An Historian Looks at Tax Havens

The recent attack on tax havens by the OECD has pictured about 20–30 countries, called tax havens, as financial cesspools destructive of the high tax systems of the world. The OECD argues that its members should gang up on these nations and shut them down by whatever means they can. This view needs to be corrected. Tax havens have a long and beneficial history serving civilization.

To put tax havens in proper perspective we have to go back 3500 years to the Book of Joshua, even to the Books of Moses, where the Lord ordered the Children of Israel to set aside cities of refuge, were a person could gain asylum from the punitive laws of Moses. Recently, Hawaiian kings on the big island of Hawaii, set aside a city of refuge. In the recent past, young Americans who had conscientious scruples against the Viet Nam War, fled to Canada and other countries as asylums against America's draft laws.

A tax haven is somewhat similar. It is a kind of economic sanctuary, a modern city of refuge for those oppressed with the fiscal laws of their homeland. People can bring their wealth to a tax haven and avoid government confiscations by tax or exchange controls, or just plain confiscations like Castro and other totalitarian rulers have done. These oppressive acts by their governments are as much an evil to them, as those oppressed politically.

Margaret Thatcher is remembered for cutting most British taxes in half, but she should be remembered most of all, for getting rid of Britain's insidious exchange controls, probably Britain's worst contribution to civilization – an embarrassment to the Crown in principle and in practice. In March 1972, the tax ministry's chief enforcement officer for exchange controls, Stanley Little, was reported on the front pages of the newspapers in London, to have offered a bribe to Swiss bankers to obtain banking records of British subjects violating exchange controls. The Swiss government notified Mr. Little that he was a persona non grata for Switzerland, and if he ever set foot in Switzerland he would be arrested.

Consider Jamaica where exchange controls have ruined one of Britain's former colonies. In the 1960s Jamaica became independent and issued a new currency, the Jamaican dollar worth 1.20 US. That is, it cost $1.20 to buy one Jamaican dollar. Jamaica, unfortunately, had British style exchange controls, meaning that all Jamaicans were locked-in to the Jamaican dollar. No one could exchange Jamaican money without the Central Bank's permission, for which there is no appeal. After 30 years of exchange controls, the value of the Jamaican dollar is not $1.20 US, but 2 cents. It costs $48 Jamaican for just $1 US. In Jamaica, as in other former colonies, exchange controls became the government's word for stealing.

The Jamaica Shuttle

When Michael Manley (a buddy of Castro) became prime minister he was determined to crack down on Jamaicans with even harsher exchange controls than those in force. Many enterprising Jamaicans were not willing to idly sit by and watch their money become almost worthless. They took action and looked to a tax haven for help. There followed a mass exodus of money from Jamaica to the Cayman Islands via small single engine Cessna airplanes picking up bundles of Jamaican dollars on small roads and fields in Jamaica and flying 250 miles across the ocean to the Cayman Islands. This exodus was so extensive that the banks in Jamaica ran out of currency and made frantic calls to their sister banks in Cayman to return the currency. The Jamaicans with their new accounts in a tax haven quickly converted their money to sound currencies. I think you could call the Jamaica Shuttle, justifiable money laundering.

Protecting people from abusive exchange controls is one of the many virtues of tax havens – ask any Jamaican who used the Jamaican Shuttle. You cannot fault people for taking whatever steps they can to protect their wealth from plunder by governments. It is as instinctive as resisting a robber. Indeed the robbery label has been applied to taxation that borders on plunder since the days of the Roman Empire, with a tax system often called by both modern and ancient historians as,

"Organized Robbery"

The OECD should look within – not at the havens – to see if their systems of tax qualify as a modern day "Organized Robbery" like in Roman times. Or perhaps, as a "scaffolding for plunder," as British historian James Coffield in 1970, described Britain's graduating system of tax rates from 1% to 80%.

Governments and especially the OECD seem to believe that all citizens have a patriotic duty to pay any tax, no matter what the rates. U.S. presidential candidate George McGovern advocated 100% rates for the wealthy. Many objected (as did the voters), but no one touched on the moral issue. In Sweden, Astrid Lindgen the famous writer of children's stories published an open letter to the government complaining about her 102% tax rate. Her letter brought down the socialist government that had ruled for decades.

When governments tax too much, there is an iron law of history, that taxpayers will respond in some direction for relief. It may be violence like the American and French Revolutions; or it may be fraud, like the notorious evasion of the "royal fifth" by Spanish galleons in the 16th an 17th centuries; or it may be flight to avoid tax – today, flight to the havens. Certainly, throughout history, flight to avoid tax has been taxpayers' first choice of ways to avoid intolerable taxation. It is not dangerous like violent rebellion, or fraud. But it puts a taxpayer's wealth beyond the reach of his government, for no government will aid another government to collect a tax.

The ancient Greeks’ solution to tax evasion was to make the rates so low evasion was not worth the trouble. When President Reagan reduced the top tax rates to 28% (from 70%) many CPA's were confronted with taxpayers in the underground economy wanting to get back in the tax system and pay what they considered were acceptable rates. Is not this flight to get back in the tax system with reasonable rates, a lesson for the OECD to learn – and forget trying to be a big bully hammering on up to 30 smaller nations that have become cities of refuge from the tax systems of Europe's socialist states?

Finally, a very insightful editor at The Times foretold of the rise of tax havens on May 17, 1894, when Britain first adopted graduated rates:

Single out the big and moderately big properties for attack, and very soon as if by magic they will begin to evade you and disappear, as all things in the world very reasonably do when singled out for attack. Even the half starved crow will not wait to be continuously shot at.

The OECD in the long run, won't win. Taxpayer ingenuity "as if by magic" will thwart the taxman as it has been doing since the beginning of recorded history.

September 4, 2002