• 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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