We may think of the Cayman Islands when we think of tax havens and shadow banking, but states like Delaware are also major players in the world of underground finance.
This year, the U.S. government will again fail to collect billions of dollars in taxes from corporations and wealthy individuals who have moved their income into tax havens. And the United States won’t be alone; in fact, as much as $20 trillion could be squirreled away in offshore tax shelters around the world.
Some of that money resides in well-known offshore destinations such as the Cayman Islands, but a significant chunk of is also hidden within America. Thanks to the legal frameworks various states, the country has come to be considered a major shelter for other people’s money, with states like Delaware and Wyoming taking the lead.
Hundreds of thousands of businesses are incorporated in Delaware, where corporations take advantage of the state’s forgiving tax code and disclosure laws. In fact, the number of corporations housed in Delaware exceeds its population, and has cost other states roughly $9.5 billion tax revenue over the past decade, according to a 2012
The people who have sheltered their money in Delaware include disgraced lobbyist Jack Abramoff and Russian arms smuggler Viktor Bout.
Delaware is not the only state to function as a tax haven.
“Delaware is the biggest state provider of offshore corporate secrecy, but Nevada and Wyoming are the most opaque,” writes journalist Nick Shaxson in Treasure Islands, his book on shadow banking and tax havens. “They allow bearer shares, a vehicle of choice for mobsters and drug smugglers, and they are particularly lax on allowing company directors and other officers to be named, hiding the identities of the real owners.”
Wyoming in particular has become a locus for corporate secrecy. In 2011, Reuters reported that a single house in Cheyenne, Wyoming served as the registered address for more than 2,000 companies. The house is run by a company called Wyoming Corporate Services, which specializes in helping clients form miniature corporations.
Thanks to states like Delaware and Wyoming, America ranked in fifth place on the Tax Justice Network’s 2011 Financial Secrecy Index, which ranks the level of secrecy in different tax havens and their significance to the global economy.
“USA accounts for slightly over 21% of the global market for offshore financial services, making it a huge player compared with other secrecy jurisdictions,” according to the Tax Justice Network.
While America’s status as a safe haven for dark money is unlikely to go away anytime soon, President Obama’s proposed 2014 budget includes some modest controls on the diffusion of American money broad. In particular, the budget targets offshoring by eliminating tax deductions for certain transactions with “affiliated foreign companies.”