A Death Knell for Tax Havens?

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retiring Supreme Court Justice Sandra Day O'Connor wrote an opinion
in the famous John Doe summons case, acknowledging that the Court
had "sounded the death knell for Boyd," which Justice
Brandeis had said was a case that "will be remembered as long
as civil liberties live in the United States." The case of
Boyd v. United States in 1885, struck down a tax law that
forced taxpayers to bring in their records for examination. Said
the Court:

any compulsory discovery by extorting a party's oath, or compelling
the production of his private books and papers…is contrary to the
principles of a free government. It is abhorrent to the instincts
of an Englishman; it is abhorrent to the instincts of an American.
It may suit the purposes of despotic power; but it cannot abide
the pure atmosphere of political liberty and personal freedom.

only has the Court sounded the death knell for Boyd, so has
our generation. Every generation has the right and does, throw out
many of the beliefs of the generations that went before. We fully
accept the right of the government to snoop into all our affairs,
especially our financial affairs. Governments today see no problem
with the destruction of the right of privacy in your financial affairs;
they use an innocuous name for this, it's called "transparency,"
like when the Oklahoma City bombers called murder "collateral
damage." The above quote from Boyd makes it clear that
the "instincts" of an American or an Englishman, were
with another generation. We have no such instincts today.

the OECD (Organization for Economic Cooperation and Development,
a Paris based European dominated organization) is on a world-wide
campaign to destroy financial privacy everywhere by blackballing
the tax havens and their banking privacy. Their policy is to ban
them from using the banking systems of Europe like the US embargo
on Cuban cigars. Seems tax havens are the infidels in the modern
world of high taxes. Any country with unduly low taxes, or no taxes,
is suspect as having harmful tax practices if it maintains banking
privacy for its customers. It has been believed until the OECD gave
us a new definition of "harmful taxes" – that harmful tax
practices were taxes that were too high, driving businesses and
people to move to lower tax realms, like so many businesses that
have left California for Nevada and other states with lower taxes.
Or, many of Europe's great athletes or actors who have moved to
tax havens in Monaco, the Bahamas and elsewhere. Now the OECD's
philosophy would seems to say, that Nevada and other states are
engaged in harmful tax practices, by enticing businesses to come
and operate in a lower tax environment. So, which is it? It was
once believed that high taxes were a threat to liberty, like when
Thomas Paine extolled the virtues of America, as a "Land of
liberty because it was a land of low taxes." At the time of
the Civil War, a British writer in (1861) in the Quarterly Review
110: 249, saw the tragedy of the American Civil War, because America
was a shining example to the world: it had a government that was
cheap, and taxes that were low, which attracted people from Europe
to immigrate and live in America. By the OECD definition, America
was engaged in harmful tax practices drawing people away from Europe's
high tax governments that needed the money. Not unlike what tax
havens are doing today to the high taxes countries of Europe's welfare
state societies.

OECD view of "harmful tax practices," has more to it than
low taxes. They seem to be saying that if every nation had high
taxes, the world would be better off, but that won't be, despite
making a "level playing field" one of their objectives.
The term "level playing field" shows up all the time in
the rhetoric of the OECD, and it is a complaint of the tax havens
themselves. They argue that even the OECD has tax practices forbidden
by them, like bearer shares, for example, which are popular in some
of the high tax OECD countries. Even the matter of opening up the
accounts at the banks, for the OECD to see, has problems with OECD
countries that draw customers to their banking privacy practices.
It is a big thing with Luxembourg's powerful banking institutions.
And while Switzerland has made a deal with the OECD to collect the
tax on accounts held by OECD residents, it has held firm that its
banking privacy is non-negotiable. In other words, the OECD gets
the tax, but not the taxpayer. That is all right, because in the
final analysis they are in it for the money.

The OECD says, there are three criteria of harmful tax practices
like: (1) no exchange of information, (2) no transparency, and (3)
no active business activities on the local level, i.e. a company
establishes itself with no activity other than the enjoyment of
lower taxes. This view encroaches on the right of every nation to
adopt its own form of taxation. And it is quite often that countries
invite businesses with the attractive plum of lower taxes even tax
holidays of a few years. Some companies may be attracted to a more
skillful labor force, or the opposite of cheaper labor, or raw materials – that
is just good business, but being drawn to lower taxes or less intrusion
by government is not fair says the OECD and they arrogantly believe
they can pull it off, but the odds are against them. There are too
many advocates for low taxes and banking privacy. They may win a
few battles but as the saying goes, they will lose the war. They
have to buck the U.S., Singapore, Hong Kong, among others, and the
U.S. has already criticized their views. The worst thing for the
OECD is that people everywhere want financial privacy. The ancient
rule that a man's castle is beyond the surveillance of the king,
is not dead. And Thomas Paine's assertion that "government
at best is a necessary evil," is more true today than ever.

was the British government a few decades ago that encouraged its
many small former colonies to set up financial centers with offshore
banking – to build economies to make them self-sufficient,
to foster high-caliber employment, and now, with the pressure of
the OECD nations, it wants to undo all that. The meetings with these
small nations and the OECD have almost led to fist fights, and certainly
ugly verbal abuse. There was a meeting in Barbados when the OECD
sponsors and the Commonwealth Secretary engaged in a "slanging
match" (whatever that means) and accused the OECD of "dictatorial
behavior." Later the Commonwealth countries argued that the
threat of sanctions was "high-handed and undemocratic."
All the while, the OECD proclaims that if the havens have transparency,
non-discriminatory taxes, and the commitment to exchange information
with other countries, this does not undermine the ability of the
offshore financial center to compete. No one believes that.

Caricom leaders consider the blacklisting of its tax havens as "ill
advised…and should not be ordered by external agencies or countries."
The attack on the Caribbean countries has "created a hostile
environment." Blacklisted countries also feel that they have
been unfairly targeted, as other major countries also avoid taxes,
including the United States, which has billions of untaxed dollars.
Some years ago at hearings before the House Ways and Means Committee,
Charles Rangel, the ranking Democrat on the Committee asked me,
"The United States is a tax haven, isn't it?" We both
agreed it was in many ways. What if they blacklisted the US?

the Pacific, it was the same story, with the small countries bucking
the OECD demands. For example, the Pacific island of Vanuatu expressed
its defiance and it originally informed the OECD it will not go
along with its demands. Its finance minister stated that the OECD
measures were equivalent to blackmail and reflected the "neo-colonial
attitude" of countries like Britain, France and Germany. But
in May 2003, the government of Vanuatu caved in to the OECD demands
and signed on to play ball with some reservations? So far 31 countries
that were threatened to be blacklisted have signed up. One wonders
why they have caved in without a fight. Could it be that the OECD
has bitten off more than it can chew? Does it have the personnel
to audit and keep tabs on that many countries? That their formidable
attack armor is not so formidable – that it is like Swiss cheese,
full of holes?

in Europe, as recently as July 2005, the OECD Europeans were to
crack down on its local tax havens, like Jersey, in which a quarter
of its 87,000 workers are in the offshore banking community. This
has produced the flight of funds to Singapore, Hong Kong, and even
Dubai in the United Arab Emirates. As a result a European journalist
said the tax havens in Europe are in "disarray." Professor
Prem Sikka at Essex University explained it this way, "Regulating
the tax havens is one of the world's great chess games. Each time
you move a piece, the other side has already moved. The OECD's move
against Europe's tax havens was supposed to become effective the
first week of July 2005. But Gibraltar has refused to go along,
prompting a leader in Guernsey's financial community Peter Symes,
to remark, "At this moment, Gibraltar has not signed up, so
we have not got the level playing field we were promised. It could
all be revoked further down the line." With the flight of capital
and money to Hong Kong and Singapore, he said this was the most
awful day of his life. What he was learning is the truism that money
and capital have no allegiance except to safety and profits.

the United States has had its own game plan in dealing with offshore
tax havens and there is little inclination on the U.S. government
and Congress to join up with the OECD's plans, especially with the
OECD blasting the United States for its tax policy on foreigners
with its low tax and no tax. The US feels it has no business, nor
does any nation have any business telling another country what kind
of taxes it should have, and this has prompted some of the OECD's
angered response to the American position.

the United States has a longstanding aversion to any international
agency exercising policy on its people or affairs. The 29 members
of the OECD that make tax policy are not going to be permitted to
make tax policy for the United States. The OECD should know that.
The OECD may be able to push around the Cayman Islands and all the
other small countries, like it's the biggest gang of bullies on
the block, but as for the United States, the OECD has decided to
leave the sleeping giant alone, as its banks and government control
the world's reserve currency, and it will not like being told what
kind of taxes it should adopt, or force on another country. The
US just wants to have its taxpayers report all their taxable income
from everywhere – if that is done, nothing else is required.
And the solution is not to act as a big bully with a novel form
of coercion unknown in history, but to develop tax treaties to deal
with the problem, which the US seems to have done very well. The
Bahamas, for example has a new treaty with the US, to provide tax
information, it has not been necessary to blackball the Bahamas
from the US banking system. Tax treaties are a well-known and well-traveled
road of dealings among nations. The OECD's big bully-system, is
novel and most likely doomed to failure – given time in the
long run. Enterprising bankers, lawyers, and accountants will see
to that. As the professor from Essex University said, it is like
a game of chess. The big question is – who is going to check-mate

am reminded of the words of Boris Bittker a leading tax academic
in America at NYU School of Law, Tax Department. When discussing
tax reforms recently enacted, it was, he wrote "to a fee-maximizing
tax professional…a platform awaiting for energetic entrepreneurs
to construct a superstructure of previously unimaginable complexity."
The days may be gone when you could simply waltz into any number
of tax havens and enjoy privacy from the world. Today you will have
to work at it. You need not engage in "unimaginable complexity,"
just a certain amount of common intelligence should enable you to
have financial privacy and no or low taxes. The days of financial
privacy are not over. And when the world wakes up and sees what
the OECD has done, like a death knell for financial privacy, there
will be a demand for the old days, when a man's castle was beyond
the surveillance of the king.

22, 2005

Charles Adams (send him
) is
the author of When
in the Course of Human Events: Arguing the Case for Southern Secession
and Those
Dirty Rotten Taxes: The Tax Revolts That Built America
. Much
of this material and more on this subject can be found in his book,
Good and Evil: The Impact of Taxes on the Course of Civilization

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