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The
Economic Freedom
Network

 

If You Can’t Beat ‘Em,
Ban ‘Em!

Socialist elites abhor financial freedom.

No, not the freedom that enables them to enjoy the range of personal choices stemming from their special professional status as financially privileged, often tenured, politicians, bureaucrats, and academics. Rather, these leftists can’t abide a commensurate range of choices being bestowed upon less enlightened mortals, i.e., the rest of us mere workers, shareholders, entrepreneurs, and taxpayers.

This freedom-stifling attitude is beautifully illustrated by the negative international campaign currently being waged against so-called “tax havens,” the financially (and sometimes politically) autonomous jurisdictions scattered from Europe to the Caribbean. Tax havens offer both their clientele and their citizenry comparatively confidential, equitable, and simplistic tax systems.

As a result of the widening gap between the low-tax regimes operating in tax havens and those operating in higher-tax countries such as Canada and the US, the former are increasingly the recipients of large amounts of income and investment revenue that otherwise would have greased the wheels of the latter’s respective social engineering schemes.

The anti-tax haven strategy was clearly laid out in a recent New York Times article written by Robert Morgenthau, the New York County District Attorney.1 Although he may not know it, Morgenthau is a proponent of an Orwellian society of state control and monitoring.

Morgenthau’s negative campaign strategy is, in the short-term, to disparage the motives of those using such financial opportunities. This entails the not-so-subtle inference that most of this revenue is the product of ill-gotten gains. In other words, tax havens are a convenient instrument for sophisticated money laundering operations.

To some, the phrase “tax haven” does conjure up images of tax avoidance, tax evasion, and anonymous numbered bank accounts. In practice, however, most financial institutions in most tax havens have adopted internationally-recognized regulatory compliance standards, strict money laundering controls, and rigid client acceptance procedures.

In the medium-to-long term, the negative campaign’s explicit goal is to eliminate tax havens, period. Discussing the Cayman Islands, for example, Morgenthau declares that, “More can be done ... Britain can end the laissez-faire practices of the (British dependency) islands. And since, from a financial perspective, the islands are an American dependency, Washington can also stop the offshore shenanigans.”

What Morgenthau fails to comprehend is why tax havens exist in the first place. There are extraordinary costs associated with operating in a tax haven. There may be foreign exchange risks associated with translating foreign and domestic currencies. Much more onerous for the tax haven user, though, are the accounting and legal costs associated with establishing and maintaining an offshore account.

Given the tremendous costs of operating an offshore account, why do individuals and corporations use them? The answer is simple: the gain individuals and corporations achieve through lower taxes, less regulation, and more privacy more than compensates them for the higher costs associated with maintaining an offshore account.

Let’s look at taxes alone in order to assess whether or not an incentive exists for individuals and corporations to attempt to avoid taxation. Of Canada’s principal competitors, that is, the 28 member nations of the Organization for Economic Cooperation and Development (OECD), Canada ranks 18th in the level of taxation assessed on corporations. More importantly, Canada’s tax burden on corporations is higher than the United States (which is ranked 12th), higher than the OECD average, and higher than the European OECD average.

Canada performs even worse regarding the level of taxation assessed on individuals. Canada ranks 22nd in terms of the level of taxation assessed on personal income. More disturbing than this dismal performance is the fact that there is a large and material gap between the personal income tax level in Canada and the levels assessed by our competitors. The Canadian rate of taxation on individuals is higher than both the total OECD average and the European OECD average. Even worse for Canada, our rate of personal taxation is higher than in the US. Hence, the so-called “brain drain.”

A further flaw in Morgenthau’s analysis is his failure to account for competition. Free trade is often discussed only in terms of tangible goods and services. However, competition exists in almost every aspect of life. For example, innovators will locate new research sites in jurisdictions that offer greater intellectual property protection than other jurisdictions. Similarly, manufacturers will locate their production sites where they can produce goods at the lowest real cost. Investors seek out the greatest return given a comparable level of risk.

Why should competition in taxation be any different? If Morgenthau’s preference for government controls were enacted, protectionist barriers would be raised, foreign exchange controls would be placed on currency, and international exchange would be restricted. Does anyone hear an echo of the policies enacted in the late 1920s prior to the onset of the Great Depression?

The case of the Channel Islands, located in the English Channel between England and France, exemplifies both this effort to curtail tax haven activity and the practical and ethical folly of such political intervention.

Britain’s allegedly post-socialist Labour Government has just released The Edwards Report,2 a 10-month study into offshore tax havens, principally Jersey and Guernsey (the largest of the Channel Islands) and the Isle of Man. Regrettably, this document (named after its principal author, Andrew Edwards, a retired UK Treasury apparatchik) may provide British socialists sufficient bureaucratic camouflage to finally clamp down on one of their historical bugbears, the Channel Islands, which have long served as an ideological irritant to successive socialist generations.

The existence within the British Isles of a prosperous, semi-autonomous polity is a testament both to the importance of low taxes as an instrument of global competitiveness (e.g., a 20 percent flat tax on income, and no capital gains or inheritance taxes) and the resultant beneficial supply-side ramifications for the domestic population (that is, plentiful, well-paid white-collar jobs, barely detectable unemployment, no sales tax, continual budget surpluses, and zero government debt) that several hundred billion dollars in well-managed deposits may provide.

If flat tax advocates wish both to humanize and to demonstrate empirically the validity of their “radical” tax proposals, they should start educating voters about this hugely successful, real world fiscal experiment thriving on British Prime Minister Tony Blair’s doorstep.

But socialist elites are seasoned professionals at dismissing positive ends that derive from politically incorrect policy means—in this case, a relatively unregulated, dynamic, highly competitive financial marketplace that rewards effort and risk-taking while refusing to subsidize or otherwise financially coddle both individual and corporate inertia or irresponsibility.

The phenomenal success of such tax havens reflects, above all, the unethical nature of other tax systems. In the US, the UK, and especially Canada, those who work hardest, longest, most successfully, and whose work adds the most value are punished relatively hard in financial terms by comparison with those less inclined to study, to work, to invest, to save, to take risks, and to create beneficial new consumer products and services.

To the extent that each one is a product of particular historical and political circumstances, no single tax haven may prove an entirely transferable fiscal model for a large, developed economy. However, the generic tax haven approach—that less government interference is preferable to more, that incentives do matter, that workers and investors do have a right to the largest share of the rewards of their efforts—is a demonstrably sound public policy template. If the Morgenthaus and the Edwards wish to retain assets in the US or the UK, then there is a simple solution: restructure privacy laws, lower taxes and reduce regulation.

In 1801, US President Thomas Jefferson, a Democrat, defined “A wise and frugal government” as one “which shall restrain men from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labour the bread it has earned.” In mid-century, a Republican President, Abraham Lincoln, cautioned that, “You cannot bring about prosperity by discouraging thrift... You cannot help the wage earner by pulling down the wage payer... You cannot help the poor by destroying the rich.”

Two presidents, two political parties, two relatively volatile periods of American history. But a single, unequivocal message: freedom and liberty work for everyone in generating choice, opportunity, and wealth. That contemporary North American policymakers remain in legislative denial over such matters speaks volumes about their politically coercive, economically illiberal instincts.

Notes

1Robert M. Morgenthau, “On The Trail of Global Capital,” The New York Times, November 9, 1998.

2Review of Financial Regulation in the Crown Dependencies, UK Government Stationery Office, 1998.





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