Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens

Book Review Treasure Islands

Tax havens exist to lower taxes and regulations on corporations and wealthy individuals.  But doing this involves significant complicated legal and accounting work.  The average person could not benefit because the fixed costs are high.  You need to have a lot of assets to benefit from tax havens.

So why do the wealthy governments of the world tolerate tax havens?  Why don’t they “use NATO to blockade these places, and tell them to end their tax-avoidance-facilitation policies, or else.”  Sadly, the wealthy have disproportionate power over politicians, and the majority of politicians are wealthy.  They like the system as it is.  You can make the tax code as progressive as you like; you will not end up taxing the intelligent wealthy much more.

This book confronts transfer pricing, where profits get shifted to low-tax countries by clever accountants.  Very difficult to police.

The is an amusing section in the middle of the book about the City of London Corporation, which has unique rights in the UK.  It is the home of most financial activity n London, and is mostly unaccountable to the UK.

In general, I believe that taxation should be the same regardless of the structure of the entity being taxed, its location, etc.  To that end, I think that corporations should be taxed on their global income as expressed to its owners.  Or, don’t tax corporations, but make all taxation like limited partnerships, and tax the individuals that own them.

There are other possible solutions.  There can be limits on corporate structure.  Israel limits subsidiaries such that the depth from the holding company cannot exceed two.  There could be consolidation and/or non-recognition of  subsidiaries in tax havens.

Additional Resources

Longreads article

Book website (those reading at Amazon, come to Aleph Blog to get links)

Quibbles

The book makes its last chapter about how tax havens helped cause the financial crisis, but it makes a very weak case.  Individuals and Banks overlevered themselves as asset prices rose, creating a bubble — not much different than the 1920s.  Tax havens played little role, even if they aided securitization in a few ways.

The book argues for capital controls, but those controls often create incentives for greater corruption.

My main problem with the book is that it does not offer any workable solutions to the problems.  My secondary problem is that the problem is not so much with the tax havens, which we could easily marginalize, but with the politicians, who do not do the hard work of seeing that taxation takes place, regardless of the corporate form or location.

Who would benefit from this book: You have to be willing to endure complex arguments to benefit from this book.  If you want to, you can buy it here: Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens.

Full disclosure: I borrowed it at my library.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

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By David Merkel, CFA of alephblog



About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.