Neo-Feudalism: Shaxson on Tax Havens

Parag Khanna has frequently discussed the rise of a neo-feudal age, with power devolving from nation-states to cities. Why are nation-states losing relevance?

One important reason is that tax havens are diverting ever more revenue away from social needs. Powerless to confront the wealthy or powerful corporations which take advantage of them, states must tax their middle classes more or cut services. Many authors have noted the proliferation of tax havens in recent years. But one rarely sees the literal trappings of feudalism re-emerge, as Nicholas Shaxson describes in his provocative account of the “City of London Corporation:”

The term “tax haven” is a bit of a misnomer, because such places aren’t just about tax. What they sell is escape: from the laws, rules and taxes of jurisdictions elsewhere, usually with secrecy as their prime offering. The notion of elsewhere (hence the term “offshore”) is central. The Cayman Islands’ tax and secrecy laws are not designed for the benefit of the 50,000-odd Caymanians, but help wealthy people and corporations, mostly in the US and Europe, get around the rules of their own democratic societies. The outcome is one set of rules for a rich elite and another for the rest of us.

The City’s “elsewhere” status in Britain stems from a simple formula: over centuries, sovereigns and governments have sought City loans, and in exchange the City has extracted privileges and freedoms from rules and laws to which the rest of Britain must submit. The City does have a noble tradition of standing up for citizens’ freedoms against despotic sovereigns, but this has morphed into freedom for money.

A few examples illustrate the carve-out. Whenever the Queen makes a state entry to the City, she meets a red cord raised by City police at Temple Bar, and then engages in a col¬≠ourful ceremony involving the lord mayor, his sword, assorted aldermen and sheriffs, and a character called the Remembrancer. In this ceremony, the lord mayor recognises the Queen’s authority, but the relationship is complex: as the corporation itself says: “The right of the City to run its own affairs was gradually won as concessions were gained from the Crown.” The modern ceremony strikingly marks the political discontinuity at the City’s borders.

The Remembrancer, whose position dates from the reign of Elizabeth I, is the City’s official lobbyist in parliament . . . Then there is the City’s Cash, “a private fund built up over the last eight centuries”. . . . Only part of it is visible: the Freedom of Information Act applies solely to its mundane functions as a local authority or police authority. Its assets are beyond proper democratic scrutiny.

The whole piece is well worth a read, describing the role of shadowy tax havens in diverting revenue from governments. How can we afford decent social programs when, as David Cay Johnston observes,

Total income taxes and income taxes per capita declined even though the economy grew 16 percent overall and 6 percent per capita from 2000 through 2010. Corporate income tax receipts fell 27 percent and declined 34 percent per capita, even though profits boomed, rising 60 percent.

According to US PIRG, in 2009, citizens of Wisconsin saw $1.6 billion in taxes shifted to them because “many of the largest corporations in our country hide profits made in the United States in offshore shell companies and sham headquarters in order to avoid paying billions in federal taxes.” Given that environment, cuts in pay and benefits for teachers, janitors, and other public workers are a foregone conclusion.

Where does it all lead? Matt Stoller frames a choice between the “liquidation” of key societal institutions or some effort to work together to preserve them. I am afraid we are moving toward a point where, as in China, our central government can barely deal with basic problems like air pollution or abusive local authorities.

Frank Pasquale

Frank is Professor of Law at the University of Maryland. His research agenda focuses on challenges posed to information law by rapidly changing technology, particularly in the health care, internet, and finance industries.

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4 Responses

  1. Adam says:

    I think it’s worth noting that the Cayman’s tax & secrecy laws are not a dead loss. They benefit the 50,000 people who live in the Caymans, both by bringing work to local lawyers and accountants, but also via lower taxes for the people of the Caymans, since those corporations pay taxes and incorporation fees in the Caymans.

    Is that a net gain to social welfare? If you believe that democratically imposed taxes always improve social welfare, then you probably think it’s not. If you think limits on the power of the majority are a good thing, then tax havens, as a practical limit on that power, may be a good thing, or at least better than an unchecked majority.

  2. Frank says:

    I think limits on the power of the majority are good when the majority is oppressive. Many of these tax havens are used by people who have more money than they can ever use—and, indeed, more than their children can ever use. The majority is merely asking them to pay their fair share to keep running the infrastructure that allowed them to make their fortunes in the first place.

  3. Adam says:

    So if tax rates were oppressive, you’d support the existence and use of tax havens?

  4. jpe says:

    The total calc of taxes lost is based on a flawed reading or, rather, based on a credulous acceptance of internet myths. The source for the calc of lost revenue is a report from Senator Levin’s subcommittee that estimates half the total is due to individual tax evasion and the other half corporate avoidance. Via the internet telephone game, that morphed into a claim that the total was due to corporate use of tax haven shell corps.

    Or: read PIRG w/ many, many grains of salt. They’ve shown they can’t do even basic research competently.