Why Tax Havens Can No Longer Be Tolerated

The recent G20 summit -- a much expanded platform from the traditional and exclusive G7 and G8 -- brought together a disparate, and somewhat desperate, group of world leaders from across the political divide.

They gathered after realising that they could no longer afford to operate within the constraints of ideological straitjackets, economic orthodoxy and in a business-as-usual mode in the face of the global financial meltdown, which has left a bloodbath of banking failure, business collapse and job losses.

The meltdown had to be addressed urgently or else it would result in a world economic depression.

So they had to find quick and sustainable remedies -- among them a US$1 trillion stimulus package and setting new rules of operation binding them all as financial markets have become so intertwined in a globalised world that collapse of one has a contagion effect on the rest.

This was a tacit admission that unregulated free markets simply do not work.

One issue that found unanimity among the G20 leaders -- with Brazil, China, India and South Africa sitting at the top table alongside traditional economic powerhouses like the United States, Japan and Germany -- is that of reining in or completely abolishing tax havens.

The issue has come to a head owing to the colossal amount of tax evaded through these havens, most of which are conveniently situated on isolated islands (i.e. offshore so-called overseas territories such as the British Virgin Islands), principalities (small territories ruled by princes, e.g. Monaco) or special administrative regions under sovereign states, as is the case with Hong Kong and China.

Thus, the strict rules governing banking in London don't apply on the Virgin Islands as is the case Beijing vis-a-vis Hong Kong, making these places havens in every sense of the word.

At a time governments need every tax dollar legally due to them to fight recession, tax evasion through tax havens can no longer be tolerated.

Geoffrey Power, a former economic adviser to the tax haven of Jersey, a British Crown dependency in the English Channel, says: "What . . . defines an area as a tax haven is the existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in tax evasion."

lack of transparency in the operations of legislative, legal or administrative provisions;

Thus, discretion, which actually amounts to secrecy, is a tax haven's main attraction through protection of personal information.

The mushrooming of tax havens has been attributed to the considerable growth of offshore banking and globalisation of world business.

Thus, tax havens straddle the world from the British Virgin Islands in the Caribbean, Guernsey, Luxembourg, Monaco, Switzerland (all in Europe) to Hong Kong and Macau under Chinese jurisdiction.

An estimated US$7 trillion of assets are being held offshore with an estimated US$500 billion of personal wealth in Jersey alone.

According to pressure group Tax Justice Network, developed countries lose US$180 billion a year in evaded taxes.

In 2007, the then US Senator Barack Obama filed a Stop Tax Haven Act with Senate counterpart Carl Levin who said at the time: "Offshore tax havens have declared war on honest US taxpayers by helping tax cheats."

On the campaign trail, Obama cited one building called Ugland House on a tax haven, the Cayman Islands, which are a British overseas territory in the Caribbean.

The building is registered as accommodating 18 000 companies but just 241 people work in the building.

"That's either the biggest building or the biggest tax scam on record," said Obama in disgust.

Tax havens are an example of what prompted former British prime minister Edward Heath's memorable description of the late British tycoon Roland "Tiny" Rowland as the "unacceptable face of capitalism" because of the latter's rapacious business methods in the 1970s.

Africa has not been spared either with the likes of the late former Zairean dictator Mobutu Sese Seko and Nigerian strongman General Sani Abacha stealing from the state and stashing the millions in numbered Swiss bank accounts.

However, countries which have fallen victim to this criminality and greed are now fighting back to protect their tax bases by taking retaliatory economic measures. A "blacklist" of offending countries was given to the G20 summit to name and shame them.

To situate the issue in our context, Zimbabwe has not been immune to this method of tax evasion.

Several firms -- some very large --have been exposed for under-invoicing exports and banking the difference offshore at a considerable loss to the economy.

This malpractice must not be countenanced any longer because the inclusive Government needs every tax dollar to pay the civil service, revive the economy, and rebuild infrastructure.

The amounts that have been externalised this way could also go a long way in offsetting the country's foreign debts and could have greatly mitigated the effects of sanctions and recurrent droughts that have hit the country over the past years.

Relevant Links Economy, Business and Finance Legal and Judicial Affairs As such, the Government of Zimbabwe should join hands with those states that have said enough is enough of tax havens and are striking back by targeting areas where errant countries' economies are open to retaliation.

The measures include threat of rescinding existing treaties and withholding interest payments to non-cooperative jurisdictions.

It cannot be business as usual anymore. Let's do away with such obscene criminality; let's not conceal it under a veil of respectability.

“So, with complete predictability, the Gang of 20 promised to spend over a trillion dollars they don’t have to “stimulate” the world economy, to help struggling countries through the IMF (its record is so good at that), and other noble purposes. The G-20 also endorsed worldwide inflation by central banks and promised—I love this one—to “take action against” tax havens.

“The era of banking secrecy is over,” said the communiqué, as though that were a good thing. “We stand ready to deploy sanctions to protect our public finances and financial systems.”

The Obama administration led us to believe it was standing firm against a world regulatory authority, which was pushed by French President Sarkozy. But you be the judge. Here’s what the communiqué says:

“We each agree to ensure our domestic regulatory systems are strong. But we also agree to establish the much greater consistency and systematic cooperation between countries, and the framework of internationally agreed high standards, that a global financial system requires…. In particular we agree: … to establish a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission…; to reshape our regulatory systems so that our authorities are able to identify and take account of macro-prudential risks; to extend regulation and oversight to all systemically important financial institutions, instruments and markets. This will include, for the first time, systemically important hedge funds; to endorse and implement the FSF’s tough new principles on pay and compensation and to support sustainable compensation schemes and the corporate social responsibility of all firms….”

And more—as if the regulators could have the requisite knowledge to manage economic affairs. This is a regulatory cartel, and to the extent it squelches competition among jurisdictions, it will produce all the evils of a coercive monopoly. That of course is the point. There is to be no safe haven where people can protect their wealth from the grasping politicians.”

The G(rasping)-20
By Sheldon Richman http://fee.org/articles/in-brief/goal-freedom-grasping20/

Instead of trying to prevent competition between jurisdictions, the government ought to be asking why people are so desperate to escape the clutches of Her Majesty’s Revenue & Customs. And instead of just trying to prevent wealth from leaving the UK, they ought to be thinking about how they can attract more of it. Dan Mitchell of the Cato Institute has made a series of excellent YouTube videos on tax havens and tax competition: Tax Competition: A Liberalizing Force in the World Economy - http://www.youtube.com/watch?v=nJWLemN29Wc

The Economic Case for Tax Havens
Statist politicians and international bureaucracies such as the OECD and UN routinely attack tax havens, claiming that they lead to “harmful tax competition.” Yet at no point do critics bother to provide any evidence for this claim. This mini-documentary from the Center for Freedom and Prosperity looks at the empirical data and scholarly research and reports that tax havens actually have a very positive impact on the global economy.
http://www.youtube.com/watch?v=yi0lkJBTi58

Monday, March 31, 2008 ~ 3:11 p.m., Dan Mitchell Wrote:
Tax Tyranny. Writing for the Washington Times, Richard Rahn explores situations in which taxation becomes morally unjustified:

At what point does taxation move from that necessary for proper government to tyranny? ...In his 1886 annual message to Congress, President Grover Cleveland stated, “When more of the people’s sustenance is exacted through the form of taxation than is necessary to meet the obligations of government and expenses of its economical administration, such exaction becomes ruthless extortion and a violation of the fundamental principles of a free government.” ...Tax tyranny can exist when members of one group are singled out to pay a disproportionate share of the tax because of their religion, ethnic group, gender or other circumstance. Nowadays, this is most often seen in government abusing the idea of progressive tax rates. For instance, in the United States, the top 1 percent of the taxpayers pay 40 percent of the income tax, yet they have only 21 percent of the income. At the same time, the bottom 50 percent of the taxpayers pay only 3 percent of the tax while having 12 percent of the income. Some politicians want to further increase the tax burden on the top 1 percent while reducing and even eliminating the tax all together on the bottom 50 percent. When a majority shifts almost all of the tax burden to a small minority who must pay a grossly disproportionate share of their income, it smacks of tax tyranny. Two-dozen countries, many of whose citizens have suffered under the tyranny of communism, have instituted “flat taxes” to avoid this form of tax tyranny.
http://www.freedomandprosperity.org/blog/2008-03/2008-03.shtml

unregulated free markets simply do not work

Pure, unmitigated bullsh!t. Free markets DO work, if the government does its proper job as a referee and properly and consistently enforces the laws of contract. The problem we've had for decades now, which seemingly grows increasingly worse with every administration, Republican or Democrat, is the fact that more and more, laws are passed that aren't enforced, can't be enforced, or that aren't enforced equally. Add into that mix laws that are down right destructive (Community Reinvestment Act, anyone?) and you've got a governmental structure that destroys the free market, while making it look like the free market's fault.

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