Economist James Henry says the annual G20 summit has a tendency to focus on last week’s news rather than fixing long-term issues like tax reform, infrastructural investment, and climate change
ANTON WORONCZUK, TRNN PRODUCER: Welcome to The Real News Network. I’m Anton Woronczuk in Baltimore.
The Group of 20, also known as the G20, met last weekend for a two-day annual summit in Brisbane, Australia. The group, which comprises 20 major national economies, including most of Europe, the U.S., Russia, and China, met to discuss issues of global economic policy, including the gender employment gap, energy, tax rules, the financial crisis, and infrastructure investment.
Here to discuss what came out of this meeting is James Henry. James Henry is a leading economist, attorney, and investigative journalist who has written extensively about global issues.
Thanks for joining us, James.
So, James, tell us what came out of the G20 that we should all be paying attention to.
JAMES S. HENRY, SENIOR ECONOMIST, TAX JUSTICE NETWORK: Well, the main focus of this G20 was on short-term issues, like Ukraine and, I think, the concern about the world economy going into yet another recession. Japan just had a very bad quarter. And so there was a lot of short-term concern.
So my favorite issue, which is tax justice and reforming the international tax system, being mentioned in the 13th bullet point of the communique in a lot of kind of generalities, and so it was a little bit like being invited to dinner and being served pictures of food.
This is a problem with the G20. They have a tendency to be focusing on last week’s news instead of fixing longer-term problems that are fundamental to making the whole system work better.
So Brisbane didn’t produce a lot of news. I think they’re focusing in their headlines on the growth problem of the world economy–everybody knows that–and on what they’re calling an “infrastructure initiative”, which is a little bit vague. We’ve–talking about getting banks and the private sector to invest more heavily in infrastructure. That’s a nice wish, but in terms of solving key problems that are going to be essential if we’re going to make investment, especially in developing countries, more effective, we need to tackle this tax problem, and also the inequality that’s being generated by the current system. None of that was really addressed by this G20.
WORONCZUK: Well, let’s talk about what they did address. Both the Australian treasurer as well as the prime minister of Britain, Dave Cameron, they all said that this meeting, that they would take very aggressive approaches towards multinational corporations and the issue of tax havens. Talk about some of the policies that came out of there that they proposed to deal with this issue.
HENRY: Well, there’s two wings to that. One is on the level of multinational companies like we saw just last week in the case of Luxembourg, 350 multinationals using Luxembourg as a kind of free pass to avoid taxation on their international business. So they’ve deferred–about three years ago, the G20 appointed the OECD to tackle reform of the international tax system. And what they’ve come up with is a list of 15 specific measures, which are really, in the aggregate, kind of attempts to keep the current system on life support. They make a noise about having taxation allocated to where economic activities really exist.
And that’s a noble ambition, but the current tax system, with its reliance on more than 80 offshore havens, basically allows multinational companies to, say, move all their patents, as Apple has done, to Ireland and Bermuda and Luxembourg and pay no taxes on billions of royalties that they pay themselves, or commodity trading companies like Glencore in Switzerland, to park profits from their trade in copper in places like the British Virgin Islands, pay no taxes to Zambia that produces it. So there’s all these games being played by multinationals to shift the kind of–shell games, really, moving the profits into low-tax havens.
And the OECD, unfortunately, to date has really come up with a list of kind of Band-Aid solutions. For example, in the area of country-by-country reporting, we still have a system where multinationals don’t even have to tell you where they’re parking the profits. They don’t even have to tell their shareholders where they’re booking profits. And under the OECD’s approach, that country-by-country reporting would only be adopted for tax authorities. It wouldn’t be allowed for the public. Well, the tax authorities already have access to this data. They don’t need more help from the OECD in getting it.
The common reporting standard that they’ve recommended is on the individual side of tax dodging, and that pertains to the fact that there’s at least $21-$32 trillion of private financial wealth offshore beyond the reach of tax authorities. And so what the OECD has come up with is a so-called automatic information exchange system, where countries would sign up for this system and be able to exchange information on tax revenues of wealthy people that are paid by their banks.
Well, the problem with this is it’s full of holes. There’s no–for example, in the background, there’s still no global system for registering the ownership of companies and trusts that are offshore. So we don’t know who owns these companies. And so that means that even if we had everyone in the world signed up to exchange information, there’d be no useful information to exchange, unless you know who the owners of the trust and the companies are that are holding a lot of this offshore wealth through these haven vehicles.
Furthermore, there’s no enforcement for the common reporting standard. It’s a voluntary standard. It has to be adopted by each country’s parliament or government. And that’s not surprising. We don’t have a global tax authority or global government, and so we have to have these [inaud.] adopted by consensus.
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But I’m still disappointed the OECD is not moving quicker toward identifying fundamental reforms in the system, namely, beneficial ownership, registration on the individual side, and public country-by-country reporting on the multinational side. If we simply had country-by-country reporting on an industry level, we’d be able to figure out–we wouldn’t have to have competitive information being provided. If we just had industries having to report in aggregate form, we’d figure out what the tax haven games are that they are playing.
But many developing countries now, I think, are so disadvantaged by this system that they basically have no chance of being able to engage in anything but tax competition with their neighbors. And so you see African countries actually having negative corporate tax rates on new investment, given all of the subsidies they pay and the tax holidays they give in exchange for it.
So you have the G20 plumping for more infrastructure investment, and it’s hard to argue with that. We definitely need a whole new set of investments to deal with climate change and energy.
WORONCZUK: But the issue on infrastructure, though, I mean, this was a really key part of the meeting, and they announced a sort of–it’s the beginning of a global infrastructure hub, and they said that they need to do this because basically the capacity of governments to fund infrastructure development can’t match that of the private sector. But from everything you’ve been saying about the issue of tax havens, it seems that if you solve that issue, that there will be plenty of funding that the government can use to deliver on infrastructure development.
HENRY: Well, there’s a certain amount of investment that governments are the only ones in a place to make. You know, investments in basic infrastructure have to be done by government. And I think that’s part of the problem. And you have to finance that in some way. And taxes are much better, it turns out, than inflation or deficit finance. We’ve discovered that the hard way in the last 50 years.
The G20 is going off on this kind of white horse of infrastructure investment, which sounds nice, but I’m pointing out that there’s a real disconnect between the tax reform agenda, which is what’s necessary to make the infrastructure really pay off for the countries where it’s going, and their–in their plea for more infrastructure investment.
A good example is China’s putting up $40 billion for a new canal through Nicaragua. The owner of that project is parking the entire investment in the Cayman Islands. He’s a Hong Kong entrepreneur. He’s heavily subsidized by China. But Nicaragua will see no taxes, no tax revenue from the canal going through their territory. That’s going to have enormous side effects on their economy and the climate. But because it’s all parked in a tax haven by the Chinese project developer, there’ll be no tax revenue from this project. It’s incredible. So that’s kind of a precise bad example of where you have a disconnect between government power and power of the private sector to use these havens.
And so the infrastructure investments that we’ve seen in the last 50 years in the world economy, a lot of the foreign direct investment has not generated the kind of productivity growth or the kind of benefits to the local economies–in many cases, the profits from the investment have flowed offshore to the investor, and the developing countries have not benefited as much as they should.
So I think that this is partly the result of political reality, which is that it’s much easier to talk about private sector investment than it is to talk about private sector taxation.
WORONCZUK: So another part of the G20 that made headlines this weekend was the British prime minister, David Cameron, who said that the red warning lights are flashing again on the global economy. And with many countries, especially in the G20, facing–with the citizenry facing high unemployment and with the eroding tax bases, wage stagnation, do you think that anything that’s come out of the G20 that deals with this, with the global financial crisis, will do anything to either mitigate or prevent another crisis?
HENRY: I think what we’ve lost is an opportunity here over this last five years of recovery to really clamp down on bad business practices, not only in tax policy and multinational company abuse, where there’s hundreds of billions of dollars being lost, but in the area of bank regulation. Basically, the banks are still in pretty bad shape after five or six years. We just had the survey in Europe of their banking system. A lot of the banks have basically made it through and survived, but they’re in no condition to take on another deeper session. So we haven’t fundamentally altered the regulation of banking. And there’s a real concern that if we have another crisis, the public sector is in no mood to or any condition to bail out banks again. So those are two glaring issues.
I think the best news we’ve had in the last couple of weeks was the climate change deal, and that was a bilateral deal between China and the United States. If Obama is able to push that through the Congress and make some progress in that area, we will see–next year is a fundamental year. We have COP21 coming up in Paris in December next year, and that is an important international meeting, where we absolutely have to get another kind of Kyoto-like treaty in order to–so we don’t cook the planet, basically. We have about 30 years left and a carbon budget of maybe 1 trillion tons, and we’re burning 35 that year. So if we want to keep the planet people below two degrees, these global leaders, partly ’cause the G20 was in Australia and Australia is a big coal producer, didn’t have much to say about climate change. But, fortunately, Obama and the Chinese president did the talking the week before.
That’s an issue that I think in the long run will create jobs in the world economy. That’s the kind of infrastructure investment on carbon reduction that we really need to make. And it will create new industries and new jobs. But it’s not something that David Cameron is focusing on. He’s worried about the very short term outlook in Europe, and that’s pretty grim.
WORONCZUK: Well, I think one can also argue that a lot of the countries in the G20 aren’t really focusing on the issue of infrastructural development away from fossil fuel. I mean, for example, you have a major deal between China and Russia for something along the lines of a $40 billion pipeline. And, actually, right before the summit that took place this weekend, this report that came out from the Overseas Development Institute and Oil Change International said that the G20 collectively subsidized $88 billion worth of fossil fuel exploration.
HENRY: That’s correct, and about $41 billion of that is in the U.S. alone. You know, the grim reality is that we have about 3 trillion tons of unconsumed carbon in the existing, proven reserves of coal, oil, and natural gas. Forget tar sands, forget unconventional energy, forget the Keystone pipeline, forget lots of resources in some developing countries, and much of the–certainly the Arctic doesn’t need to be developed. The proved reserves that we already have are three times what we should be able to consume, what we can afford to consume, in order to keep the world’s climate from going to two degrees higher from where it was in the 1880s. It’s already 0.85 higher than then. And so we have about half a point, just 1.1 point to go until 2050, beyond which the predictions are that there will be all kinds of side effects–on coral reefs, on the Arctic, on the glaciers, and we’re already seeing a lot of that. Greenland melting is not a prospect that anyone living in Florida today should take lightly.
But it’s hard to tell this very powerful industry–which, by the way, just spent a fortune on the congressional election in the United States, the oil and gas industry–that maybe two-thirds of its existing reserves are stranded assets. And that’s something that certainly stock markets did not absorb.
So we’re in for some challenging, tough times here. But I think this G20, politically speaking, was just not the right place for the kind of hard conversations we’re going to have next year in the climate change negotiations.
WORONCZUK: Well, I mean, let’s focus in on that point, because, I mean, it just seems, though, at this point, that everything from dealing with tax havens, with which I understand about $20 trillion is removed from tax bases globally, to these issues of climate change. And as you said, it seems that much of what they proposed in terms of regulation to deal with the financial crisis is ineffectual. I mean, do we continue to appeal to the G20 and its leaders?
HENRY: Well, we make do with what we have. This is a more or less–this is a kind of a substitute for having either a global dictatorship of some kind or–. Basically, we have the world’s most important economies get together and see what they can agree on. And I think that’s on balance a good thing, for them to be talking rather than fighting. And the problem is that on these basic issues, we’ve seen time and again where the meetings have not been fruitful in the way of really producing effective change.
I think next year we have the G20 in Turkey, which is an interesting place to have a meeting these days.
But I think we have to learn to reduce our expectations of major reforms at any one of these meetings and just look at what they’re able to achieve over the last five years. And I guess from that standpoint the good news is that they are at least acknowledging that the world tax system doesn’t work and that it needs to be reformed, that it’s unacceptable for very wealthy people to be able to use tax havens to shelter their money offshore while the rest of us are having to foot the bills for climate change.
The good news there is that there’s at least $12 trillion sitting in banks of private financial wealth, much of which comes from kleptocracy and from tax evaders, and we could just tax it, if we needed to, to fund some of these climate change investments, on the order of $100 billion a year that we have to make.
So the G20 is responding, I think, to kind of the near-term political pressures that all of these leaders are on. It’s sort of a reflection of the short-term political cycle, as well as the longer-term problems. But, hey, it’s all we’ve got.
WORONCZUK: Okay. Economist James S. Henry.
Thank you so much for joining us.
HENRY: You’re quite welcome.
WORONCZUK: And thank you for joining us on The Real News Network.
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