In many ways, the Kingdom of Saudi Arabia contains one of the most unique styles of government and political culture in the world. The central institution of the government is the monarchy—headed by King Abdullah. The Holy Qur’an is the constitution of the country and the nation is governed on the basis of Islamic law or Shari’a. The reaches of the king’s power are essentially limited only by Saudi tradition, Shari’a, and consensus among the royal family and religious leaders.
Saudi Arabia holds a tight grip on the nation’s government, politics, and culture in large part because the country has so much oil wealth–Saudi Arabia holds nearly 21.5 percent of the world’s proven oil reserves. The Kingdom’s ability to maintain control over this political structure depends on its ability to use oil to increase well-being in the nation and maintain a position as the leading player in the region’s power politics.
When the rest of the region was rocked by anti-corruption demonstrations and regime change during the Arab Spring, Saudi Arabia, with the exception of some demonstrations by a Shia minority in the east, remained relatively calm. These political demonstrations against corruption have little opportunity or likelihood of success for two major reasons. First because the monarchy has deep pockets of military power and isn’t afraid to use it. Second because the general population is generally content. Saudi citizens may be interested in reform, but not fundamental change. In fact, according to a nationwide survey in 2008, 80 percent of Saudis supported a free press, but a nearly equal majority (79 percent) also supported an absolute monarchy. King Abduallah enjoyed a 95 percent favorable rating.
Officially Dan Mitchell is a Senior Fellow at the Cato Institute, a conservative public policy research organization, and a researcher on tax reform. Unofficially, he has (perhaps ironically?) called himself the “world’s self-appointed defender of so-called tax havens.”
Oddly enough, Mitchell and I agree on many of the facts about these havens. We both have observed, for example, that there are buildings in Delaware and the Cayman Islands that house thousands of corporations. Mitchell concludes there is nothing wrong with either; I conclude there is something wrong with both. Mitchell also agrees that the United States “could be considered the world’s largest tax haven.” On that topic, he’s even cited my paper on non-resident deposits in secrecy jurisdictions. In his comment, he does not take issue with my methodology or my results, but rather concludes that my finding that the United States is the largest holder of non-resident deposits “makes the case for pro-market policies.” I, on the other hand, have argued that these findings support across the board reform, rather than that limited to traditional offshore financial centers.
So how is it that two (relatively intelligent?) people can draw such different conclusions? I would argue our differences lie not in our facts, or perhaps even our economics, but in our underlying philosophical and theoretical differences.
It’s an interesting time for east Africa. Until recently, no one believed it had much energy wealth at all—6 billion barrels, tops, compared to its western counterpart, which boasts at least 60. But the times they are a-changin’. At the end of last month, Kenya sent the world and the markets a buzz when the government announced Canada’s Africa Oil Corp discovered oil in the northern region of Turkana. Given the geographical proximity and similarities, this discoverey also has implications for Ethiopia. And additional discoveries have already been made in neighboring Tanzania and Mozambique.
The oil strike in Turkana does have the potential to transform Kenya’s economy and propel its ambitions to become a leading regional power. But despite the almost-auditory-cheers echoing from Kenya’s leaders, the discovery is not all good news. Of course, analysts are already cautioning the country against falling victim to the resource curse. Many point to Uganda, another in the east African nation that recently joined the energy club, as an example of what not to do.
No one is going to start drilling tomorrow. For one thing, a worldwide rig shortage is delaying production. But in many ways, Kenya itself isn’t ready. The discovery was unexpected enough that the country does not have the experience or the regulatory framework to handle the oil sector. James Phillips, chief operating officer of Canada’s Africa Oil Corp., said “the company won’t…move ahead with its plans in the area until Kenya’s energy ministry develops rules that would determine how that gas could be produced and sold.” Kenya has insisited it is ready. Yet the country regulates oil and gas production and exploration with the Kenya Petroleum Act, a 13-page law passed around 1986. And Kenya’s leaders are on the verge of passing an exemption in its value-added tax for oil and gas exploration companies, in an effort to avoid the “cooling effect” that the tax would have on imports and purchases in the scramble.
On a large scale, corruption undermines development and democracy, exacerbates poverty, erodes civil society, stifles social services, and worsens public health. When it involves cross-boarder flow of money, it is damaging to economies not just because of the underlying corrupt acts, but also because it deprives the country of both public and private resources—including financial capital—that might otherwise be diverted to productive activities.
Most of the corruption that we talk about on this blog and in the general dialogue about corruption and economic development—concerns this sort of large-scale corruption. But there is another kind of corruption that is often overlooked: and that’s when it occurs on a mush smaller scale.
Corruption on a small scale, sometimes called “petty corruption,” occurs in thousands of contexts daily. Every day people, usually in developing countries, make thousands of everyday payments to building inspectors, customs officials, and other bureaucrats for the services that those employees are obligated to perform, but don’t without a little extra. This type of corruption has a much different effect than its large scale counterpart. When a person pays a bribe, the venal official need not necessarily transfer it abroad. In fact, they are more than likely to just spend the cash. But, as U4 Anti-Corruption Resource Centre points out, petty corruption can still impose “a heavy financial burden on individuals, especially the poor, … facilitate illicit activities such as smuggling and trafficking and ultimately foster the development of informal activities and shadow economy.”
Eastern Europe has been wracked with corruption scandals over the past few weeks. In Hungary, Transparency International released a report about the cozy relationship between business and government in the country, and warns that the government’s internal checks and balances are breaking down. In Slovakia, Smer-Social Democracy party took over the government in part due to a massive corruption scandal. Earlier this year, two ex-ministers of Romania were jailed on corruption charges and Romaina’s former prime minister became the country’s first head of government to be convicted of corruption.
The truth is, though, that corruption in Eastern Europe is not a new problem. In fact, our friends at Transparency International have been warning the world about these problems for years. Most scholars blame the “long hangover” left by communisim in these ex-Soviet states:
Under communism corruption was considered by many a necessary part of life. Small ‘gifts’ of sweets, alcohol and other goods were taken to doctors or civil servants to get proper or quick services. Waiting periods of months for imported or scarce goods could be shortened considerably by offering officials ‘gifts’ or money.
Studies have repeatedly shown that people living in former communist states see corruption in all levels of society, from business to the school system to police and government, but often most strongly in the health sector and the judiciary.
If you’re not one of the 112 million people to have already watched Jason Russell’s Kony 2012 video on YouTube, you might be inclined to tune in here first.
Kony 2012 is part-documentary, part-over-produced-Hollywood-flick that has engendered an enormous amount of attention and emotion on Facebook, Twitter, and blogs. It concerns Joseph Kony, a warlord from Uganda who, with the help of his forces, the Lord’s Resistance Army (LRA), has abducted and enslaved tens of thousands of children in his own country, as well as the Democratic Republic of the Congo, South Sudan, and the Central African Republic. He remains at large, despite the fact that he is wanted for war crimes by the International Criminal Court and that President Obama has sent U.S. soldiers to help hunt him down.
But in the media, the video itself hasn’t been the dominant issue. Rather it is the fact that the video has generated so much attention itself that is, apparently, the most attention-worthy. And perhaps as a direct result of all this attention, the short film has also generated a whole lot of obloquy.
In The President’s Framework for Business Tax Reform, which the White House released earlier this week, President Obama advocates lowering the U.S. corporate tax rate to 28 percent. This move is not surprising. Last month, President Obama brought up a basic minimum corporate tax in his State of the Union address.
But the tax cut is not alone. Alongside this cut, Obama advocates cutting corporate tax loopholes. This element is not to be overlooked. There are far too many corporate tax loopholes—which are deductions, credits, and other tax expenditures that benefit certain activities—and they often result in very different marginal tax rates for companies in different industries. They even sometimes result in for different companies in the same industry. It is these loopholes which allow corporations to pay an average rate of 12%, even though the statutory rate is 35%. It is these loopholes that allowed the 100 largest U.S. multinational corporations to pay about $16 billion of U.S. tax on approximately $700 billion of foreign active earnings in 2004 – an effective tax rate of about 2.3%. We must close these loopholes to align the effective corporate tax rate with the official rate.
In fact Senators Carl Levin and Kent Conrad have already introduced a bill, to accomplish just what this. The bill, called Cut Unjustified Tax Loopholes Act or CUT Loopholes, would slice loopholes and, according to the Joint Committee on Taxation and the Office of Management and Budget, would reduce the deficit by at least $155 billion over the next decade.
Compared to some of the countries in the neighborhood, Uganda is doing pretty well. Directly to the West lies the Democratic Republic of the Congo, ranked by Foreign Policy as the world’s fourth most failed state. With a per capita GDP of $189, it is one of the poorest nations in the world. In the last ten years, it has fallen into near chaos, with many areas lacking law, order, electricity, and medicine. Directly to the North of Uganda lies South Sudan, the world’s newest nation, which despite outward promises remains in a fearsome political deadlock with its northern counterpart. Its first year of nationhood has been marked by brinksmanship over the billions of gallons of oils that lie in the south, but must be piped through the north to reach international markets. Also nearby are the Central African Republic, one of the least-developed countries in the world, and Somalia, the world’s practical synonym for failed state.
Uganda, in comparison, looks pretty good. In 2011, Uganda held its fourth presidential and parliamentary elections in 20 years, although none included a peaceful transfer of power. Its economy is also doing comparatively well—government policies have encouraged a consistent pace of growth, including 7.2% in 2009 and 5.2% in 2010, very respectable numbers given that much of the rest of the world was still in recession in those years. Much of this growth is driven by the service, manufacturing, and agriculture sectors—the latter of which contributes to 80% of the country’s employment.
Like I said, pretty good.
This post is the second part of a two-post series. The first post, on the economic costs of Section 1504, is available here.
Embedded into the Dodd-Frank Wall Street Reform and Consumer Protection Act–also known as the “financial overhaul bill”—was Section 1504, which will require companies listed on the U.S. stock exchange to disclose payments to governments for oil, gas, and mining. The American Petroleum Industry (API), a U.S. trade association for the oil and gas industry, is pushing back against this provision. In a letter to the SEC, API claims Section 1504 defies Executive Order 13563, which Obama signed in 2011, to require federal agencies to “engage in a cost-benefit analysis…of proposed and existing regulations.” API argues the SEC has failed to conduct that compulsory cost-benefit analysis. They’re even threatening to sue.
This post establishes a theoretical framework for that cost-benefit analysis. In my first post, I addressed the costs of Section 1504. Below are the benefits.
Benefits of Section 1504
Economic and political benefit to impoverished residents of foreign countries. At its core, the intent of Section 1504 of the Dodd-Frank Act is to reverse the “resource curse” in developing countries. The resource curse is the tragic phenomenon that countries well-endowed with natural resources tend to have slower economic growth than their counterparts without. This theory has been demonstrated in strong quantitative terms. According to an analysis of developing countries by Jeffrey Sachs and Andrew Warner, the more an economy relies on mineral wealth, the lower its growth rate. Countries with significant natural resource endowments also tend to have an increased likelihood of experiencing war and violence and a decreased likelihood of having a democratic system of governance.
In July of last year President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act–also known as the “financial overhaul bill”—into law. Embedded into the Dodd-Frank Act was Section 1504, which required companies listed on the U.S. stock exchange to disclose payments to governments for oil, gas, and mining. Under these provisions, companies would provide this information in their SEC filings and it would be publicly available.
Unsurprisingly, the American Petroleum Industry (API), a U.S. trade association for the oil and gas industry, is pushing back. In a letter to the SEC, API claims Section 1504 defies Executive Order 13563, which Obama signed in 2011 to require federal agencies to “engage in a cost-benefit analysis…of proposed and existing regulations.” API argues the SEC has failed to conduct that compulsory cost-benefit analysis. They’re even threatening to sue.
But, yes, please. Let’s talk cost-benefit analysis.
In his State of the Union address less than a month ago President Obama brought up a basic minimum corporate tax. He noted that “companies get tax breaks for moving jobs and profits overseas” and that American companies should not be allowed to use these mechanisms to avoid paying their fair share.
But in order to change this status quo, legislators need to close the loopholes that allow companies to drive down their effective tax rates far below the official rate. This needs to happen. There are far too many corporate tax loopholes—which are deductions, credits, and other tax expenditures that benefit certain activities—and they often result in very different marginal tax rates for different companies who conduct very similar business activities. It is these loopholes which allow corporations to pay an average rate of 12%, even though the statutory rate is 35%. It is these loopholes that allowed the 100 largest U.S. multinational corporations to pay about $16 billion of U.S. tax on approximately $700 billion of foreign active earnings in 2004 – an effective tax rate of about 2.3%.We must close these loopholes to align the effective corporate tax rate with the official rate.
About three years ago, the U.S. Internal Revenue Service (IRS) caught wind that Swiss bankers from Swiss banking giant, UBS, were traveling to the United States and systematically offering wealthy Americans the opportunity to evade taxes. They also learned UBS formed offshore non-U.S. companies for investors’ assets and then engaged in an aggressive cover-up to conceal these activities.
After an intense investigation by the IRS, the United States Department of Justice (DOJ) pursued both criminal and civil charges against the giant Swiss bank. Federal prosecutors dropped criminal charges eighteen months later, however, after the bank admitted to fraud and conspiracy, paid a $780 million fine, and satisfied DOJ prosecutors that it had dismantled its offshore banking operations.
In August 2009, UBS agreed to a settlement with DOJ on the civil charges and as part of the deal, offered to hand over the names of 4,450 tax evading Americans to the IRS. For a moment, it looked like the Swiss government—in a grasping act of self-preservation—would step in and forbid UBS from handing over the names. But at the last minute, the two houses of Swiss Parliament agreed to stick to the deal.