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[Piecake]

Seeking prosperity through lax business and tax regulations leaves countries worse off.

But as many are finding, becoming a tax haven has unexpected costs. Precipitous economic, political, and social declines have occurred so often in such states that observers have coined a new term for it: “the finance curse.” When the "finance curse" strikes a country, there is a recurrent pattern: While its democracy, economy, and culture remain formally intact, they are increasingly oriented to and co-opted by international elites. In other words, such countries gradually become organized around the interests of people who don't even live there, to the detriment of those who do. The services produced by these countries protect cosmopolitans’ wealth, but the riches never flow to the the local producers, undermining their capacity for self-governance and social cohesion, as well as the development of infrastructure and institutions.

The corrosion described by the finance curse has affected even some of the wealthiest financial centers, such as Luxembourg, which is the domicile of choice for $3.5 trillion worth of mutual-fund shares and over 150 banks. As a result of a robust financial-services sector that contributes 27 percent of the country’s economic production, the Grand Duchy boasts the highest per capita GDP in the Europe, far outstripping its nearest rivals, Norway and Switzerland. At first blush, Luxembourg would appear to be in terrific shape: a wealthy democracy, thriving in the center of Western Europe.

However, as the economist Gabriel Zucman has shown, Luxembourg's role as a leading tax haven has benefitted foreigners at the expense of locals, across the board. Over 60 percent of the country’s workforce is comprised of foreigners, who reap virtually all the benefits of the wealth generated by the Duchy. The society, as a result, is fracturing along expat-versus-local lines, both in economic and political terms.

As Zucman documents, inequality in the Grand Duchy has skyrocketed, with poverty doubling since 1980, and real wages for ordinary Luxembourgers stagnating for the past 20 years. Meanwhile, salaries for expat wealth managers have exploded, tripling housing prices in Luxembourg City. However, even this new wealth has not benefitted the local economy: Due to Luxembourg’s tax policies, public institutions such as the educational system are in "accelerated decline," mainly to the detriment of locals. The result, Zucman observes, is that Luxembourg has become more of a free-trade zone than a state.

This represents a threat to European democracy. As Zucman points out, Luxembourg has full membership in the European Union based on the premise that the government represents the citizens of the Duchy. However, having “sold its sovereignty” to multinational corporations, Luxembourg has also made itself the political arm of international finance, effectively giving those multinationals voting and veto privileges over European public policy.

For this and other reasons, a group of 300 of the world's leading economists called recently for an end to tax havens—or at a minimum, an end to the financial secrecy they provide. This is unlikely to happen. For one thing, as the Panama Papers showed, the people directly empowered to make the necessary changes are themselves deeply enmeshed in the world of offshore finance; that is, they reap significant personal benefits from the perpetuation of the system. For the same reason, leaders of small nations struggling to find their feet economically may be reluctant to forego the temptations of the quick riches that offshore finance seems to offer. By the same token, it is extremely difficult to disentangle a country from the tax-haven business once that industry becomes a monoculture, dominating the economy as well as the government; as the cases of Jersey and Antigua show, there is often nothing left to build upon once the offshore business dries up or leaves.

http://www.theatlantic.com/business/archive/2016/07/tax-haven-curse/491411/

Quite fascinating. I especially thought the Luxembourg example was especially interesting because I think most people associate tax havens with Carribean islands, so its interesting how you are seeing the same impact in the heart of Europe as you are in more 'traditional' tax havens. I would definitely recommend reading the whole article.

Would Ireland be considered a tax haven? Or have they avoided that by attracting more diversified businesses?

 

[TheSecondSpitter]

The corporate tax rate in Ireland is 12.5% compared with ~30% in the civilized world.

Coupled with territorial taxation and shitty transfer pricing rules, in my view it's a tax haven.

Apple and Google's subsidiaries in Ireland are the richest companies in their respective groups.

 

[ClosingADoor]

The EU should get corporate tax levels at roughly the same rate and close loopholes. Some improvement is being made with that I think, but too little. Going to cost my own country - Netherlands - some tax income then as well, but its for the better.

 

[TheSecondSpitter]

The EU views tax competition between Member States as a legitimate response to the freedom of establishment and free movement of capital

 

[Piecake]

The corporate tax rate in Ireland is 12.5% compared with ~30% in the civilized world.

Coupled with territorial taxation and shitty transfer pricing rules, in my view it's a tax haven.

Apple and Google's subsidiaries in Ireland are the richest companies in their respective groups.

It'll be interesting to see if Ireland goes the route of Luxembourg then

 

[Window]

This is surprising and not what I would have expected. Thanks for the article.

 

[TheSecondSpitter]

It'll be interesting to see if Ireland goes the route of Luxembourg then

After the recent OECD BEPS project some of these multinationals will need to start shifting actual key personnel into tax havens or risk having transactions between affiliates recharacterized or disregarded.

 

[water_wendi]

Quelle surprise.

 

[LJ11]

Will check this out, but I did a quick ctrl f to see if Shaxson was mentioned, author links to his book. Treasure Islands is a decent book, not sure if I would recommend, but its short enough and i liked that he paid particular attention to the eurodollar market. Thanks for posting this.

 

[lastplayed]

Who wants Luxembourg anyway.

 

[Piecake]

Who wants Luxembourg anyway.

Yeesh, no wonder they had to turn into a tax haven to try to convince people to move there.

 

[Booya_base]

Oh dear, I live in Jersey so this is sobering reading. I currently love the place. Still no idea how/if Brexit will effect us, let alone the 'finance curse' - interesting times ahead!

 

[M3d10n]

I'm not surprised. I always imagined this to be the case: these places are just transit points for foreign money, very little of which trickles locally either as taxes, investment or spent in the local economy. It's false wealth, basically.

 

[Peagles]

But our Prime Minister said we are not a tax haven, and the Panama Papers were a left wing conspiracy!

Spoiler

sigh...

 

[numble]

It'll be interesting to see if Ireland goes the route of Luxembourg then

Tax haven is a catch-all term. Ireland, Hong Kong and Singapore being a tax haven for trading activity is different than Luxembourg being a tax haven for financial services or Caribbean Islands being a tax haven for investment activity.

 

[MistakenMobius]

As someone living/working in Luxembourg, the article is far from complete:

Luxembourg banking industry used to be mainly private banking thanks to secrecy law but now that is out of the way, they had to transition/transitioning to the fund industry but it's mainly back office: it's clerk doing accounting, IT, some custody. There is probably very few fund manage in Luxembourg.
Also most working in Luxembourg are not living there: they live in neighboring country where it's much cheaper.
The lux government is helping luxembourgish people a lot: they have a huge amount of well paying public job and are helped to buy property.
Also the government didn't really had a choice:
After the end of coal and steel industry the country would be like a countrywide Detroit.
Look at the north of France or around Luik in Belgium, nothing but desolation.

The sky high rent is also sure I think to a NIMBY mentality where most new housing are still individual houses or very small building that are snatched by the Yankee expats or Russian and Chinese oligarchs of Amazon or Microsoft not by the small hands of the finance industry that are commuting from Trier, Arlon or Metz.
Regarding education: most Luxembourg people go to foreign country to study anyway, the college of Luxembourg is a quite new etablishment with very few cred