The Morality Of Offshore

Jeremy Hetherington-Gore, Tax-news.com, London

27 June 2000

See Discussion Forum Topic: The OECD v Offshore - add your comments!

In a turbulent period for the world of offshore, the power structures representing the 'first' world of rich countries have thrown four major thunderbolts at low-tax jurisdictions in as many weeks.

First came the G7's Financial Stability Forum's list of offshore jurisdictions posing a risk to global financial stability, followed by the EU's Feira 'withholding tax' deal which involves a quest for information-exchange agreements with top jurisdictions including the EU's dependent territories; then came the double whammy from Paris, with the Financial Action Task Force and its parent the OECD both issuing lists of miscreant jurisdictions guilty of accommodating money-laundering, or of pursuing 'harmful tax practices'.

To a large degree the timing of these assaults on offshore is no coincidence - they are co-ordinated between the smallish group of top finance ministers and their advisers. No-one knows to what extent the rich country offensive against tax havens will be successful, but here is a deeper question: should it succeed? What is the morality of taxation and the escape from it? Where do you stand on the axis of mitigation - avoidance - evasion?

There are so many conflicting arguments that it makes one dizzy to contemplate them all, let alone draw conclusions. Here are some of the reasons for and against control of 'offshore':

FOR

• Money-laundering must be stopped in order to control the spread of drug-smuggling and drug usage;
  

• Money-laundering is also the counterpart of capital flight, which often represents the plundering of assets from poor countries by criminal businessmen and corrupt politicians;
  
  
• It is unfair that countries with low tax regimes should be allowed to attract money from high-tax countries, thus causing 'losses' of tax that penalise poorer people.

AGAINST

• Most of the offshore jurisdictions are, or were, poor countries, often ex-colonies, which by their own efforts have constructed financial industries and should not be bullied out of their legitimate income by rich countries afraid of losing tax income;
  
  
• Letting rich countries tax their citizens more heavily simply puts more money into the hands of the state which spends it badly;
  
  
• Competition between countries, in tax as well as in other respects, creates a virtuous circle of increasing efficiency and wealth.
  

A sorry muddle of conflicting human emotions underlies the arguments. Genuine concern for the poor sits alongside jealousy of people richer than oneself; the natural human desire of individuals to optimise sits alongside notions of civic responsibility. The history of the ennobled and knighted Michael Ashcroft says it all.

The report issued by Oxfam this week in support of the rich countries' attack on offshore has as its thesis the idea that tax which leaks away from high-tax areas is money which could have been spent on the third-world poor. Unfortunately the facts don't support this idea: the UK, which is raising more tax than ever before and has a massive budget surplus is spending less than ever on aid to the third world. The sad truth is that politicians in rich countries are not elected by the world's poor, and don't represent their interests. It is not accurate to blame offshore jurisdictions for the ills of the third world.

However compelling the arguments for spending more on relieving poverty, it is unlikely that increasing taxation is the right way to go about it. If anything, reducing taxation is more likely to help, by reducing the incentive for people to go offshore and leaving them more money with which to pursue philanthropic goals. Tax policies aimed at increasing charitable giving have usually been successful when they are introduced, but are not much in evidence in most rich countries.

Eventually, in a seamless global economy, it must be correct to apply 'unitary' taxation both to people and companies, as recommended by Oxfam, and to divide the tax 'take' among countries according to some equitable scheme; but it is Utopian to imagine that this can be achieved in the world as it is structured today. The Internet will probably bring along the opportunity to do it, though. Once the bulk of the world's financial transactions take place over the Internet (not so far off?) it will be possible to tax a person's lifetime spending on a uniform basis, and distribute the money equitably (according to residence? location of spending? population?).

As far as companies are concerned, there will be no solution to the problem of tax and its avoidance as long as countries (or regional economic groupings) compete economically, and hence fiscally. The solution is not to tax companies at all, something recommended by many economists. It is often said that companies don't pay tax, only people do so. The problem is that corporate taxation is more prone to distortion than personal taxation. Thus, once there is a universal scheme for taxing people equitably, and the role of government has been reduced to that of administering spending, companies can be taken out of the tax net altogether.

This prescription may or may not be practicable, and it may never happen, but it would achieve a much more moral result than today's higgledy-piggledy world of high and low taxation.

See Discussion Forum Topic: The OECD v Offshore - add your comments!

.

Recommended

Write a comment