The Weakening of Nations: How Tax Work-Arounds Undermine Our Society

Loopholes, poor regulations, and off-shore havens allow corporations and the very wealthy to draw on the benefits of a strong nation-state without fully paying back in, eroding a system that's less tested than we might think.

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The Ugland House of Grand Cayman Island houses the office of the Cayman's largest law firm, Maples and Calder, and is the registered office of some 18,000 companies / Reuters

Millions of dollars of Mitt Romney's personal wealth have been recently tied to bank accounts in the Cayman Islands, a Caribbean UK territory with decent SCUBA diving and spectacular don't-ask-don't-tell banking regulations. The Romney campaign protests, weakly yet amusingly, that "the accounts provide no tax advantage to American investors like Romney" but are there purely for the convenience of foreign investors who might wish to invest in Bain Capital without the "entanglements" of the United States tax system. Either way, a portion of Romney's considerable wealth is parked where it isn't subject to the same taxation that the average citizen experiences.

Romney's situation is actually quite typical for a man in his societal position. He has enough money to make himself attractive to a variety of financial odd-duck "nations" around the world who would be more than pleased to "host" his wealth in exchange for the occasional transaction fee, without pestering him about financing their schools, healthcare, roads, war, or any of the annoying trappings of civilization. The question remains -- is that moral? Isn't Mitt Romney a citizen of a particularly large nation-state already? Does he not owe that nation-state taxes, given that he is such prominent citizen that he may actually be elected president of the place? What is going on here?

It seems that the concept of the nation-state itself is becoming a very pliant one for certain actors in society, be they corporations or the very wealthy. The fact is, nations only function because the majority of its citizens believe that their responsibilities to that nation are fixed and immutable, on everything from taxes to dying in war. If we don't make very clear distinctions as to who owes whom what in this world, the relative stability we've come to enjoy in the international system may give way to illegitimacy and, ultimately, chaos.

THE RECIPE FOR A NATION

It's impossible to talk about the ethics of offshore banking without bring up a much broader issue, one that is perhaps overdue for a revisit -- what is a nation and what does it mean? The average person takes the concept of a "nation" and assumes that it is concrete. In fact, today's system of states today is scarcely two or three centuries old. Sure, the United States and many other nations are technically older than that, but in reality what existed before was much more fluid and chaotic -- minor kingdoms, duchies, fiefdoms, and principalities, usually squabbling, sometimes cooperating, and only barely organized by ethnicity or language. Historically, states have very rarely agreed upon common currencies. Your identity was instead tied to a locality, scarcely a few hundred miles in any direction, and you probably thought the next kingdom over was the worst place on earth.

Born theoretically with the Treaty of Westphalia in 1648, but not truly coalescing in most places until the 19th or even 20th centuries, the modern concept of the nation-state is a larger entity united under a flag -- a very early, pre-Adobe Illustrator attempt at branding. Local dialects were stomped out to make way for a single, standard language. National creation myths were taught in order to give all citizens a similar set of assumptions about who they are, where they come from, and where they are going. All this, plus agreed-upon borders, make up what we now consider an inhabitable "country."

In the 21st Century, every place on Earth is divided into these nation-state things, even where they probably don't quite fit, such as African countries with hundreds of ethnicities and dozens of languages. Regardless of their imperfection, they are the unit of analysis. But that's changing.

ON RIGHTS AND OBLIGATIONS

Throughout the world, we are at a crisis point as to defining the rights and obligations of the members of a nation-state.

From individuals, it is clear: you owe taxes from your income and your purchases; you must obey the laws; if necessary, you must go to war; you can elect political officials so that these obligations are tailored more to your liking. The nation-state pledges in turn to give you access to recourse of grievances and to limit the application of violence and harassment to you from official actors. You get rights and responsibilities.

There is, of course, another inhabitant of a nation-state: the corporation. Though originally created specifically as entities that were not supposed to receive the benefits of citizenship, in exchange for which they received the ability to walk away from debts, corporations are getting an improving deal as they move through society as actors, gaining the privileges of individuals while taking on fewer of the obligations associated with being located in a single place.

Let us take, as an example, Citibank, the second largest financial institution in the United States. Consider the fact that Citibank received billions in bailout cash. Though publicly traded to anyone, this behemoth enjoys an explicit guarantee from the U.S. government to keep existing no matter what business strategy it might employ. After all, they are an American institution, and it is in the best interest of Americans to make sure that it keeps existing, no matter what it might cost in terms of tax money. So when the company got up to its eyeballs in worthless derivatives, the U.S. Federal Reserve Bank sprang into action to make the company whole. Even without the bailouts, Citibank benefits tremendously from the American government, the physical and legal security it provides, all of which is expensive.

Presented by

Eric Garland, a futurist and strategic analyst, is the author of Future Inc: How Businesses Anticipate and Profit from What's Next and How to Predict the Future...and WIN!

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