What is a tax haven?

A tax haven is a jurisdiction that allows foreigners to avoid the fiscal control of their countries. There are two main reasons for their existence: the illegal origin of the money and avoiding taxation. So, tax havens are characterized by different levels of secrecy and low rates of taxation for foreigners.

When did tax havens first appear?

Until the middle of the nineteenth century, the social elites did not pay significant taxes, so there was no need for fiscal evasion. But, as taxation was extended to the whole of society in some countries, a very affluent and exclusive class of people increasingly used historical tax havens such as the cantons of Zürich or Geneva were used increasingly to hide fortunes from state control during the first half of the twentieth century.

Why the british crown dependencies are important tax havens?

Until the Second World War, the European empires had controlled the international commerce of energy resources and commodities through colonization. Thus, the French, the Dutch, and especially the British Empire along with the USA, had been able to manage the raw materials or the oil market. However, after the destruction of Europe and the subsequent gradual decolonization, these countries feared losing control over international commerce. So, in the 1960s, the countries that had been powerful empires, particularly the United Kingdom, designed political structures to maintain control over profits in formerly colonized countries. These legal devices saw the rise of tax havens that allowed the elites to operate in the shadows, by means of transnational companies. In this way, the control of governments and their fiscal authorities was avoided.

The progressive fiscal regime during the post-war period in the western countries

After the Second World War, Western countries had to face two challenges: rebuilding their destroyed infrastructure and reducing social inequality to overcome the socialist regimes in the East. The best way identified to achieve both of these aims was redistributing the national income by means of progressive fiscal programs. The redistribution of the national income fosters economic growth in an economy based on consumerism, which was the case in Western economies. The common explanation for this phenomenon is that people with low incomes tend to spend all of their incomes in order to meet their basic needs. However, rich people tend to save much larger proportions of their incomes, which they do not require for day-to-day survival. Therefore, distributing the national income through progressive fiscal regimes fosters consumption and the economic growth.

What is the influence of the internet in fiscal evasion?

It should be noted that, even in the 1980s, using a tax heaven came with important logistical difficulties such as hiding a bag full of dollar bills when crossing borders. Thus, before the development of the internet, the use of tax havens was limited to the political and financial elite, who were the only ones with the means to do it. Currently, however, the use of tax havens has expanded to a social segment that grows year after year because of the internet. There are private bank offices and legal firms in every city of Europe, and they offer the possibility of eluding national tax systems. The situation has reached the point where even small and medium-sized enterprises (SMEs) can easily evade tax authorities all across Europe.

What are the consequences of the tax evasion?

Progressive fiscal regimes and tax systems have all but disappeared because of tax evasion. The multinationals do not pay corporate tax thanks to different means of evasion. Rich individuals, known sometimes as “the 1%”, are easily able to avoid paying income tax. Therefore, the state cannot redistribute their income. Moreover, heavy consumption taxes mitigate the chronic deficit of the state. In this sense, almost every European country has increased VAT or equivalent taxes during the most recent crisis, a measure which has caused consumption to sink and which has, therefore, decreased employment and salaries.

What does it have to do with housing?

To understand the role of tax havens in housing, two facts are crucial: first, there are huge fortunes hidden in tax havens such as Luxembourg or the British Crown Dependencies. Second, in the last decade, profits from consumption have started to decrease. The reason for the decrease in profit is the dwindling consumption that increasing socio-economic inequalities have caused. So, Western financial elites have decided to seek profit beyond consumption, from people’s basic needs, including housing.

How the funds or companies based in tax havens obtain the profits from housing

Up to the subprime crisis, financiers widely considered mortgages to be the best way to profit from housing. But the socio-economic model which arose after the last crisis is based on low salaries and job insecurity, so the risk of unpaid mortgages has increased. Consequently, a housing system based on mortgages has come to be considered to pose a risk to banks in a society whose members are increasingly dispossessed.

To avoid this risk, financiers have chosen and lobbied for a housing model based increasingly on rents. Due to the fact that housing is a basic need, rents increase where there is demographic pressure. Thus, the money hidden in tax havens has adopted the form of anonymous investment funds to extract rental income from cities. Furthermore, Real estate investment trusts (REITs) are companies whose aim is just to rent real estate goods, especially housing but also business premises, airports, and other such properties. These financial powers have managed to persuade almost all European countries to exempt REITs from paying the corporate tax.

Why Real Estate businesses that do not contribute to the real economy have obtained special privileges alongside other companie

The goal of these real estate companies was to foster the entry of the funds based in tax havens into the housing market. With the achievement of this goal over recent years, housing prices have dramatically increased. Thanks to the general acquiescence of the political powers, rent costs have increased, while people’s salaries have stagnated or fallen.

As a final reflection, this model involves the transformation of the former European productive model into a rental economic model. The latter model reminds us of the extremely unequal eighteenth century: then, wealth was mostly in land, which the aristocracy widely owned. The aristocracy obtained rents that were as high as possible from the peasantry, while the aristocrats themselves were largely exempt from taxes. Nowadays, income is concentrated in the cities, where anonymous funds have a free hand to extract the city’s wealth through rents, while they also avoid taxation