What Malta Tells Us About Oligarchy

SUMMARY

Paul Krugman examines how Malta has become a central hub for corporate tax avoidance and profit shifting, highlighting the broader implications for oligarchy and public policy. He critiques both European and U.S. governments for their failure to address these practices, linking them to weakened social programs and increasing inequality.

MAIN POINTS

• A shift from taxing capital to taxing labor has contributed to the rise of oligarchy, with declining effective corporate tax rates driven by loopholes. [0:00]
• Malta, despite its small population, is a major destination for foreign direct investment due to its role as a tax haven, facilitating massive profit shifting through shell companies. [1:00]
• The distinction between tax avoidance and evasion is blurred in Malta, with both legal and illegal activities occurring, including money laundering and criminal acts. [2:00]
• Profit shifting costs the United States over $100 billion annually, an amount comparable to major social programs, highlighting the scale of the issue. [3:01]
• Although the European Union has taken some steps to curb tax shelters, enforcement is weak and corruption persists, while the U.S. under Trump has withdrawn from international agreements to limit tax havens. [4:01]
• The ongoing tolerance of tax avoidance is attributed to the power of wealthy individuals, creating a self-reinforcing cycle that exacerbates oligarchy and requires urgent action to reverse. [6:01]

DETAILED ANALYSIS

A significant transformation in global taxation over recent decades has shifted the burden away from capital and towards labor, contributing to the entrenchment of oligarchic structures. Central to this shift is the dramatic decline in effective corporate tax rates, achieved not only through reductions in headline rates but also through the proliferation of loopholes that enable profit shifting. Malta exemplifies this phenomenon, functioning as a major tax haven despite its small population.

The island's official statistics report over $500 billion in both inbound and outbound foreign direct investment, figures that far exceed the scale of its real economy and are made possible by the widespread use of shell companies. These entities allow multinational corporations to reallocate profits to Malta, where corporate taxes are effectively negligible.

The activities in Malta straddle the line between legal tax avoidance and illegal tax evasion, with some operations involving outright money laundering and criminal conduct. The dangers of investigating these practices are underscored by the assassination of a Maltese journalist who probed the issue. The scale of profit shifting is immense; for the United States alone, annual losses exceed $100 billion, an amount on par with the budgets of vital social programs like food stamps and Medicaid for children.

This loss of revenue undermines the funding of public services and exacerbates economic inequality.

Efforts to address these issues have been inconsistent. While the European Union has made some progress in curbing tax shelter practices in countries like Ireland and has proposed a minimum corporate tax rate of 15%, implementation remains weak and corruption is a persistent obstacle. In the United States, recent policy has moved in the opposite direction, with the Trump administration withdrawing from international agreements aimed at limiting tax havens.

The persistence of these practices is attributed to the influence of wealthy individuals and corporations, whose ability to avoid taxes further increases their power, creating a feedback loop that accelerates the concentration of wealth and power. Reversing this trend requires decisive and coordinated action, as the current trajectory threatens to deepen oligarchic control over economic and political systems.

LINKS

• Paul Krugman's Substack article on Malta and oligarchy

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