Piketty crossing the Delaware

by John Quiggin on May 18, 2014

Like lots of other readers of Thomas Piketty’s Capital, my big concern is not with the accuracy of the diagnosis and prognosis but with the feasibility of the prescription. Piketty’s proposal for a global wealth tax requires an end to the capacity of capital to escape taxation by exploiting the limitations of national taxations system, through tax havens, transfer pricing, artificial corporate structures and so on.

Given the limited record of success in past efforts to control global tax evasion and avoidance, Piketty is reasonably pessimistic about efforts in this direction. But the latest news from the OECD is remarkably positive. All members of the OECD (notably including evader-friendly jurisdictions like Austria, Luxembourg and Switzerland) have agreed to a system of automatic information exchange for tax purposes. Moreover, the “too big to jail” status of major banks engaged in facilitating tax evasion and money laundering, may finally be coming to an end.

On the face of it, the oft-repeated, but so far unjustified claim that “the days of tax havens are over“, may finally be coming true, at least for all but the wealthiest individuals. But the crackdown on individual tax evaders only points up the ease with which corporations (and individuals with the means to establish complex corporate structures) can avoid tax through a mixture of legal avoidance and unprovable evasion (for example, by illegal but unprovable internal transfers).

At the core of the problem is the ability to establish corporations in ways that make their true ownership impossible to trace. And, the jurisdiction most responsible for this is not a Caribbean island or European mini-state, but the “First State” of the US - Delaware, which has long been the preferred location for US incorporation by reason of its business friendly laws.

For a long while, most reference to Delaware as a tax haven came in the form of a tu quoque from the pro-haven side of the debate. Since any challenge to Delaware’s role in the corporate sector seemed unthinkable, it was argued, any US criticism of Switzerland or Luxembourg was mere hypocrisy. The same point was made about the UK and France, with reference to their various offshore dependencies (the Channel Islands, Caymans and so on). But now the argument has turned around. As the various tax havens have fallen into line with OECD agreements and US legislation like the Foreign Account Tax Compliance Act (FATCA), they now have an incentive to turn attention on to Delaware. Having a corporation registered in Delaware is starting to look somewhat like possession of a Swiss bank account: not necessarily illegal or even improper, but certainly something that arouses suspicion. Here are a few straws in the wind

  • A New York Times story on corruption and money laundering in Europe gives a prominent mention to the role of “US states like Delaware and Wyoming”. There’s an internal link to an Op-Ed I’d missed, entitled “Delaware: Den of Thieves?
  • In the course of the recent election campaign in Quebec, a prominent supporter of the Parti Quebecois was attacked for apparently owning companies registered in Delaware
  • US Senator Carl Levin’s long-stalled attempts to bring in a “Stop Tax Haven Abuse Act” is restarting, including a focus on Delaware shell corporations. It’s unlikely that this will pass any time soon, but it’s still an encouraging development.

None of this would have much impact on the really big tax dodgers, like Apple and Google. But even here, things are moving. The era of untraceable and untaxable capital movements may come to an end sooner than we expect.



William Timberman 05.18.14 at 11:35 pm

A consummation devoutly to be wished. Love the title — reminds me of a certain painting. Surprisingly easy to imagine myself as a shivering patriot on the opposite bank, waiting patiently to assist General Piketty onto dry land.


Main Street Muse 05.19.14 at 2:03 am

Connecting Washington crossing the Delaware with tax cheats makes me sad for so many reasons. #1 reason it makes me sad – it makes me think of all the soldiers who die to protect corporations’ rights to avoid taxes like they were the plague.


Tabasco 05.19.14 at 2:59 am

It’s all very nice to have the members of the OECD agreeing to exchange information for tax purposes, but there are credible non-members of the OECD with sophisticated banking systems who could facilitate tax minimisation – Hong Kong and Singapore, for example.


Anderson 05.19.14 at 3:12 am

I’m always surprised that enough other states don’t band together & federalize corporation law. Tho the Roberts Court would find that unconstitutional I’m sure.


BBA 05.19.14 at 3:26 am

Good luck with that. Here in the States it’s more unusual for a corporation to be registered outside Delaware.


John Quiggin 05.19.14 at 3:55 am

@3 Singapore has already signed on to the OECD agreement. Hong Kong has dragged its feet a bit more, but is on the way to signing a FATCA agreement with the US.

And that’s true more generally. No jurisdiction was willing to stick to its guns and maintain “unco-operative tax haven status” rather than comply with the (admittedly weak) requirements of the 2009 OECD blacklist, and it appears none will resist FATCA (or, for that matter, “GATCA”) in the end.


John Quiggin 05.19.14 at 3:58 am

@BBA Of course, that cuts both ways. If pressure starts up (potentially from outside the US) Delaware will face a choice between tightening up on shell companies and disclosure, or risking losing the incorporation business entirely. The Caymans and other similarly placed jurisdictions have chosen to tighten up.


heckblazer 05.19.14 at 4:16 am

This quote on Wyoming from a Reuters story jumped out at me:

“New laws require companies to have a physical presence in the state through an owner or a registered agent, and make it a felony to submit false filings”.

Because holy crap, that implies until recently you didn’t need a registered agent and false filings weren’t a felony.


Tabasco 05.19.14 at 4:45 am

“Delaware will face a choice between tightening up on shell companies and disclosure, or risking losing the incorporation business entirely.”

That’s unlikely to happen in the short term, since the Vice President is from Delaware.


John Quiggin 05.19.14 at 6:53 am

@9 At least from the point of view of an outsider, you seem to impute impressive power to the office of VP. My impression is more that of the story of “a woman with two sons, one of whom went to sea and one of whom was elected vice president; neither was ever heard of again”


Tabasco 05.19.14 at 7:02 am

I think he might have just enough influence in Congress to save the day for the only industry his state has.

Plus, while unlikely, it is not impossible that he might run for, and win, the Presidency in 2016.


Murc 05.19.14 at 12:55 pm


You seem to be under the impression that Joe Biden is actually affirmatively in favor of Delaware whoring itself out to the lowest bidder, rather than that simply having been the price of doing business if you want to be politically successful in that particular state.

That was, of course, a distinction without a difference when he was a Senator. But now he’s a VP with a national profile, and Delaware is a guaranteed blue state that’s irrelevant to the nomination process. What makes you think Biden isn’t incredibly glad he won’t have to carry water for those assholes ever again in the Senate, and will chuckle politely if they ask him to do so?


JRHulls 05.19.14 at 1:55 pm

One has to be very careful about accusing someone of irony in this day and age, but it can’t be unintentional that a transaction under the Foreign Account Tax Compliance Act becomes at FATCAT?


JRHulls 05.19.14 at 1:56 pm

Fumble fingered pre-coffee typing…… -a FATCAT


John Garrett 05.19.14 at 3:41 pm

As John Nance Garner said after four years as VP, “the Vice Presidency ain’t worth a bucket of warm spit.” Or words (if there are any others) to that effect.



Jim Harrison 05.19.14 at 4:03 pm

The pressure on taxing authorities to crack down on tax havens can have a perverse effect because the easiest way for prosecutors to respond to public pressure is to go after relatively small fish. You can bust the ordinary millionaires when they try to imitate the billionaires, but the political power and armies of lawyers of the real plutocrats puts them effectively beyond the law. The state actors get valuable political cover from theatrical trials, but the system itself remains unchallenged. Jeffrey Winters explains how this works in his book Oligarchy, the political science counterpart to Piketty’s tome.


roger gathman 05.19.14 at 4:13 pm

Theodore Roosevelt advocated having a real commerce department that would register and regulate all interstate businesses. That would get rid entirely of the siting and headquartering scam.
On the other hand, we are looking at the Obama administration and probably a republican dominated legislature for the next two years, and after that another neo-lib Dem, etc. I imagine the quid pro quo for any “reform” will be a radical lowering of corporate taxes and other kinds of folderol that will make it unnecessary to hide money.


Wonks Anonymous 05.19.14 at 4:50 pm

It’s my understanding that the incorporation advantage of Delaware is not merely in the content of its laws. If it were, other states could easily adopt the same laws and poach some of its business. Rather, Delaware early on grew an “infant industry” of courts experienced in business law, and most businesses would prefer to use those courts. Perhaps not especially relevant to this post, but just something I found interesting.


Bruce Wilder 05.19.14 at 5:13 pm

There’s a rhetorical trope on the left making fun of the tendency in the law to elevate corporations as persons with rights. If corporation law were to be reformed, one element might well be to require that corporations be “citizens” with a definite domicile and limited legal capacities outside their “home”. This would be a profound change, and reversal of globalization, even if it did not extend to restrictions on who could own equity financial instruments of “citizen” corporations.

The evasion of corporate taxes through the use of tax havens has become a complex game in which legal and accounting “structures” of beneficial ownership and nominal control have evolved from slender fictions into mere wisps of smoke among the mirrors. The primary strategy is not simply to employ shells located in post office boxes and rented office suites of a few ten square feet, but to move these shells around constantly, and more swiftly than a New York hustler playing three-card monte. Audit becomes impossible, as the shell game’s dynamic complexity creates a kind of encryption.

Instinctively, I sense there’s an opportunity here to conceive of, and press a radical reform, which could address both the ability of wealth to evade taxes, but also the ability of corporations to centralize strategic control of vast sectors of the economy in networks and holding companies. The bank holding companies that combine ownership of financial sector players, which ought to be competitive opponents and checks, and the media conglomerates, which combine ownership of all kinds of publishing and communication — not to mention the medical-industrial or military-industrial complexes — are not monopolies of the classic description, but they are far more corrupting and destructive, wielding an oppressive and concentrated power.

Imposing significant constraints on the structure and scope of corporations, to dampen the evasion of taxes, will require breaking their power, but it could also open the door to addressing these other issues of overweening corporate power.

Piketty’s rhetorical tact in presenting remedieis is a clever one in some ways. There are a lot of economists, who are fixed on the idea that the economy before taxes is some natural ideal of efficiency (though perhaps a bit red of tooth and claw), but the economy after taxes can be an ideal of equity. It’s an incredibly stupid way of thinking, an artifact of a conventional style of abstraction, but it’s the prejudice of a significant part of the profession. But, such careful parsing hides the reality of wealth as power bearing down on us all.


Jim Harrison 05.19.14 at 5:33 pm

The focus on corporations is misplaced. Corporate personhood, after all, is a legal fiction. The real villains are the individuals and families that use the machinery of corporate law to their own benefit, often to the detriment of the supposed owners of firms as well as society as a whole. We live in an age of oligarchs, not faceless organizations. In this case, at least, the Bible has it wrong. We fight against flesh and blood, not principalities and powers.


hix 05.19.14 at 6:41 pm

The big business is in coporate tax avoidance that is often legal or at least in a grey area. Why bother to fight for small change and threaten that business. Truely rich people are still attracted by the offer to physically move themself for a couple of month a year to those tax havens and pay no capital gains taxes at all – completly legal.


TheSophist 05.19.14 at 10:06 pm

Credit Suisse just agreed to pay 2.6 billion (yeas, billion) in penalties for abetting tax evasion. Can somebody more knowledgeable than me comment on whether this is a genuine move in the right direction or just a pittance?


James Wimberley 05.19.14 at 10:16 pm

John Garrett #15: I’ve heard that Garner’s “spit” was bowdlerised. Not sure which other bodily effluvium he spoke of.


BBA 05.19.14 at 11:18 pm

Since when does the US take action in response to pressure from overseas? We haven’t even adopted the metric system!

But my overall point is that when you say there’s a problem with “Delaware” you’re really saying there’s a problem with the US regulatory system as a whole. Most states have followed Delaware’s lead in lax corporate disclosure laws; the main reasons why Delaware maintains its advantage are inertia and (as Wonks Anonymous @18 mentions) case law. Certainly non-Delaware corporations like Apple (registered in California) and General Electric (New York) can avoid taxes just as well.


John Quiggin 05.20.14 at 12:17 am

@hix Living in a tax haven is a bit like the talking filibuster

@BBA The question isn’t so much whether the US will take positive action in response to pressure, as whether it will push back against measures by foreign jurisdictions treating the use of US (particularly Delaware) LLCs as tax evasion: Brazil took some steps in this direction a while ago. As regards the special status of Delaware, my understanding is that this isn’t a big deal for major corporations, for which transfer pricing and similar techniques are more important than disclosure, but that Delaware (along with competitors like Wyoming) is more friendly to shell companies used by wealthy individuals and small businesses.


John Quiggin 05.20.14 at 12:19 am

@22 Still a pittance, but, in combination with the requirement for a criminal conviction, a step towards actions that will be more than a cost of doing business.


JPL 05.20.14 at 12:23 am

Re J Harrison @ 20:

If your comment was intended as a response to B Wilder @ 19, I would disagree; the focus on corporations in that comment (which was not anyway intended as a grand overall solution) is not misplaced.

1) The inclusion of corporations under the term ‘person’ (use of the term to refer to corporations, understanding corporations “as” persons) was originally intended to be legitimate only in certain strictly specified legal contexts (the modified term ‘juridical/fictitious person’). Any use of the term ‘person’ to refer to a corporation outside of these specified contexts renders the category (of ‘person’) incoherent and is illegitimate. (BTW, whenever a corporation is the referent, the term used should be ‘juridical’ or ‘fictitious person’ not simply ‘person’.) This illegitimate usage includes the context of campaign finance contributions, among other areas. The whole “corporations are people, my friend” slack thinking metaphor gambit will eventually be unravelled. But the reforms in corporate law mentioned by BW can be carried out independently of the status of corporations wrt the category ‘juridical person’, and of course independently of the appropriateness of the metaphorical use.

I intended a (2), a more substantive defence of BW’s focus, but I’ll have to do that later; I have to go now.


BBA 05.20.14 at 3:01 am

I suppose this just goes to show the disconnect between domestic and foreign views of what’s going on here.

In general, the IRS and other American authorities view the entire rest of the world as one giant tax shelter. This leads most directly to onerous bureaucratic burdens on American expatriates, who have to deal with FBAR and FATCA and other acronyms to prove they aren’t tax evaders, but it also has led to the US becoming a tax shelter for the rest of the world. After all, why should we help foreign countries collect taxes on American companies[1], when everyone knows the only reason why anyone would pay taxes abroad is to avoid taxes here at home[2]?

[1] Here “American” includes US-registered companies owned by foreigners whose only presence in America is an account with a mail-forwarding service.
[2] Granted they still don’t pay much if anything in US taxes, but that’s beside the point because…shut up, that’s why.


Jim Harrison 05.20.14 at 3:36 am

Corporations go back quite a ways, and the general notion of artificial persons is older still. I find it hard to believe that these legal forms are the real problem. I don’t doubt that corporations can be problematic in various ways, but my point was simply that the current situation has less to do with the privilege of limited liability firms than the way that corporations have been captured by individuals, especially managerial types who leverage their control of corporations to secure enormous rents and become absurdly rich.


liberal 05.20.14 at 10:12 pm

Yawn. If you tax land value, you can rest assured the underlying asset won’t flee to another jurisdiction.


Ogden Wernstrom 05.21.14 at 9:38 pm

What’s the land value of a PO Box in Delaware?


hix 05.22.14 at 5:20 pm

Moving residence is not an option against counries that are serious about taxation. The problem is that many are not. Its unfortunately not a difficult move for rich people everywhere. Austria is both cultural and geographical closer than many parts of Germany itsself to Bavaria for example. And its not like anyboy can control if one truely stays 6 month (unless one is called Boris Becker – he went to lots of very public events in Munich all year round).


Bruce Wilder 05.22.14 at 6:33 pm

Jim Harrison @ 29

For what it’s worth, I agree that the legal personality of the limited liability corporation is not a root problem.

I think we need to put a low ceiling on the ability of C-suite executives to extract income and wealth from their positions of enormous power. Being able to make millions in a short time from being at the head of a great corporation tempts sociopaths to compete for these positions and to behave irresponsibly and in a parasitic or predatory fashion, to realize quick gains.


dax 05.23.14 at 9:02 am

I’m appalled that someone could think FATCA is a good thing. It requires non-American banks to hand over details of financial data, without any reciprocity on the American side despite lame assurances by the Americans to the contrary. And it requires them to turn over this data even on its own citizens and residents, those who were unlucky enough to be born in the US or otherwise “earn” US citizenship.


Ebenezer Scrooge 05.23.14 at 11:53 am

The other reason Delaware is popular is that its Chancery Court judges have a deserved reputation for high technical competence. Business lawyers like judicial competence, once the important thing–overall friendliness–is assured.


Martin Bento 05.25.14 at 5:02 am

Bruce, I do think corporate personality is important because it implies that corporations have the rights that accrue to human beings and has been so applied legally. Obviously, the legal system creates corporations and can grant them the rights deemed useful. But the legal system has come, more or less, to recognize that human have intrinsic rights that do not necessarily originate in the legal system itself. Philosophically, this gets complex, but that is where we are and it is a good thing, on balance. Treating legal fictions as having intrinsic rights like free speech gets very problematic, however.

Partly the reason intrinsic human rights are so important in modern society is that you do not actually have a right to exist without paying society, which could be considered right zero. I’m not talking about means of sustenance, which, after all, are normally created by others, who arguably have some claim to receive compensation for providing them. But you are a physical being, and therefore existence for you has to mean occupying space in a specific location 24 hours a day. And you are an animal, so some of that time you must be asleep. One thing that becomes very clear to you if you ever live on the street, as I have, is that you do not actually have any such right. Public places like streets and parks do not generally permit sleeping (sometimes the formal law is murky, but the fact is, if the police want to roust you, they can). If you go to the woods outside of town, some entity, public or private, owns that land and can evict you if they choose. All the habitable land is real estate. That is not to say that you cannot be anywhere. You can, either by stealth or tolerance (it is frequently more convenient for the authorities to ignore you than hassle you). But neither stealth nor tolerance is a right. The result is that you must pay society for your right to exist. Even if you inherit unencumbered title to real estate, you must pay property taxes, but most must pay much more than that. While corporations must also pay some fees and do some paperwork, it is trivial next to rent, particularly for LLCs. One of the few ways the playing field can be equaled is for corporeal beings (people) to have rights that incorporeal beings (ironically called “corporations”) do not, for the reverse is true automatically. The ability of corporations to make their domicile ambiguous, central to the OP, is a consequence of the fact that they do not actually have a domicile – they are phantasms of the air.


Bruce Wilder 05.25.14 at 5:58 am

Martin Bento @ 36

You touch on the basic concept of Ricardian rents. Quoting Wikipedia:

Ricardo noticed that the bargaining power of laborers can never dip below the produce obtainable on the best available rent-free land, because whenever rent leaves them with less than they could get on that free land, they can simply move to the new location. The produce obtainable on the best available rent-free land is known as the margin of production. Since landlords have a monopoly over a given location, the only limiting factor for rent is the margin of production. Thus, rent is a differential between the productive capacity of the land and the margin of production.

This law has a number of important implications, perhaps the most important being its implication for wages. The Law of Rent implies that wages bear no systematic relationship to the productivity of labor, and are instead determined solely by the productive capacity of marginal land,[3] as all production in excess of that amount will be appropriated by landowners in rent.

This is not the notorious iron law of wages, which predated Ricardo and is most commonly associated with the writings of Thomas Malthus. Indeed, Ricardo was an intellectual rival of Malthus on this point. The law of rent explains why the iron law of wages consistently fails to predict actual wages: if there are highly productive land sites available free, wages will tend to be high, all things else being the same; if the only available free land yields little, wages will tend to be lower.
In contrast to Malthus’s hypothesis of overpopulation, Ricardo explains mass poverty using deductive logic by noting that when there is no rent-free land, subsistence becomes the effective margin of production. Landlords will not charge more than this amount because it would entail no production at all, and thus no rent.

What you experienced might be called, enclosure. It is cutting people off from access to the means of production and everything else — a kind of helplessness, which does not have to be learned.


Martin Bento 05.25.14 at 7:11 am

Sure, except that I do not think there is any more rent-free land, save in places not habitable without significant resources, e.g., Antartica, and perhaps in some areas not yet entirely incorporated into the modern world, e.g., the upper Amazon. Also, wanting access to means of production produced by someone else is one thing; being denied access to space to stand and sleep upon the Earth is something else. It leads back to me to one of my personal crusades: bring back public housing! But that, I suppose, is for another thread.


JPL 05.25.14 at 12:46 pm

I had wanted, in response to Mr. Harrison above (@20), to pick up on a point in BW’s comment that I think deserves emphasis and focus. BW notes, “… the reality of wealth as power bearing down on us all.” And, “… the ability of corporations to centralize strategic control of vast sectors of the economy in networks and holding companies. The bank holding companies … and the media conglomerates …not to mention the medical-industrial or military-industrial complexes– are not monopolies of the classic description, but they are far more corrupting and destructive, wielding an oppressive and concentrated power.” One could add here as an example the petroleum industry (used to be called the “7 sisters” cartel) and their influence on the decision on the Keystone XL pipeline and climate change/ alternative energy policy in general.

The point is that big money (control of very large financial resources) represents a potential to influence human decision making akin to a physical force in causing physical events. Big money has the potential to corrupt the political decision making process. (E.g., decisions about the Keystone XL pipeline) I.e., concentrations of big money can be brought to bear on policy decisions to favour the aims of the money interests and override the operation of ethical principles, which would preclude the suffering of the many. Thus big money should not be allowed free rein to do whatever it wants in the hands of “sociopaths” (and indeed the conventional mentality of the corporate boardroom is sociopathic.), but should be governed by ethical and rational principles, ideally through government “by the people”. Taxation is one way to reduce or limit these large concentrations of uncontrolled money.

Liberals have long regarded government (“big government”) as an essential, popularly controlled counterweight to the uncontrollable and financially powerful private business sector. But government does not necessarily need to be opposed to business interests as such; they are after all one set of interests among many. Rather, it should be opposed to the potentially malignant influence of big money on the policy making process, and aim to bring it under ethical control. In the past people thought of things, as a practical matter, in the relatively concrete terms of class interests (capital vs. workers, etc.), but the problem is to deal with the existence of uncontrolled big money. The problems of imbalances of wealth are not confined to capitalist systems. (Look at the evolution of the Chinese and Russian systems.) The question is, why do all the political-economic systems we’ve tried so far tend toward plutocracy? We need to determine what are the pathways by which big money influences the political decision making process, and then block them.

For individuals, there is a point beyond which the pursuit of money becomes excessive, unnecessary and illegitimate (and not “deserved”). For corporations, the thinking of the managerial class is completely governed by limited and sociopathic conventions; there is no ability for independent thinking. (Mitt Romney’s 47% confessional) Left to their own devices, we see the results today. This connects, I think, to Ingrid Robeyns’s project: we need to recognize limits on concentrations of uncontrolled money. Individuals can still continue to pursue their puerile indulgence of self-regard, but they don’t need such excessive amounts of money to do it.


John Quiggin 05.26.14 at 3:38 am

Responding to various posters commenting on Delaware’s supposed legitimate benefits as a specialist in incorporation, it’s worth making the point that all tax havens say this: the Caymans, Liechtenstein, Switzerland etc make exactly the same claim with varying degrees of plausibility.

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