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A Taxing Fundamentalism
Friday, 29 May 2009 13:41

International investment centre are not an appropriate target for the Government, argues the Chief Executive of Jersey Finance

by Geoff Cook

Many commentators have observed that the April G20 London summit delivered more form than substance, but at least achieved a consensus. Obama clearly excelled at playing the role of mediator; critically with China. Sarkozy and Merkel will feel they have secured a commitment to tough regulation, and Brown may well have seen the event as the pinnacle of his political career.

The measures agreed were $500bn for the IMF to lend to struggling economies, $250bn to boost world trade, $250bn for a new IMF “overdraft facility” which countries can draw on, $100bn for international development banks to lend to the poorest nations, and the IMF will raise a further $6bn from selling gold reserves to increase lending for the poorest countries. Only time will tell if it is enough.

The key outcome from the summit for Jersey was a pleasing, but arguably overdue recognition from the G20 nations of its high standards of regulation and transparency, through inclusion in the top tier of countries.

Some who had given, but not delivered on commitments, will feel aggrieved; especially as the political weight of the Chinese ensured no listing for their satellite centres, despite being broadly in the same position as those who had made recent promises on transparency and disclosure.

Months of speculation and intense debate regarding the future of International Investment Centres are at an end.
We have the cooperative, respectable, transparent and well regulated group; the Premier League; and then the two other divisions; league division one, who now aspire to join the top flight, currently on a yellow card, and league division two, summarily shown the red card by the G20 referees; the Financial Stability Forum and the OECD.

So, Jersey and other cooperative, transparent and well regulated centres can now rest easy. The ‘Tax Haven’ question is settled……………or is it?

If the debate were simply about transparency and disclosure then centres such as Jersey would have nothing to worry about. But it is not.

The real issue underpinning this whole debate is not in fact transparency, but tax; who collects it and how. It is also about wealth, who creates it, who enjoys it, who controls it, and who shares in it. The arguments are as old as time, but have lost none of their potency in exposing societal fault lines.

In feudal and agrarian societies over the centuries landowners and the nobility held the real wealth. This all changed when the industrial revolution liberated the means of wealth creation whilst the French revolution wrested it from the grasp of the aristocracy.
As wealth creation and distribution became more dispersed, voter emancipation accelerated the process with welfare programmes, health, education and pensions all increasingly seen as the right of every citizen. All this has been achieved through the redistribution of wealth progressively from those who create or hold it, to those who don’t, principally through the means of taxation and government benefits.

When in balance this system has worked well, but there are inherent dangers. If through the populism of voter appeal or through some systematic ideology the means of wealth creation are overburdened, the incentive to create wealth is diminished, and governments consume a greater and greater proportion of the total economic value available.

Eventually the economic engine becomes too dependent on an inverted pyramid of wealth creators. The creators become disincentivised and go elsewhere, or simply down tools. This was the situation in the United Kingdom in the 1960’s and 70’s with the basic rate of tax peaking at 35%, and a top personal income tax rate of 98%. With the recent budget announcements it seems the UK is once more travelling in this direction.

Most developed democracies would see the maintenance of a balanced system of wealth distribution as fair and reasonable; with those who prosper enjoying the fruits of their wealth, whilst providing for shared services and a safety net for the needy.
As with any spectrum of opinion there are fundamentalists who operate at the margins, fiercely intolerant of those who will not accept their views. Most of the time this doesn’t matter, as the majority view holds the centre ground and balance is delivered through the ballot box. But at times of crisis and uncertainty this can change.

Free markets; globalisation and tax competition have all combined to produce stellar growth in world GDP over the last thirty years pulling countless millions out of poverty. Sadly, problems caused by the tooth and claw capitalism of a few ‘financial masters of the universe’ over the last few years may be about to undo much of this good work, that is, if the tax fundamentalists have their way.

Unfettered capitalism can be problematical, and checks and balances by way of sound regulation are clearly essential. However it is important to keep in view that in remedying the global financial crisis, it is the checks and balances which need attention, and that we do not throw the wealth creating baby out with the bathwater.

 The huge volume of commentary which has followed the crisis; with every pundit, commentator, special interest group, and anti business lobby, now championing their superior ‘model’ for the conduct of wealth creation, distribution and taxation, has certainly generated more heat than light.

An unlikely alliance of tax hobbyists, left wing newspapers, trades unions, and development agencies has catalysed around calls for greater concentration of the means of wealth creation in the hands of governments, and implicitly greater taxation of business and wealthy individuals through the outlawing of wealth structuring and planning, together with restrictions on cross border capital flows.

They hope that their own constituencies will be beneficiaries of this new ‘contract’, with the authors; the tax hobbyists, gaining fame and funding, and their supporters feeling validated in their enduring distrust of the wealthy and their advisers.

Moves are in train to stigmatise wealth structuring and planning; to restrict capital movement through attacks on the use of international finance centres, and to undermine transfer pricing arrangements. If successful the combined effects of these protectionist measures will be to trap capital within borders, significantly reducing overall economic activity.

Such measures will restrict wealth creating activity and encourage growth in central government expenditure. The net effect will be a constriction of wealth, a reduction in tax bases and a loss of global prosperity, driven by a short sighted grab for tax, all delivered through the Trojan horse of transparency.

Even the OECD believes this kind of protectionism in respect of tax competition would be a bad thing:- “We also agree on the need to avoid raising new tax obstacles to cross border trade and investment. Indeed, it has been asserted that, if the project can be successfully concluded, governments will be subject to legitimate market constraints and that fair tax competition may produce a strong downward pressure on tax rates.”

The reality is this particular grab will miss the target, as even if discriminatory measures are introduced, they will not see universal adoption. Like water, the flow will follow the course of least resistance, with mobile capital moving eastwards as the USA and Europe live with the outcomes of the unintended consequences of financial services protectionism.

In times of crisis strange things can happen, extremists can sound rational and appealing as all norms are brought into question, and weary travellers look for a new compass to navigate their way through stormy seas.

Utilising your tax free savings allowances, paying into a pension or trading a few shares within your capital gains tax allowance, are activities that many millions of people undertake in the UK. They are tax avoidance; which means to say that without taking those planning measures, those people would pay more tax.

To accuse banks or companies or individuals of illicit, or immoral behaviour because they plan their international affairs in perfectly legal and sensible ways simply raises the spectre of wrongdoing in a misleading and mischievous manner. Moral judgement without a transcending benchmark is simply a matter of opinion, and opinion fuelled by anger is rarely rational.

Paid for ‘research’, produced by the tax hobbyists, supported by self interested union groups, and trumpeted by sympathetic bugles, claims that billions is being misappropriated through international finance centres. These claims have no credible evidence underpinning them, demonstrating an opacity which these same sources would find intolerable were it postulated by others. This pure ‘guess work’ is simply a convenient fiction designed to mislead and incite opposition.

The UK budget contains fresh measures designed to make the well off pay more, and Mr Brown’s recent letter to the Crown Dependencies in respect of ‘tax avoidance’ implies further measures may follow.

Herein lies the fundamental lack of understanding of the benefit the Crown Dependencies bring to the United Kingdom. With around £200bn of international capital conduited into the City of London by Jersey alone, it is self evident that significant benefit is being enjoyed by the UK from this activity, not to speak of the substantial  liquidity support to the UK banking system throughout the banking crisis. Indeed if the deposit value supplied by the three Crown Dependencies is aggregated, the level of liquidity support is significantly greater than that supplied by the Bank of England.

Contrary to the myths propagated by detractors, Jersey’s deposits are gathered from over two hundred countries across the globe, and with the majority held in non sterling currencies, it is undeniable that substantial additional financial value is brought to the United Kingdom by its loyal Crown Dependency.

In Greek mythology, the Sirens were three enchanting seductresses, who lived on an island called Sirenum scopuli. Sailors who sailed near were compelled by the Sirens' enchanting music and voices to shipwreck on the rocky coast.  

The Siren voices of the tax fundamentalists may appear compelling; but beware Mr. Brown; there is no pot of gold at the end of this rainbow, only a further weakening of your already embattled banking sector, as capital takes flight to friendlier shores.

Should you require evidence to support this claim then you need look no further than the Eurobond market for the clearest demonstration of the law of unintended consequences. A $3 trillion dollar market which left New York for London in 1963, due to the more attractive conditions provided by the United Kingdom. A market where no meaningful records are kept, bearer status is still permitted and no tax is paid.

Prime Minister, this market sounds like a much more attractive target for the tax fundamentalists; that is, unless you wish to keep it.
 

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