Save the tax havens – we need them

Dr Eamonn Butler argues the case for tax havens. He investigates why the G20 leaders would be so against tax havens and the people who use them.

What is it about tax havens that makes the G20 leaders so keen to crack down on them? Outrage against all those Russian mafia bosses secretly laundering their prostitution and protection racket money through Luxembourg or disgust at Third World dictators being able to siphon millions of their people’s money into numbered Swiss bank accounts in case they need to make a quick exit one day?

Or is it just envy – the feeling of unfairness that billionaires can sip cocktails on their yachts off Bermuda, paying nothing in tax, while poorer mortals like us have to work and slave?

It’s probably a combination of all three, because G20 politicians have hated tax havens for so long that they’ve started to believe their own spin on the subject. But the business of tax havens is actually far more prosaic than any of these rather exotic images. And the real reason why our leaders hate them is that they simply can’t stand the competition.

If you want to pay less tax – as about five billion of the world’s population doubtless do – you have two options. You can evade taxes, concealing your income from the authorities, which is, of course, illegal. Or you can avoid taxes, which is perfectly legal. You might simply claim the full deductions allowed by the tax authorities or maybe move your money into a place where taxes are lower.

 

It’s avoiders, not evaders, who are the tax havens’ staple customers. The image of drug money being washed through the Cayman Islands is the stuff of thrillers rather than reality. Criminals generally launder money at home because it’s far riskier to move it across borders. The bread and butter of tax havens is people like you or me, who put their modest life savings into a respected investment company in the Isle of Man. And we do it because that way our savings don’t get clobbered for capital gains tax every time our account manager decides to sell one batch of shares and buy another.

Few honest people have qualms against clamping down on criminals. But despite all the Godfather-style spin, it’s actually the rest of us whom the politicians want to clamp down on. They figure – correctly – that if we remain at liberty to put our money in the Virgin Islands or some other place where taxes are lower, we are likely to do just that. And our ability to escape puts limits on just how much they can tax us.

This explains why even Gordon Brown is calling for curbs on tax havens, despite the fact that many of them, including the Channel Islands, are British dependencies. Other countries want even tougher sanctions.

It’s pure financial protectionism. The G20 leaders signed a communiqué praising free trade and deploring anticompetitive barriers in goods and services. That’s because leaders don’t make goods and services. But they do make taxes and are really keen to keep out the competition in that sector. They don’t mind us shopping around the world for the cheapest goods, but they certainly do mind us shopping around for the cheapest taxes.

They have only themselves to blame. It’s not just that governments seem unable to rein in their bureaucracies and keep their costs under control. It’s that they have made taxes so complicated. The last time I looked, the UK tax code ran to 9,973 pages, and that was back in 2007. Complexity inevitably creates loopholes – which lean, nimble tax havens are delighted to help people exploit.

Many countries have lower taxes on foreigners who invest there. That’s because they figure their own residents are largely captive. But they know that international investors can put their money anywhere in the world, so countries have to make themselves attractive in order to pull them in. When you have two different tax rates for the same thing, however, you must expect trouble. And you get it. What happens is that domestic investors simply send their money to a tax haven, then send it back again as if it were “foreign” investment and pocket the difference in the rates.

You can’t blame the tax havens for this kind of wheeze. The root cause is high and complicated taxes. The surest way for the G20 to get rid of tax havens would be to cut and simplify their own taxes – to take on the competition directly.

Until they do, that competition serves a useful purpose for the public. It does make politicians think twice about adding to tax rates or complexity. In particular it limits the burden they can put on savings and investment – the engine of economic growth.

If tax havens boast some of the highest living standards on the planet, that’s got very little to do with money laundering. It’s because low taxes encourage enterprise, stimulate growth and promote personal freedom, too. Rather than trying to kill tax havens, wouldn’t the world be better if our politicians instead sought to beat them at their own game?

Published in the Sunday Times here

Blog Review 928

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Architects, their clients, politicians, the civil servants and us.

Yes, our public sector pension funds are in just as much of a mess as this. For the same reason: politicians can promise big pensions knowing that someone else will have to raise the taxes to pay them.

So who gains from deregulation? From supply side reforms? Yes, correct, the consumer.

Speaking of consumers, this might not be the best way to reduce press interest in your consumables.

The damage that the target culture creates.

It appears that tax dodging trusts are not exactly new.

And finally, another classic as if written on Twitter.

Teachers boycott

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It's teachers' conference time, and they want to boycott exams. Just like the old days, isn't it?

Research from Durham University suggests that the value of GCSEs has fallen by around one grade in the last ten years (ie a B is now a C) and that for A-levels maths (maths is easy to measure objectively), it has slipped by 3.5 grades in 20 years (ie a D score in 1989 now gets you an A).

Likewise, despite getting better and better grades on UK exams, the performance of UK kids is actually falling on international exams like PIRLS. The universities too are voicing increasing skepticism at the value of A-level grades, and employers too.

UK kids are falling on international exams because it's harder for schools to teach to the exam, as they do with GCSE and A-levels. Gordon Brown's fixation on targets – specifically, kids getting 5 A*-C grades has focused the whole of the education system on achieving just that, and nothing more. (Hence today's stories that kids don't read for pleasure any more – they just learn how to analyze key passages from the set texts.) Teachers' and heads' pay and pensions depend on hitting the target. So they don't enter kids they think might fail, they focus on turning Ds into Cs and not on the needs of A or F pupils, they work out the easy subjects for their kids, they spoon-feed kids with answer grids and the like. It gets the grades, but doesn't educate the kids. Worst of all, the exam boards want happy customers, and happy customers are schools which get lots of A*-C passes, so they have an incentive to inflate the grade system too. Targets have corrupted the whole system.

The teachers' proposed boycott of exams will do nothing to change this. Exams at 7 and 11 provide extremely useful information – not just about how well the kids are doing, but about how well the teachers are performing. And they resent that oversight, because they believe their own spin about their 'professionalism'. But we all need to be monitored. Of course, the multiplicity of exams has made the 'cram-a-kid' culture more intense. But the way to solve that is to simplify the tests, not to abolish them and the information that they deliver to education managers. The tests were conceived, under the Thatcher administration, as simple pencil-and-paper tests, but they have developed under Gordon Brown into a full-blown targets exercise, raising the stakes for teachers and pupils alike. There's a lot wrong with education, but the teachers' solution is self-centred.

Dr Butler's new book, The Rotten State of Britain, can be bought here.

Eric Hobsbawm speaks out!

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This would be amusing if it wasn't so sad. Eric Hobsbawm tells us that the mixture of current events and those of the late eighties show us that both communism and capitalism have failed. No, really, a shudder in capitalism, as has happened in the past (oooh, 1930s, 1920 ish, early 1890s, 1873....) is a disproof of the system so absolute that it ranks up there with with the results of communism. That economic system so appalling that not even the Russians would put up with it, that economic system so appalling that, in PJ O'Rourke's words, it even managed to make Germans poor?

We have lived through two practical attempts to realise these in their pure form: the centrally state-planned economies of the Soviet type and the totally unrestricted and uncontrolled free-market capitalist economy.

It is to giggle, isn't it? "Totally unrestricted"? I think the only place we could say that has been true of in recent decades is parts of Somalia and while the results have not been all that wonderful they've not been noticeably worse than the semi-Marxist kleptocracy that preceeded it.

The future, like the present and the past, belongs to mixed economies in which public and private are braided together in one way or another.

Well of course. This isn't that much of a revelation. What the argument is all about though is which parts are to be private, which to be public?

It's been said before but it bears repeating, that there are three different sorts of things to think about. There are those things that only government can do and which government must do. National defence, the criminal justice system and so on. There are things that government most definitely should not be doing, like deciding what we all have for dinner each night or what consenting adults decide to consent to in the gonad playtime moments (and no, these things should not be decided democratically nor collectively either).

And then there are those either way things. Where we might rationally differ on whether something should be provided using the machinery of State. Or perhaps financed using the powers of tax compulsion. Or privately: education might be a test case here. There are entirely respectable arguments for the State financing of at least a certain level of education (as being part of a literate population is probably a public good). There are many fewer for State provision of that education. There are also decent arguments in favour of having a purely private education system: most notably that it cannot be captured by those who would teach obedience to their vision of the State.

But there's absolutely nobody outside of a very small indeed anarchist fringe who is saying that the future does not belongs to mixed economies. The argument is over what the mix is.

The closest thing to criminals?

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In a Western democracy the Police Force should be a bastion of a safe, civilised society. But the events of the past week have shown there is a growing gulf between the police and the people they are meant to protect.

 

The police should be there to protect our property, lives and well-being, yet there seems to be a culture of conflict emerging where the police have become separated from society. As Philip Johnston said this week, the videos of police in full riot gear beating the seemingly inoffensive Ian Tomlinson to the ground conjure up images of a paramilitary force under a faraway dictatorship, rather than civilians in uniform serving the public.

Regardless of whether the police directly caused the death of Ian Tomlinson, the video evidence we have all seen is clear. He had his hands in his pockets with his back turned away from the police and was not a threat to them or the situation as a whole. This was not the only damaging story for the police force this week. Clearly the news that a major terrorism operation was compromised because the head of counter-terrorism personally flashed highly sensitive documents to waiting photographers is worrying. At least he has had the decency to resign.

There seems to be a severe lack of leadership within the police force. They resemble a gang who operate as they want and feel free to yield huge amounts of power and ‘flash their badges’ as they see fit with little control from above or suitable repercussions when they make mistakes.

Personally, if I was in need or felt threatened in public, the police would not be the first people I would turn to. Essentially, the police are the front-line agents of the state.

Brussels Dispatch: The perfect storm

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The great thing about this current man-made economic crisis – other than the brilliant cover it has provided for government to launch the biggest financial power-grab the free world has ever seen – is that its bright red flashing light has distracted attention from just how structurally unsound the entirely synthetic euro is proving to be.

Spain’s economy, for example, is asphyxiating: unemployment is running at 14%. Its deficit is 7% - incidentally, that’s over twice that allowed by the Maastricht Convergence Criteria. It also has a current account deficit nearing 9% of GDP (whilst Germany has a current account surplus of 7%).

The next great sub-prime lending disaster is hiding within the Western European loans to Eastern Europe of around $1.5tn. Austria, Belgium, Sweden (and Switzerland) have a loan exposure of between 25% to 60% of their GDP. Italy has a debt to GDP ratio of over 100% (but that’s just to itself).

As of February 2009, the lowest eurozone annual inflation rate was Ireland and Portugal at 0.1%; the highest were Finland 2.4% and Malta 3.5%. In the same month, manufacturing output was declining at record levels, hitting Germany and France particularly badly.

So, it is about the best the eurozone can do at the moment not to fall apart – and the pressure hasn’t even started yet.

According to the European Central Bank, the M3 money supply across the eurozone is growing at 6.5% annually. ECB interest rates are currently at 1.25%

Against any logic (other than straightforward duplicity), the Keynesians have somehow convinced the world that the big fear for the global economy is deflation. Milton Friedman said that inflation was always and everywhere a monetary phenomenon. Inflation is properly understood as an expansion of the money supply (and credit).

In summary, manufacturing output is falling. Certain member states are encumbered by massive debt.  Both considerations will push the ECB to consider lower interest rates. But the money supply is already expanding at a rate far greater than has been reflected by price rises.

Blog Review 927

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The public sector has higher wages than the private. Better pensions....and they're getting better pay rises too. Something's not right here, surely?

Milton's four ways to spend money and when politicians are acting boldly.

Dealing with climate change and Ben Bernanke's PhD thesis. It's uncertainty that's the real problem.

And in dealing with climate change, we could have a complex system that politicians can game and a simple one that they can't. So guess which politicians have chosen?

It's true that newspapers face some difficult technological changes: but they also seem to have a death wish.

A note for drug war warriors. Even when you should be able to control drug production, in fact, even when you do, the effect is only short term.

And finally, this might explain Johann Hari.

167 CCTV camera pilgrimage

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Today, Good Friday, there's a pilgrimage in Westminster, from Methodist Central Hall to the Anglican Westminster Abbey, and on to the Catholic Westminster Cathedral. It's a distance of little more than a thousand yards – about three good fairway strokes for Tiger Woods – down Victoria Street. But over the years that I have worked nearby, I've noticed CCTV cameras springing up here and there along the route. In my book, The Rotten State of Britain, I have documented how we are sleepwalking into a surveillance state (not to mention a database state and a nanny state). So I decided to trace the route myself and count the number of CCTV cameras that I could see.

I started at the North door of the Abbey. I couldn't see any cameras on this magnificent building, though a notice by the door alerts tourists to the fact that CCTV is used inside. As I gaze across Parliament Square, and up the bottom end of Whitehall, with Parliament behind me, I must be on scores. But my eyesight isn't great, and I don't want to whip out my binoculars and start scanning the Treasury and other government buildings, in case I get arrested and held for 21 days without charge as a terrorist. Nor can I cross the Square and take a closer look, because it's full of Tamil demonstrators.

But I can see 8 very easily on the new Supreme Court building, another 6 or so on the Queen Elizabeth Conference Centre, and even two over the entrance of the Abbey bookshop. Thank goodness they didn't disfigure Nicholas Hawksmoor's fabulous West Front with them.

Strolling over the road I find Central Hall pretty well camera-free too, though I know there are some round the bank, and from here I can see 5 down Tothill Street and another 3 on the Treasury building at the end of Storey's Gate. On the other side of Victoria Street, I can see 2 on the Schools Department, and the Department of Business seems particularly anxious about its security, because on this side alone in sports and impresive 11.

As you would expect, when you pass Scotland Yard you are under the gaze of dozens, either on the building itself or on the lampposts outside. I count 18 on the two sides I can see, but there are almost as many at the back. I'm halfway down my route now, and the count has already passed 100.

Past the Albert pub with a very artistic looking CCTV camera pretending to be a streetlight, I can see the Korean Embassy, which boasts another 6, and the Howick Place Post Office, with a modest 1 being visible. But the Ministry of Justice has four heavy-duty cameras with floodlights that look as if they can be swivelled in any direction to meet the need of the hour.

Ashdowne House, which is home to another bit of BERR, is also very security conscious for some reason, with another 6. And at last I'm turning into the marvellous forecourt of the Cathedral. Looking down Victoria Street, I make out 7 on the Kingsgate shopping arcade, 3 on a large pole at the end of the street, and 6 more that seem to be for traffic management. As I reach the Cathedral steps I look back I can see another 9 cameras. And maybe there are more inside the building itself, staring out at me, I don't know.

All in all, I have counted 167 CCTV cameras in my short three-drive walk. I've probably missed a lot more that my poor eyesight and my anxiety to avoid arrest have caused me to miss. And the Home Secretary Jacqui Smith ridicules the idea that we are living in a police state!