The Moral Case For Tax Havens

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On
October 23, 2002, the front page of the Royal Gazette, the
main daily Bermuda newspaper, proudly recorded that local gangsters
had been foiled by the legendary efficiency of the Bermuda Police.
Fifty-six boxes of eggs had been intercepted, allegedly planned
to be thrown at the local constabulary during Halloween. By coincidence,
it was also reported on the same page that Jesse Jackson (yes the
US shakedown artist) had predictably failed to turn up for a local
conference about women in business. Bermuda, like other tax havens
(a name that locals detest), was facing business as usual. Just
another boring day for its 60,000 residents who enjoy crime-free
lives, nil unemployment, take the azure sea and delightful climate
for granted, and do a million and one other things that peaceful
happy people do in order to live a normal prosperous life.

Alas,
Bermuda has a terrible reputation with foreign government elites.
It is a mid-Atlantic affront to the American and European governments
who believe they have a right to tell the rest of the world how
to live and what their tax laws should be. The guts of the problem
is, that Bermudians do not pay income tax on their earnings, capital
gains taxes, or corporate taxes on profits. This state of affairs
is infinitely worse than throwing eggs at policemen, and is considered
to be a greater menace to the financial well-being of Western civilisation
than even Jesse Jackson. Many politicians wish to close down, or
at least hobble, the activities of pirate countries like Bermuda,
The Bahamas, The Cook Islands, Switzerland, and about 35 other financial
pygmies that are mere dots on the map of the world.

Over
the past ten years or so, governments (and other quasi governmental
organisations such as the OECD) in the United States and Western
Europe have been throwing rotten eggs and rotten arguments at the
so-called tax havens like Bermuda and the Cayman Islands on the
grounds that they siphon off legitimate tax revenues. This has been
described as "harmful tax competition" (an oxymoron),
or has been categorized as illegal tax evasion. The clients of tax
havens, wealthy individuals and multi-national corporations, are,
it is said, dodging their legitimate tax obligations to their countries
of domicile and as a result those who are left at home are unfairly
compelled to pay higher taxes. Spending on social programs such
as education and pensions is reduced and many high-powered and high-paid
lawyers and accountants expend time and effort in tax dodging when
they could usefully be engaged in more productive tasks.

For
years, orthodox economics has condemned tax avoidance as unproductive,
as well as being unfair to other taxpayers. Yet public expenditures
in almost every country one can name (including Bermuda) are unproductive
and have risen steadily absorbing over 50% of GDP in many countries.
Most thoughtful people now belatedly understand to their horror
that government bureaucracies (often employing about a fifth of
the labor force) are not staffed by disinterested philosopher kings
who somehow magically understand what the people want and impose
taxes accordingly. It is not overstating the case, to say that many
public employees arrived at their desks with the objective of doing
good, but somewhere along the way, they ended up doing very well
for themselves.

Why
should the activities of tax havens be put in the spotlight of public
distaste in North America and Europe? One reason is that the success
of Bermuda and other tax efficient countries feed the fantasies
of pro-government and anti-business fanatics — after all Enron established
a few off balance sheet entities in the Cayman Islands, the fabled
numbered bank accounts in Switzerland have long been accused of
facilitating money-laundering and linked to drug trafficking, and,
more recently, low-tax jurisdictions are a bogey-man of anti-terrorists.
A more important reason is that high-spending Western governments
desperately need lost revenues to keep the state machine ticking
over whilst taxpayers resent the grasping mitt of government on
their wallets. When governments grab over 40 percent of a country's
income in taxes a natural resistance to having incomes and wealth
confiscated builds up in the minds of productive citizens.1

We
need to remind ourselves that until the early 20th century,
governments tended to restrict their activities to maintaining an
army against foreign aggression, a police force to protect law-abiding
citizens against robbers and thieves, and a limited number of social
activities such as public health and education. In most countries,
less than ten percent of incomes were taken in taxation. All of
this changed because of the costs of fighting two world wars and
innumerable other small conflicts, a desire to redistribute incomes
from the rich to the poor, and the recognition that governments
by spending huge amounts on social programs could effectively bribe
voters with their own money to vote high spending politicians into
office. Elections became in the words of H.L. Mencken "advance
auctions of stolen goods."

Perceptive
voters recognised that government looting of their private property,
incomes, and wealth impeded the production of goods and services,
and was being abused by hyper-active and incompetent governments.
From the end of the Second World War, in 1945, a few wealthy individuals
and corporations decided to take remedial action to protect their
assets from the plundering activities of government. They rested
their case largely on the dictum of Judge Learned Hand who stated:
"Anyone may arrange his affairs so that his taxes shall
be as low as possible; he is not bound to choose that pattern which
best pays the Treasury; there is not even a patriotic duty to increase
one's taxes…nobody owes any public duty to pay more than the law
demands. Taxes are an enforceable extraction, and not a voluntary
contribution."

As
the burden of taxation and other nefarious activities of governments
increased, largely because of military spending and the creation
of massive welfare states in Europe and the United States, the activities
of a few tax freedom-fighters mushroomed into something of a major
cottage industry. There are now something like 40 or so tax havens,
and even countries like Hungary2 are
getting into the business of preserving the assets and incomes of
those who find that tax authorities (representatives of the looting
class) were penalizing relatively minor economic figures like dentists
in Belgium, tennis players in Germany, or movie stars and writers
in UK. Such people, pilloried by politicians as being unpatriotic,
were simply people who loved their countries but feared the plundering
and economically counter-productive activities of their governments.

Plundering
and looting are strong words but they accurately describe many modern
governments. Such words were used to great effect by the famous
French economist and pamphleteer Frederic Bastiat (1801–1850)
who wrote of the French Government: "If you make of the
law the palladium of the freedom and the property rights of all
citizens, and if it is nothing but the organisation of their individual
rights to legitimate self-defence, you will establish on a just
foundation a rational, simple, economical government, understood
by all, loved by all, useful to all, supported by all, entrusted
with a perfectly definite and very limited responsibility, and endowed
with an unshakeable solidarity. If, on the contrary, you make of
the law an instrument of plunder for the benefit of particular individuals
or classes, first everyone will try to make the law; then everyone
will try to make it for his own profit."3

Bastiat
could have gone on and said that ultimately many citizens will decide
that they do not like the law and will take actions to avoid its
unpleasant plundering activities. Once the government bite on individual
incomes reaches 30 percent or thereabouts a silent tax revolt takes
place. People either stop working (hence the huge numbers of the
underclass that simply mooch around most of the day), they cheat
on their tax returns, or they shift assets and commercial activities
abroad to countries where the tax regime is less hostile to earnings
and the preservation of capital. Just as the exploited and victimised
left Europe in the 18th and 19th centuries
for the freedom of the United States and elsewhere, the wealthy
also vote, not with their feet as did "the huddled masses yearning
to breathe free" but with their bank balances and intellectual
capital. They are heirs to a time-honoured custom of free people
of telling overbearing government to take a hike. There is no Statue
of Liberty in the harbour of Hamilton, Bermuda but on Front Street
there are two banks, and two blocks away are legions of lawyers,
accountants, and other financial professionals willing to assist
in the freedom to keep private property out of the grasping hand
of free-spending foreign governments. Confiscatory taxes force otherwise
law-abiding citizens into revolutionary action called tax avoidance
by its supporters and tax evasion by its critics.

There
is a huge morally important point at stake. Government taking is
usually justified by the fact that it performs good works and provides
endless benefits to its citizens. The State is somehow more important
than the individual, and he should willingly stump up his share
because of all the benefits showered on him by benevolent rulers.
Others, like the American Founding Fathers, argue that the individual
takes precedence over government and there are inalienable rights
to privacy, life, liberty, and property and that the compulsory
sequestration of the individual's property through taxation makes
the rights of man dependent on the goodwill of the state. As Frank
Chodorov stated: "If the State has a prior right to the
products of one's labour, his right to existence is qualified."
Once income taxes were imposed on the citizen, the level of earnings
he was allowed to keep became dependent on the goodwill of the government;
and how much he was allowed to keep varied with the size of the
government jackboot.

Those
who value individual freedom over government benevolence (or should
that be malevolence) seek to protect their assets and their privacy
from prying eyes, but they are usually portrayed as greedy selfish
barons who neglect their responsibilities to those at home. Whilst
most of the tax avoiders do not act from altruistic motives, it
is relevant to recall that Joseph Schumpeter in his essay "The
Fiscal State" pointed out that one of the consequences of the
unlimited power of governments to tax their citizens would be a
misallocation of resources away from wealth producing investments
and into largely non-productive public spending designed to redistribute
income or the building of public monuments. The Declaration of Independence
put it more succinctly when it said of King George III that: "He
has erected a multitude of new offices, and sent hither swarms of
officers to harass our people and eat out their substance."

The
most important activity of the misnamed tax havens is to avoid governmental
unproductive spending and to allow entrepreneurs freely to invest
and produce the goods and services needed for the world to prosper.
Tax efficient countries like Bermuda therefore enable resources
to be used for the purposes of increasing the standard of living
of everyone including the poor. Left to politicians, assets would
be used for non-productive purposes and living standards would improve
less rapidly. Time and time again, it has been shown that much of
government expenditure is wasted on such things as huge public buildings,
subsidies, national airlines, futile redistribution of wealth programmes,
armaments, or just simple corruption of public officials. Modern
government has become a gigantic slot-machine that uses the political
process to take from everyone and give to some, the major objective
being its own preservation.

Tax-efficient
countries provide a mechanism for restricting the ability of governments
to impose onerous tax burdens on their citizens, and assist in compelling
governments to provide an economic climate more receptive to the
peaceful activities of business. Without the safety valve of tax
havens, taxpayers in North America and Europe would be milked even
more vigorously by the looting class than they are at present. Far
from cheating citizens of North America and Europe tax havens provide
an essential escape route that enables capital to be preserved for
productive purposes. In addition, it buttresses what is a core value
of the West, namely freedom.

The
utility of tax efficient countries will end when taxation levels
become less onerous, but with Tax Freedom Day4
getting later each year, and the US tax code at 45,663 pages5,
don't bet the farm on that happening soon.

Can
there be a more moral case for tax havens, than tax efficiency,
restraints on government power to grab the income of its citizens,
the preservation of capital to increase prosperity, and freedom
to enjoy private property? I think not.

Notes

  1. Medieval
    serfs lost around 30%.
  2. See The
    Economist, October 19, 2002, page 93.
  3. Selected
    Essays on Political Economy
    by Frederic Bastiat, pages
    238
    and 239.
  4. May 3rd
    in the United States, June 10th in UK, in 2002.
  5. New York
    Times, August 12, 2002.

October
30, 2002

Bob
Stewart [send him mail] has
lived in Bermuda all of his adult life, and was chief executive
of the Royal/Dutch Shell Group of Companies in Bermuda until his
retirement in 1998. Subsequently, he was President of Old Mutual
Asset Managers, Bermuda, and retired from there at the end of 2002.
He is a director of several Bermuda companies and investment funds,
and the author of A Guide to the Economy of Bermuda, which
will be published within the next few weeks.

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