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Tuesday, July 20, 2004

Should I Invest? Or Will the CEO Rob Me?

Ever since I posted about Ekasse, a financial firm that promises to provide an overseas credit/debit card and "coded bank accounts solutions to avoid taxation," I've gotten a steady stream of hits from people searching for information about the company. Since it's not like their web site is hard to find, I suspect that these people are concerned that after they deposit their money, with "complete privacy and anonymity," Ekasse will steal it.

Guys, I don't know if Ekasse is going to rob you. I do know that you should pay your taxes, though. You'll sleep better and feel better about yourself, if you act honestly.

Concerns similar to those of Ekasse's potential customers are the subject of a recent paper by Harvard tax shelter expert Mihir Desai and rising star Dhammika Dharmapala. They point out that tax shelters have some drawbacks from the point of view of a firm's stockholders. The problem is that if managers use tax shelters to hide profits from the government, they can also hide them from stockholders, allowing the managers to pocket the money themselves. Enron, which had hundreds of shell companies in the Cayman Islands, is the quintessential example. Desai and Dharmapala say that they've found econometric evidence of this kind of behavior: better governed firms (where managers can more easily be ousted by stockholders) use tax shelters less.

Desai and Dharmapala's findings highlight another efficiency cost of the government's failure to crack down on tax shelters. Besides costing the government tax revenue, they may also reduce investment, growth and jobs. Tax shelters create an environment where investors must be fearful that CEOs will steal their money.

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