Monday, February 25, 2008

Britain: being a tax haven is risky

A little while ago we noted on a couple of occasions (such as this one) a palpable shift in the world's mood about tax, generally, with influential people on both left and right arguing about the dangers of demonising tax and encouraging tax-dodging: a practice that has been so feebly challenged for so long.

In the last couple of weeks we have seen a dramatic sea change in Europe in particular on something very closely related: the dangers tax havens pose to the world. The mood shift is currently strongest in Germany, as evidenced by the German Finance Minister's recent comments:

It is not just about Liechtenstein. We are also talking about Switzerland, Luxembourg and Austria. We want to launch a battle against all tax havens in Europe.

Our recent blog, Blockade the Tax Havens, contains some examples, and questions are now being asked with more frequency all over the world - the Netherlands is the latest case in point - about whether the giant distortions in international taxation are acceptable in democratic societies.

Now we'd like to point out a nice article in Britain's Observer magazine by the commentator Nick Cohen. It starts like this:

The wealthy have got away with financial crimes for so long they no longer regard them as crimes. When they are caught breaking the rules others must obey, they denounce the timid attempts by governments to enforce common standards as a shocking assault on a natural order in which tax is optional for those with the money to buy exemptions.

While we wouldn't seek to demonise "the wealthy" across the board as this article seems to be doing, we agree that Cohen identifies an important truth about Britain here. With reference to the emerging news from Liechtenstein, where, it turns out, British, American, Dutch and other authorities are seeking (timidly, in Britain's case) to avail themselves of this whistleblower's evidence, Cohen continues:

Maybe for the first time in a generation, governments are seeing the irresponsibility of the rich as a threat as dangerous to a nation's well-being as terrorism or drug trafficking and treating it accordingly.

In Germany, the decision by tax fraud investigators to... er... investigate tax fraud has turned the letters page of the Financial Times into a wailing wall for funny money men the world over.

For our part we would be a little less harsh on the Financial Times, which has hosted a series of wonderful editorials and comment pieces in recent months (like this one) very much in line with TJN's thinking. Once again, however, Cohen has a powerful point: describing "the City (of London) in open revolt against the notion that foreign billionaires should pay a little more towards the costs of the country that protects them." Cohen then goes on to quote TJN:

All missed the point that tax havens are inherently criminal and would go under without the proceeds of crime. As John Christensen, director of the Tax Justice Network, puts it, they are enemy states, pirate islands that have declared economic war on the rest of the world. It's not just that they happen to be used by individual criminals - drug dealers, kleptomaniac African dictators - they are criminal entities themselves that survive by sucking potential revenues out of wealthy and destitute countries alike. If rich citizens obeyed the law, or tax havens ended their secrecy, offshore banking wouldn't exist.

As he points to Germany's efforts to crack down on tax havens, he points out what everyone in Britain should be asking:

I cannot imagine Gordon Brown or David Cameron talking in the same way about Jersey and the Isle of Man. The idea that David Miliband would authorise MI6 to find informers in offshore banking systems feels equally far-fetched. Britain is a country where councils can bug the phones of fly-tippers and put spy cameras in litter bins, but tax inspectors cannot bug the offices of fraudsters or send spies into Jersey.

Britain, it turns out, was offered data from Liechtenstein but turned it down at first. All this secrecy, shiftiness, in the pursuit of Britain's interests in the financial sector. If we are to believe the FT's Wolfgang Munchau, reliance on this sector may turn out to have been a rather unpleasant mistake.

In the next few years, I expect the UK economic miracle to be exposed for what it was: an overlong joyride on the back of an overlong asset price bubble.

He also foresees some political fall-out, with wide-ranging implications.

The greater the extent of public bail-outs or bank nationalisations, the greater will be the public’s regulatory revenge.

Perhaps the worst thing will be that working in finance will no longer be regarded as cool, as it has been over the past 15 years. Finance will be once again what economic theory always told us what finance should be: a necessary activity, requiring some technical skills, but rather dull in the absence of bubbles.

It's like what we pointed out in a couple of articles in our last edition of Tax Justice Focus: betting your country's future on being a tax haven looks like being a risky gamble. Britain may be about to find this out: the hard way.


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