Bermuda’s $59 Million Worker

DR. Davies is an economics professor researching international trade, multinational corporations, and tax policy. Originally from West Virginia, he switched from a planned career in marketing to economics as an undergraduate. His research covers profit shifting, tax havens, and how countries can design tax policy that captures the benefits of multinationals while addressing income and wealth inequality.

The Confluence: What drew you to studying international trade and multinational taxation specifically?

Dr. Davies: What I liked about economics from the start was how logically it approaches the world: there’s cause and effect, and people respond to things. Once you start seeing the patterns in behavior, even behavior that doesn’t look particularly rational, you can begin to understand why people do what they do, and then think about how to nudge that behavior toward something more beneficial for society.

I’d also always been fascinated by the wider world beyond my own small corner of it, which is what pulled me toward international trade specifically. Most of my research now is on the multinationals that effectively run large parts of the global economy: how to design tax, environmental, and labor policy to capture the genuinely inventive, productive things these companies do, without letting all the benefit concentrate in the hands of the very rich.

The Confluence: Companies like Google and Apple famously locate major operations in Ireland. What actually determines where a multinational sets up, and how much of that is about Ireland’s low tax rate?

Dr. Davies: If you ask multinationals directly, the thing that matters most to them is proximity to customers. There are plenty of places with far lower tax rates than Ireland, but Ireland is in the EU and sits right next to the UK, close to a lot of customers.

The second thing is labor: Ireland has a highly skilled workforce. People assume multinationals are chasing the cheapest workers on the planet, but that’s a small part of the story. Google needs programmers and creative people, not the cheapest labor available, and Ireland has plenty of those too.

Tax policy helps, I won’t pretend otherwise, but it’s not the predominant factor, and it doesn’t work without everything else. Multinationals are looking for a whole package, and tax is one part of that package that matters on the margin.

The Confluence: You’ve written about profit shifting, moving a company’s tax bill around rather than moving people or factories, through something called transfer pricing. How does that actually work, and how does it end up affecting an ordinary person’s paycheck or the price of a product?

Dr. Davies: We used to think of transfer pricing as a pure shell game: just moving money around on paper. Say Apple Ireland owns the patent for the iPhone. Anywhere else that wants to make or sell an iPhone has to pay Apple Ireland to use that patent, and because there’s nothing else quite like it, that price can be set at almost anything. The more that patent is said to be worth, the more money moves to Ireland, where the tax rate is roughly half what it is elsewhere, and the less tax gets paid overall.

We used to think the only real consequence was what governments collect in tax. What we’re learning now is that there are real effects beyond that. When a company starts using a tax haven, it tends to pay its workers more, even in the high-tax countries where it also operates, but the people who see that pay rise are mostly already highly paid: CEOs, managers, skilled professionals. That contributes to income inequality.

And when a company has more money left over, it invests more and innovates more, and because most innovation now happens inside multinationals themselves, that leaves them able to grow more cheaply than smaller competitors can. Power keeps concentrating in the multinationals, and while that can be productive, it isn’t especially fair: a lot of people get left behind.

The Confluence: Do tax havens actually create real jobs, or is most of what happens there more abstract than that?

Dr. Davies: We don’t have great information on this, because a tax haven isn’t just a country with a low tax rate, it usually comes with a lot of secrecy too, which makes it hard to follow the money. But there’s real variation within tax havens.

Take what a US multinational earns overseas per worker: the global average is around $50,000. In Ireland it’s about $100,000, which could mean Irish workers are twice as productive, or it could be the tax effect. In Switzerland it’s about $600,000 per worker. In Luxembourg, around $2 million. In Bermuda, something like $59 million per worker, which either means the average worker there is over a thousand times more productive, or, more plausibly, that you’re looking at a building with two hundred multinationals registered to a single mailbox.

Places like Ireland, Switzerland, and Luxembourg do seem to generate real economic activity. Places like Bermuda and the Cayman Islands mostly don’t.

The Confluence: Countries sometimes cut tax rates to compete with each other for multinational investment, something you’ve called tax competition. Is that competition good for ordinary people in those countries?

Dr. Davies: It depends. When tax cuts bring in real investment and jobs, particularly the higher-paying jobs that come with multinationals, that’s a good thing, but the gains don’t reach everyone evenly. Blue-collar workers and people with less education often don’t see much of that benefit trickle down to them, so they can end up left behind.

When I started in this field, I expected multinationals to be the villain, exploiting workers directly. There’s actually not that much direct exploitation going on. The real problem is a small group of people capturing a lot more of the gains without sharing much of that wealth, and if we can’t address that directly, the question becomes how to design tax and labor policy to spread it around instead.

The Confluence: How would you design that policy, to attract investment while still spreading the resulting wealth around?

Dr. Davies: I’d combine a low corporate tax rate to attract companies with a genuinely progressive personal income tax, ideally one that also reaches wealth rather than just income. Ireland is a decent example: a relatively low corporate tax rate draws in a company like Google, and a progressive personal income tax means the people who go to work there and earn a lot end up giving a good share of it to the government, which funds education, roads, healthcare.

But income tax alone probably isn’t enough. People at the very top often get compensated through equity, investments, and property rather than wages, and those are much harder to tax properly. That’s part of why there’s growing interest in a wealth tax to go alongside income tax.

The Confluence: Do tax treaties between countries, like one between the UK and Ireland, actually drive more investment, or do they look better on paper than they work in practice?

Dr. Davies: Based on my own research and other work since, I don’t think tax treaties between rich countries do much of anything. A treaty between a rich country and a lower-income country is different: it functions more like a seal of approval.

Negotiating one takes real money and time, and completing it signals that a country can make an agreement and stick to it, which builds trust. If treaties do affect investment, I think that’s where it comes from, though it’s diffuse enough that it’s hard to see clearly in the data. If you’re a multinational about to put $100 million into a factory overseas, it helps to trust that the money won’t just be taken from you once it’s built.

The Confluence: Looking back at everything we’ve covered, what’s the one point you’d underline?

Dr. Davies: Multinationals are genuinely productive, but they lead to inequality, and that inequality is something we really need to get on top of.