Nicholas Shaxson, author of Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havensdiscusses the enormous impact of tax havens on the current budget crisis in the UK, the US and other countries.

…tax havens have grown so fast in the era of globalization, since kind of the 1970s, that they have now become right—they are now right at the heart of the global economy and are absolutely huge. I mean, there are 10—anywhere between 10 and 20 trillion U.S. dollars sitting offshore at the moment. Half of world trade is processed in one way or another through tax havens. It’s all around us, and it’s absolutely huge.

Part of that—part of that message is that the biggest tax havens in the world are not so much these little islands, but big, rich countries. The United Kingdom, my country, is one of the world’s most important tax havens. And right now in Washington, D.C., I’m sitting in one of the world’s biggest tax havens, as well: the United States. So, this is something we need to really reappraise, the whole geography of the system, and understand how important it is. And when we’re hearing figures of $100-plus billion lost to the U.S. taxpayers, I would argue that is just one aspect of the problem. The problem is much, much bigger. There are many, many other aspects to consider here.

Shaxson explains how the UK and the US act as tax havens by enabling companies to avoid democratic constraints meant to protect consumers and to regulate abuses in the financial industry.

Well, there are two aspects to this, really. One is the U.K., the city of London, which is the financial district of the United Kingdom, is itself a tax haven. And I need to explain a little bit what I mean by “tax haven.” There’s no general agreement worldwide as to what a tax haven is. A lot of people focus on the tax element, but it’s much more than that. Tax havens do offer zero or low taxes to people elsewhere, but they also offer secrecy. They offer escape routes from financial regulation. They offer escape routes from criminal laws. The key theme here is escape. If you don’t want to do—if you are constrained by democratic rules and curbs at home, you take your money offshore, you take it elsewhere, to a place where they’ll let you do what you’re not allowed to do at home.

…Global Financial Integrity, which is a Washington think tank, in January estimated that illicit financial flows out of developing countries in 2008 added up to $1.2 trillion U.S. dollars into tax havens and rich world economies. A lot of that came here into the United States. A lot of Latin American money comes here. And so, the United States itself is a tax haven. United States has a kind of two-faced problem. One is that it’s losing money to foreign tax havens, but also it is itself offering secrecy facilities, offering tax-free treatment to foreigners who bring their money here, and helping foreigners evade taxes and commit crimes. And one of the arguments, great arguments, in my book is that this money that’s coming in does not make up for the money being lost. Instead, it causes harm. It further puffs up wasteful property bubbles, further puffs up Wall Street, and has contributed even more to this, you know, “too big to fail” problem and the problem the financial capture of the political process. So we have a double—the inflow problem and the outflow problem both being harmful for the United States, but also for the developing countries.

General Electric has come under fire lately for tax avoidance and many companies now base their bonuses to executives on after tax profits rather than company growth. Shaxson says, “This is economic conflict. When one country tries to suck tax revenue or illicit flows or whatever out of another country, that is an aggressive act. And we need to start taking much more robust action to defend all of our countries against what’s going on in the offshore system.”