A Death Knell for Tax Havens?

The 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:

And 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.

Not 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.

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.

The 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.

It 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.

The 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?

In 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?

Back 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.

Meanwhile 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.

Finally, 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 whom?

I 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.

August 22, 2005