By David Cay Johnston
The views expressed are his own.
A new report from London and President Barack Obama’s statements to “60 Minutes” show financial crimes spreading like wildfire and governments failing to stop them.
Tax evasion equals 18 percent of global tax collections, a new report by British accountant Richard Murphy shows. His report for the Tax Justice Network cleverly lined up a World Bank Report on the size of shadow economies with a Heritage Foundation report on average tax burdens by country to reach that figure.
Murphy’s $3 trillion estimate, 5 percent of the global economy, shows how a combination of weak rules on accounting and disclosure combined with inadequate budgets to enforce tax laws impose a terrible cost on honest taxpayers and the beneficiaries of government service.
While the United States has one of the most effective tax regimes, especially for on-the-books wage earners and pensioners, and one of the smallest underground or shadow economies, it has the largest amount of tax evasion measured in dollars.
Murphy’s report covers 145 countries that generated $61.7 trillion of gross product, 98.2 percent of the world total. The 145 countries had only 61.7 percent of world population, a reminder of how poor the more than 2.7 billion people in the other 90 countries are.
Murphy estimates U.S. tax evasion at $337.3 billion, 10.7 percent of the global figure and close enough to the official Internal Revenue Service tax gap estimates to be credible.
The United States has lower tax rates than eight of the nine other top 10 tax evasion countries. Rampant evasion in America raises doubts about the notion that high tax rates fuel evasion.
WHY NO PROSECUTIONS?
Another sort of financial crime was discussed when Steve Kroft, interviewing Obama for CBS’s “60 Minutes,” cited a poll showing that 42 percent of Americans believe Obama’s policies favor Wall Street. Kroft said he suspects that is because “there’s not been any prosecutions, criminal prosecutions, of people on Wall Street.”
Obama deftly avoided the issue. “Some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn’t illegal. That’s exactly why we had to change the laws.”
Shame on Kroft for not following up with the obvious question: “Where are the prosecutions of those who did commit crimes, Mr. President?”
There is no need for new laws to rein in fraud, the evidence of which is pervasive, reported in detail by our savviest journalists, thoroughly documented in academic reports and in all manner of official government reviews.
Obama then ever so subtly shifted gears, telling Kroft “and that’s why we put in place the toughest financial reform package since FDR and the Great Depression. And that law is not yet fully implemented…”
Obama’s words neatly conflated two separate issues.
One is atrocious business judgment that should have wiped out the wealth of those who invested in the speculative derivatives casinos. That might have restored Wall Street as a home to investment houses that marshaled capital for productive investments.
The other issue is fraud.
Juries often fail to grasp arcane regulations. A crime so complex that it takes a prosecutor a day for her opening argument invites reasonable doubt. But fraud is something juries do get. Show a jury falsified records and bald-faced lies in disclosure documents, then toss in testimony from insiders who pointed out the wrongdoing only to be told to shut up — or who got fired — and convictions follow.
A GROWTH INDUSTRY
We know this because during the savings and loan crisis two decades ago juries convicted in more than three thousand cases, including more than a thousand major felony cases committed by senior insiders.
The man most responsible for those convictions was Bill Black, a federal banking regulatory lawyer at the time who now teaches about white-collar crime as a professor at the University of Missouri-Kansas City law school.
So has Obama or his Justice Department sought Black’s advice? “No,” Black told me.
Instead Obama leans on Treasury Secretary Timothy Geithner, who was worse than a sightless sheriff when he presided over the Federal Reserve in New York. Geithner not only failed to stop the looting, he actually shut down investigators who were onto the frauds because he said he worried that the institutions he was supposed to regulate were too fragile to withstand scrutiny.
The worst part of this is that the statements of the leading Republicans seeking to succeed Obama, a Democrat, make clear they have no interest in putting Wall Street criminals behind bars either.
Financial theft is a growth industry because of government failures that I would attribute to excessive reliance on the financier class for advice, campaign donations and absurdly well paid jobs for officials between their government jobs.
Will the next journalist who interviews President Obama please press the issue: where are the banking fraud prosecutions, Mr. President? And don’t let up until the president picks up the phone and tells Attorney General Eric Holder he wants a 1,000 or more major felony indictments in the next nine months.
Yes Mr. President, where are the prosecutions for insider trading fraud commited by the likes of John Boehner and Nancy Pelosi. The government sent Martha Stewart to jail for what these two “leaders” did.
Prosecuting tax evaders would allow for some tax reduction for honest taxpayers. Memo to GOP: You want tax cuts? Fund the IRS and DOJ to make people pay their taxes. Then we can talk about cutting taxes for the honest taxpayers.
Thanks DCJ!
And Obama should be held to account on this.
If what you are saying is true, a huge portion of our national debt is attributable to both tax fraud and corporate looting of our national coffers. (no big surprise)
I will vote for Obama, without reservation. He is far better than the alternatives, but if he is the man he claims to be, stiffer laws (that all Republicons have been vehemently in opposition to) are not enough. It is time to round up those who have been allowed to prosper at the peril of our nation.
Unleash the Hounds!
Excellent questions! Now, how do “we, the people” get our “representatives” to follow up such that the “system” functions as intended under applicable laws and regulations?
Why do we have to wait for the President or the DOJ – where are the State AGs or sharholders who know they have been used and abused. Why aren’t they holding their CEOs and Wall Streeters to the fire and massively hauling them into court? We the people in general should have a class action law suit on Wall Street, the FED , and Congress for bailing out the fraudsters. Put all of Congress in jail and start all over with new representatives, term limits, election funding limits, and outlaw lobbyists.
What a useless graphic. Obviously the US with the biggest economy will have the largest evasion even if all of the country evasions were the same.
WHAT IS THE PERCENTAGE EVASION PER COUNTRY – only then can one make a reasonable determination.
Come on Reuters you articles are supposed to be for adults.
Moreso-JLWR-’we,the people’ should want to know where the profit from investment portfolios are coming from.
Ignorance is bliss and the investing punter who wants a profit at minimum cost should do a bit of research into their own portfolios.
“The United States has lower tax rates than eight of the nine other top 10 tax evasion countries. Rampant evasion in America raises doubts about the notion that high tax rates fuel evasion.”
So taxation rate is lowest in the USA out of the ten, and tax evasion rate is also lowest… I don’t see how this raises doubts about the notion that high tax rates fuel evasion. If we’re going to accept the correlation alone as evidence for or against this notion; would you (or one of your readers) calculate a Spearman’s Rank Correlation Coefficient (or other Rank Correlation Coefficient) on these data sets, between taxation rate and tax evasion rate? I have a feeling that there will be a positive correlation… Am I wrong?
If you are saying that tax evasion is more complex than a simple causal relationship from tax rates alone, I would agree with that. Tax evasion rates and the size of the shadow economy must be correlated to other things too, such as: * Strength of accounting systems, transparency culture and tax enforcement regime (both internally and across borders) * Simplicity and enforceability of tax code (not too many loopholes – easy to identify suspicious behaviour) * Availability of suitable tax havens with adequate means of wealth transfer with the country in question
Somebody would have to fund the agencies charged with enforcing the tax codes involved, but we all know which party controls the purse strings at the moment, don’t we?
@matthewslyman, Methinks you misread what DKG said.
You are correct in observing that the U.S. “…taxation rate is lowest in the USA out of the ten, and tax evasion rate is also lowest.
DKJ has, instead, chosen to observe that our U.S. economy is “short” by the highest amount of “diverted tax dollars” of every country charted. That should be little surprise, considering the sheer size of American GDP as compared to the others (which is not shown).
So, even at our relatively low tax rates, the total U.S. “missing” tax revenue in dollars clearly exceeds that of every other charted country. That, to me, suggests our government has more to gain by “tightening up the weave of the tax net” than governments of lower GDP and lesser “lost” tax revenue; but they obviously need to do what they can anyway.
Columnist here….
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