The Offshore Wrapper: a week in tax justice #65

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Greece’s stand off with the EU’s power brokers is gripping Europe’s media.

Tax justice and how sovereign states are at liberty to choose policy and set their own tax rates is at the heart of the matter.

One of the most contentious issues in this epic clash is the Greek proposal to raise corporation tax. The Greek government want to raise corporation tax from 26% to 28% and impose one off additional corporation tax rate of 12% on corporate profits above €500,000.

This proposal did not make it into the proposed deal published by the European Commission last Monday, which only accepted a corporation tax rise to 28%.

The European Union, instead, would like to see more money raised from VAT, which of course will hit Greece’s already hard pressed citizens.

The EU’s tax position is increasingly pursued by tax havens and right-wing administrations. Collect government revenues by increasing revenues from the general public and cut tax for business as much as possible in order to ‘unleash growth’.

But the evidence shows that this kind of political mix just doesn’t work. Instead of more growth and more taxes we just get lower government revenue, continuous budget cuts (which hurt growth) and increasing inequality. In Kansas, where Art Laffer, the godfather of this brand of right wing economics, unleashed his experiment the state teeters on the verge of bankruptcy.

Tsipras, the Greek PM has blasted the EU and Greece’s creditors for their position. He argues that as long as workable proposals are put forward that reduce the deficit, it shouldn’t matter how that is achieved.

In addition he has claimed that the IMF in particular has asked the Greek government to water down proposals to increase taxes on the wealthy. If that is true, the IMF should know better. Its own research suggests that more equal societies (and achieving them by taxing the wealthy) can lead to more growth (see Wrapper #48).

The current negotiations paint a rather disturbing picture of the European Commission (led by the former prime minister of a tax haven, Luxembourg) and other creditors putting political dogma before policy, and seeking to impose a low tax, weak state and pro-wealthy political agenda on the Greek people.  Surely the European Union should be flexible enough to allow countries within it to make different political choices?

Finally, consider this: All that Greece is asking for is that it be allowed to raise corporation tax on wealthy businesses to the same level as currently in place in the United States of America, 40%, and marginally above the rate Japan had until 2013 of 38%.

Have these economic giants seen a collapse in their economies over the last few years due to this crushing tax rate? Have thousands of businesses relocated to Greece with its relatively low rates? Far from it.

In fact, check this graph from the OECD which shows the economies of the US and Japan have considerably outpaced Greece since the crisis.

* There is more than one way to crack a nut (Translation by Google)

The road to nowhere

Kenya’s National Youth Service has been at the centre of an escalating corruption scandal over recent weeks.

It was reported that there was an attempt made by some people in the youth service to defraud it of over 826m Kenyan shillings ($8.38m).

Large payments were requested on behalf of six companies, supposedly for a road building programme.

However, the companies involved were set up just months before they were granted tenders and were owned by just three people. The payments were stopped before they could be made.

The scandal has become a political football with opposition leaders calling for the Cabinet Secretary on the NYS to resign, and the President stepping in to say that she is not under investigation and has no case to answer.

Kenya’s anti-corruption agency has seized computers and is investigating.

This is not the first scandal to hit Kenya in recent months. The country founded an Ethics and Anti-Corruption Commission in 2011 and the body has been investigating a number of cases. But recently some have found its work rather too thorough.

In April, MPs voted to sanction the chair and deputy chair of the commission after it released a report accusing 175 politicians of taking kickbacks.

The seedbed of terrorism is systemic corruption

Last week, before the news broke of the shocking mass murder of tourists at a beach in Tunisia, the World Bank released a report revealing widespread fraud on the part of Tunisia’s former dictator Zine el-Abidine Ben Ali.

Researchers investigated 209 companies between 2002 and 2009 related to the Ben Ali family. The study looked at imports to Tunisia and found widespread mispricing by companies associated with the family. Imports were deliberately undervalued in order to pay lower import tariffs. In total the researchers found that the family had defrauded the state of between $1bn and $2.2bn.

This is second report that the World Bank has completed on the former Tunisian dictator. The first looked at how the family amassed $13bn in wealth.

Interestingly the focus of that report was how government policy was specifically tailored to favour companies linked to the president’s family.

It sounds like a similar story to the Finance Curse where governments consistently favour the financial sector, to help them gain ever bigger profits at the expense of the real economy.

Perhaps the World Bank might want to apply its methodology to companies which grant political donations in London and New York.

Switzerland names names…

Recently, the Swiss government surprisingly published in their official government Gazette the names of several people the Indian government is pursuing for tax fraud.

Priti Patnaik, who attended a Finance Uncovered course last year, wanted to discover why Switzerland – a country whose biggest export is banking secrecy – could allow this to happen. Priti concludes that it is more than likely the Swiss Gazette may soon be the source of more revelations.