February 20, 2008

Blockade the tax havens

Around 1000 rather affluent Germans are not sleeping too well since former Deutsche Post AG Chief Executive Officer Klaus Zumwinkel was arrested by the German tax authorities on February 14. The information leading to his arrest came from a DVD containing a list of alleged German tax evaders, purchased for around € 5 million by the German BND intelligence service to pay a former employee of LGT, Liechtenstein’s biggest bank. It was money well spent.

Tax havens are to those engaged in tax evasion what fences [dealers in stolen property] are to thieves. Tax evasion is a crime. It’s not harmless cleverness and fun; it’s theft from the community you live in. Those who engage in it, and those who facilitate it, are criminals. It is time that the more determined, if not yet sufficiently aggressive, attitude and actions of the civilised world towards money laundering is extended to tax evasion through off-shore tax havens and the corrupt states/entities that live off this trade. [Like terrorism, the definition of money laundering is always political. But at least, we know what Buiter's position is.]

The list of countries that make a living out of tax evasion and related activities (essentially the same countries that consciously created, and in some cases continue to offer, facilities, laws, regulations and institutions to facilitate money laundering) is long. The OECD lists 35 microstates with the tax haven designation, but this excludes larger countries with strong bank secrecy laws whom the shoe fits just as well (e.g. Austria, Switzerland, Luxembourg).

Many are located right in Europe. The include micro-states/entities like Monaco, Liechtenstein, Andorra (the only three tagged as “uncooperative” tax havens by the OECD), Guernsey, Jersey and the Isle of Man. Any country with an unhealthy respect for bank secrecy is part of the tax evasion/money laundry fraternity. Among the EU members, Luxembourg and Austria are prominent examples. Cyprus has long been a surprisingly copious source of funds invested in the former Soviet Union. Outside the EU but in the heart of Europe, Switzerland has long profited from the facilitation of foreign tax evasion and money laundering.

Of course there are many other tax havens, money laundromats and regulatory havens outside Europe. The Caribbean has quite a few (the British Virgin Islands, the Cayman Islands, Panama etc.), and others are scattered all over the world. The European tax havens are, however, unique in offering stable governments, predictable laws, rules and regulations - indeed most of the letter but none of the spirit of the rule of law - and low risk of having part or all of the ill-gotten gains parked there expropriated or extorted. The European tax havens are a tax evaders paradise. It is time to change that.

The vast majority of European countries - all those that lose out because of the existence of these tax havens - should unite in a determined effort to end these countries’ ability to offer safety to tax evaders by granting anonymity, confidentiality and secrecy. The exact modalities may differ from case to case. Jersey, Guernsey and the Isle of Man should simply be absorbed lock, stock and barrel into the UK, with English laws, rules and regulations applying across the board. The special status of these strange entities is not cute; it’s an enabler and facilitator of unethical and illegal behaviour. The EU should adopt a directive on bank secrecy that would end the nefarious practices of Luxembourg and Austria. Belgian dentists will just have to get used to paying taxes. Andorra, Monaco and Liechtenstein should be given the choice of ending bank secrecy or facing annexation (by France and (once it abandons its bank secrecy laws) Austria respectively).

Switzerland is the big prize, as unlike the other tax havens, it is a country rather than a dwarf-state and postage-stamp curiosity, and it is outside the EU. It should be subject to sufficiently stringent economic sanctions from its neighbours (after all, it is landlocked!) to induce it to abandon the laws, rules and regulations, including its extreme version of bank secrecy, that make it the one of the countries of choice for parking illegal or extra-legal money.

The activities engaged in routinely and as a matter of course by these tax havens are hostile acts towards all countries whose tax bases are undermined by them. It is time to stop being polite about it. If the EU, the US, Canada and Japan were to take a united line on this, things could change very quickly.

February 20th, 2008 in Economics, Ethics, Politics | Permalink

58 Responses to “Blockade the tax havens”

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Capital Flows In And Out Of Royal Pirate Coves

February 29, 2008

Non-doms and tax havens: the Chancellor’s good fortune

The Chancellor hasn’t had much luck since he took command of the good ship Britannia. Some of the back luck was of his own making and the criticism of his (in)actions has been partly deserved. As Martin Wolf has pointed out, even when he has done the right thing, he has at times done it for the wrong reasons and clumsily. The taxation of non-doms is an example. The Tories came up with the clever populist wheeze of taxing non-doms and using the (overestimated) proceeds to pare back death duties. The immediate ‘me-too’ reaction of the Labour government lead to the hasty introduction of a two-part proposal.

Non-doms would remain exempt from UK income tax on foreign earnings not remitted to the UK for seven years. After seven years, they would either pay a yearly £30,000 fee per capita to retain their non-dom status, or pay UK income tax on their worldwide earnings, regardless of whether they are remitted or not - like the poor doms have had to do all along. There would also be some tightening up on the legal definition of repatriation of earnings, to close some glaring loopholes.

A second, rather fuzzy part of the proposal involved (or appeared to involve) greater reporting obligations for non-doms on assets held in foreign trusts. Many of these foreign trusts are off-shore vehicles located in tax havens.

The explosion of indignation that greeted this proposal was deafening and largely bereft of logic other than the financial self-interest of those non-doms who would be adversely affected by the proposal. The fact that the UK government’s introduction of the non-dom proposal was motivated by a knee-jerk opportunistic response to an opposition initiative, and that the details of the proposal were hastily cobbled together and ill thought out, ought not to obscure the fact that the proposal makes moral and economic sense. It is fair and just that those who are resident in this country be taxed on their worldwide income; they are the beneficiaries of the public goods and services financed through this country’s tax system. The very existence of the resident but non-dom category is an outrageous sop to a small number of highly vocal and well-connected rich folk and their lobbyists. The unequal treatment of equals introduced by the creation of the non-dom (resident but non-domiciled for the purpose of income tax and inheritance tax) category undermines respect for the law among the tax paying public at large.

The equal treatment principle would not lead to the Chancellor’s exact proposal, of course. It would point instead to a tax code that forgets about the £30,000 annual capitation charge and simply abolishes non-dom status. Every UK resident should pay UK income taxes on his/her worldwide income. End of story. Simple. If the Chancellor is in a good mood, he could grandfather existing non-doms for a number of years.

Morality of course, may come with a price tag: If the Chancellor’s proposal or my own modification of it were to do material lasting damage to parties other than the non-doms whom it is intended to hurt, these costs would have to be set against the benefits: “Erst Kommt das Fressen, dan Kommt die Moral.” In this case, however, I believe that morality will be quite affordable.

The practical objection to the non-dom proposal (as opposed to the ‘all taxation is theft’ rantings that have occasionally polluted the air in this debate) is that non-doms would leave the UK as a result. The obvious response to that question is: how many and so what?

There are estimated to be around 130,000 non-doms in the UK (I am one of them, my wife is another). The Treasury has estimated around 3000 would leave. City opponents say as many as 8000 would leave. Personally I cannot think of any 8000 people currently living in the UK whose departure would make a material difference to the material well-being those left behind. Who would be prompted to leave?

Clearly, the lemmings would include those non-doms who would be hit by the £30,000 fee (those living in the UK for more than seven years) and for whom the annual ‘surplus’ value of living in the UK (that is, the annual value of living in the UK with non-dom status rather than in the best available alternative) is less than £30,000 per member of the household. For those already here, the cost of moving abroad would have to be set against the expected sequence of non-dom fees. It is hard to credit (1) that many non-doms would fall into this category and (2) that a lot of revenue loss would be involved - the richest non-doms, like many of the richest doms, already have much of their assets abroad and legally avoid or illegally evade UK income and inheritance tax on these assets. The fee would cause a few non-doms with relatively low earning power to leave. The implications for the tax authorities of this reduction in the tax base would be small.

With a UK marginal income tax rate of 40 percent, if I were determined to stay resident in the UK, I would pay the £30,000 fee rather than losing non-dom status, if I had more than £75000 annual income abroad that I did not bring back to the UK. The ‘outside option’ of leaving the UK may, however, be financially superior to staying either as a non-dom paying the £30,000 fee or without non-dom status, and this can be so both for those with foreign non-repatriated income above £75,000 or below it. To know the answer even to the straight financial cost-benefit analysis of staying vs. going, you would have to know the (present discounted value of the) total after-tax income of all kinds a person would earn in the UK compared to what they would earn if they were to move abroad. Income now earned and taxed in the UK and income that would be earned and taxed abroad in one’s new residence following emigration from the UK are important elements in the comparison.

For the very high earners among the non-doms (both those who have very high incomes earned and taxed in the UK and those who earn and keep most of their investment income abroad, the £30,000 fee is a side-show). The proposed change in the definition of what, for UK income tax purposes, constitutes foreign earnings brought into the UK is somewhat more material. The real issue is that a number of non-doms fear that they would have to reveal the whereabouts, size and nature of assets held abroad in a variety of off-shore arrangements, often in tax havens.

The BND to the rescue of the Chancellor

And it is here that Mrs Merkel and the BND (the German Federal Intelligence Service - a bit of an oxymoron that one) have come to the rescue of the Chancellor. Their creative and determined attack on German tax evasion and on the foreign tax havens (in this case the Preposterous Principality of Liechtenstein) that facilitate this crime has suddenly narrowed the external options open to anyone anywhere with a vested interest in tax havens. The fact that tax authorities throughout the world have now acquired copies of the famous DVDs (the UK authorities may have done so independently earlier), makes it conceivable, for the first time in my lifetime, that the authorities of all key countries whose tax bases have been undermined by tax havens will crack down jointly and severally to end this nefarious tax piracy.

A tax haven is a state (or an entity with some if not all the defining properties of a state) whose key defining properties are secrecy and confidentiality for foreign investors in the country. First, it asks few if any probing questions about the provenance of the funds and other assets deposited in financial institutions within its jurisdiction. Second, it provides little if any information likely to be useful to foreign tax authorities, police authorities and other law enforcement agencies about the financial affairs of the customers of its financial institutions, even where these customers live in the jurisdictions of these foreign authorities.

Unwillingness to provide information to foreign tax and/or law enforcement authorities is therefore the defining characteristic of a tax haven. A tax haven may impose low or high taxes on those within its jurisdiction. That is irrelevant to whether it qualifies as a tax haven. A country that imposes no income tax, wealth tax, property tax or indeed no tax of any kind on its residents is not a tax haven if it freely provides information to foreign tax authorities and/or to other foreign law enforcement authorities about the financial affairs of persons (natural and legal) deemed, by these foreign authorities to fall under their jurisdiction.

Wealth held in tax havens by a foreigner tends to be of three kinds: (1) Legally/lawfully obtained wealth held in the tax haven in accordance with the laws, rules and regulations of the country or countries of residence of the foreigner; (2) Legally/lawfully obtained wealth held in the tax haven in violation of the laws, rules and regulations of the country of countries of residence of the foreigner; and (3) Illegally/unlawfully obtained wealth (which would, in general, therefore also be illegally held in the tax haven, although it may be possible to conceive of a fourth category of unlawfully obtained wealth that is legally held somewhere). Some of the non-doms in the UK are up in arms for one of two reasons. The first is the Chancellor’s proposals may force them to acknowledge that (some of) their off-shore wealth falls into categories (2) and (3) - lawfully obtained but held in an unlawful manner or unlawfully obtained. This is especially true of the part of his proposal dealing with the need to provide information about off-shore trusts - likely to be watered down or even dropped altogether, unfortunately. The second cause for non-dom upset is that they fear that the proposals may move some off-shore assets from category (1) to category (2). This would be the case if the chancellor were to simply abolish the non-dom category altogether and taxed all UK residents on their world-wide income - the US system.

How hard would an effective crackdown on tax havens be?

The OECD lists 35 state-like entities (mostly micro-states) as “Jurisdictions Committed to Improving Transparency and Establishing Effective Exchange of Information in Tax Matters”. They are

Anguilla,
Antigua and Barbuda,
Aruba,
Bahamas,
Bahrain,
Belize,
Bermuda,
British Virgin Islands,
Cayman Islands,
Cook Islands,
Cyprus,
Dominica,
Gibraltar,
Grenada,
Guernsey,
Isle of Man,
Jersey,
Liberia,
Malta,
Marshall Islands,
Mauritius,
Montserrat,
Nauru,
Netherlands Antilles,
Niue,
Panama,
Samoa,
San Marino,
Seychelles,
St. Kitts & Nevis,
St. Lucia,
St. Vincent and the Grenadines,
Turks & Caicos Islands,
US Virgin Islands and
Vanuatu.

Of these 35 ‘promise to do better’ tax havens, seven are Overseas Territories of the United Kingdom (Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Montserrat and Turks & Caicos Islands) and three are dependencies of the British crown (Guernsey, Jersey and the Isle of Man). The British Empire, i.e. the UK government on its own, could therefore do much to end the capacity of tax havens to aid and abet tax evasion. Aruba and the Netherlands Antilles are two countries belonging to the Kingdom of the Netherlands. Niue and the Cook Islands are ‘fully self-governing countries in free association with New Zealand’ and the US Virgin Islands are an External Territory of the United States of America. Fifteen of the thirty five somewhat co-operative tax havens listed by the OECD could therefore be easily forced to desist by a simple act of will from the UK, the Netherlands, New Zealand and the US.

The OECD has also determined that three other jurisdictions -

Barbados,
Maldives and
Tonga,

identified in its 2000 Progress Report as tax havens should not be included in the List of Unco-operative Tax Havens and do not meet their tax haven criteria any longer. I would, however, still list them as tax havens, albeit perhaps co-operative ones.

The OECD lists

Andorra,
the Principality of Liechtenstein and
the Principality of Monaco

as Unco-operative tax havens - the bottom of the pit. By my secrecy and confidentiality criteria, the following countries would also count as tax havens:

Austria,
Luxembourg,
Switzerland,
Dubai, and
Singapore.
No doubt I have left out a few.

A determined crackdown on all tax havens could start by an OECD-wide agreement that the failure by any country to mandate the prompt and efficient provision to any foreign tax authority of comprehensive information on assets held and income earned in that country by residents under the jurisdiction of that foreign tax authority would be treated the way money laundering and financing of terrorism is treated today. A sequence of graduated sanctions against non-compliant countries would then be implemented. In the case of Liechtenstein and Switzerland, exclusion from the Schengen agreement would be a neat and elegant sanction. I wonder whether it is possible under EU law to suspend the membership of Luxembourg and Austria in Schengen until they terminate the bank secrecy laws, rules and regulations that undermine the fiscal sustainability of the other EU Member States.

Tax havens, by allowing foreign tax dodgers to hide behind their cloaks of confidentiality and secrecy, are engaged in economic warfare against the countries whose tax bases they help undermine. It is time to stop them. It is of course, not just rich industrial countries with big bloated welfare states that have an interest in stamping out tax evasion by cracking down on tax havens and abuses of bank secrecy. Developing countries have had their meagre resources looted effortlessly by kleptocratic rulers, thanks to the services provided by tax havens. Emerging markets like India would no doubt actively support action to put the tax havens out of business.

In the UK, the Chancellor has been fortunate that his decision to tackle the non-dom issue was followed closely by Germany’s decision to have a swipe at one of the world’s most notorious tax havens. It is time to follow through on this bit of good fortune by deepening and broadening international efforts to combat tax evasion and tax avoidance. It’s time to put paid to the notion that you can be too rich to pay taxes.

February 29th, 2008 in Culture, Economics, Ethics, European Union, Politics | Permalink

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March 1, 2008

Non-doms: move to New York City and pay more

18 Responses to “Non-doms: move to New York City and pay more”

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As all the biggest power houses on earth work day and night to move around their wealth, trying to protect it all from the collapse they, themselves caused, things continue to fall apart. More hedge funds are collapsing. The wealthy are trying to form a new association of pirates to protect themselves by bribing even more politicians. Obama is now going down in flames because of his talk about ending the Cayman Islands tax haven. ........

Obama's campaign took a sudden and 'unexpected' turn for the worse with the media hell hounds going after him when the news broke...IN EUROPE...that he was going after the Hell Hounds and Pirates of the Caribbean. When he denounced the 12,000 companies in one small building in the Cayman Islands, I knew he would be doomed to defeat as the media would suddenly find a thousand flaws in his character and past. What is very darkly amusing in a nightmarish way is how they found out he has had associations with corrupt business people in the past! This, in an election with the Keating 5 McCain and Cow Futures Hillary? HAHAHA. Right.

This election is going to be even worse than the previous 4 elections. The final candidates will be in the pockets of these pirates who are organizing even bigger lobbying pushes. The corruption in DC is much worse each cycle. This cycle, it is tremendously worse. Every possible candidate who could stop this was ruthlessly eliminated. And not by the voters, they were simply responding to the tidal wave of media events. I knew Obama was in trouble before the voting began because the news stories on TV would show one minute of McCain, 5 minutes of Hillary and only about 5 SECONDS of Obama. He was vanishing right before our eyes. They were so naked about this with Ron Paul, he vanished even when he was on stage, yelling! I was 'vanished' by the media and I am very aware how this works.