takes care to anonymize his or her IP address.

In the United States law enforcement officials have early and often expressed deep concerns about the digital currency. Both the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury and the U.S. Department of Justice have released official statements regarding the regulation of virtual currencies. FinCEN has also already imposed money laundering controls on Bitcoin usually reserved for traditional wire transfer services, like Western Union. These controls include bookkeeping requirements and mandatory reporting for transactions of more than $10,000.

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How to Include Developing Countries in the OECD’s Standard for Automatic Tax Information Exchange

July 24, 2014

This week the Organization for Economic Cooperation and Development released the full version of its new standard for automatic tax information exchange. Under the standard, governments would collect data from financial institutions on investment income, financial assets, and account balances paid to non-resident accountholders. On an annual basis, participating governments would exchange that information automatically with other jurisdictions.

In a statement, OECD Secretary-General Angel Gurria said the launch “moves us closer to a world in which tax cheats have nowhere left to hide.”

This impetus for this new standard came from a mandate by G20 nations and the OECD will formally present the plan to the next meeting of the world’s leaders in September. The standard also follows from a great deal of bilateral and multilateral progress made by the United States and European Union on automatic tax information exchange.

For any of these efforts to have a real impact on economic development and reductions in poverty, it must translate to action in the developing world. That’s because tax revenues are, and will continue to be, the world’s most sustainable source of development funds. Yet if these systems and agreements exist only between developed nations and tax havens—and until developing countries participate in a similar system or agreements of their own—the progress we’ve made will have little effect on economic development and acute poverty.

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Can the Vatican Bank be a Moral Leader in Transparency?

July 17, 2014

In its list of Most Influential People this year, TIME magazine called Pope Francis a “moral leader in word and deed.” In the commentary on this accolade, President Obama said this of the pope: “His Holiness has moved us with his message of inclusion, especially for the poor, the marginalized and the outcast. But it […]

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Switzerland’s Two Faces of Secrecy

July 11, 2014

For about five years now, nations around the world have called on Switzerland to change its secret ways. Over these years Switzerland’s banks, which hold nearly one-third of the estimated $7 trillion in global wealth kept offshore, have borne much of the brunt of the U.S. Department of Justice’s campaign against banks facilitating tax evasion by American citizens. Other nations, such as India, have also followed suit. And although Switzerland has attempted to cultivate an image of international cooperation – the reality of Swiss banking secrecy has been more of the same.

For the purposes of outward appearances, at least, Switzerland has caved to some of the international pressure. After much debate in 2009, Switzerland surprised the world when, at the last moment, it decided not to step in and forbid banking giant UBS from handing over the names of tax-evading Americans to the Internal Revenue Service. In 2012 Switzerland began making overtures toward cooperation when it agreed to make anonymous advance payments to German tax authorities for undeclared money. In 2013 Switzerland joined the OECD’s Multilateral Convention on Mutual Administrative Assistance on Tax Matters. Under this agreement, participants must aid each other in tax collection efforts, and the agreement also includes some provisions on automatic exchange of financial information.

While these public agreements and appearances represent, in many ways, a new voice for this nation, for all practical purposes they do not represent a shift from the status quo.

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