Tax Competition, Economic Freedom and Sovereignty – Adam Smith Institute
Extracts from a speech by Geoff Cook at the Adam Smith Institute, 4th November 2009 :-In the year 1204 King John of England and Duke of Normandy lost most of his French possessions following defeat in battle; the people of Jersey were faced with a choice; would they remain part of the Duchy of Normandy, as had been the tradition until that time. Or would they throw their lot in with King John, their Duke, descendent of William the Conqueror. Jersey decided to remain loyal to King John, and was rewarded with significant constitutional freedoms; which have to this day extended to the right to set its own taxes and customs duties. Jersey receives no financial support from the United Kingdom and was the only part of the British Islands along with Guernsey to be occupied during the Second World War; the last time in fact that Jerseys income tax was amended to the current rate of 20%, which has stood for over 50 years. Jersey was known in the 1950s as the honeymoon capital of the UK , and more recently for the Jersey Royal Potato, and as the home of that most endearing brown bovine of creatures, the Jersey cow. In the 1960s as UK firms increasingly went overseas, Jersey developed a finance industry, servicing the needs of British expatriates. For 50 years this industry has developed and has become one of the worlds leading niche international finance centres. It now employs 13,000 people in banking, wealth management and fund administration. It is this history that has put Jersey at the very heart of the G20 agenda; with Banks, Bankers Bonuses and Tax Havens, at times competing as the pejorative of choice. But we are no strangers in Jersey to international scrutiny: We were subject to requests to amend our tax arrangements under the OECD Harmful Tax Competition programme back in 1998. More recently the EU Code of conduct group on business taxation appear to have indicated that our tax system may not meet with the Spirit of the EU code of conduct. This is interesting given the current fiscal framework has been built in a very transparent manner over a period of years, and especially as the UK had previously indicated our tax system did meet code requirements. In Jersey we have a diversified tax base including corporation tax, income tax, property taxes, customs duties, and a goods and services tax. Of course we offer benign tax treatment to non residents, as do a large number of other countries including many EU members. It is certain for example the United Kingdom and the US could not fund their significant budget deficits with out offering tax free returns to overseas investors. What is more in Jersey we have a strategic reserve of 582m. We fixed the roof whilst the sun was shining; and we put money aside for the rainy day we knew would eventually come. We have an economic stabilisation fund of 140m, which our Finance Minister has committed to deploy, only on the advice of an independent panel of experts. Ergo we have 18 months income in the bank and no debt! But we need to distinguish here between tax transparency and tax competition. Jersey is no friend to tax evaders and criminals. We have achieved the highest ratings of any country under the IMF FSAP inspections, and have been a leading and willing participant in the OECD Tax Information Exchange programme. Last year we filed over a thousand suspicious transaction reports and cooperated in over 700 investigations Tax evaders should not be able to use jurisdictions to hide none disclosed wealth. Recently published research conducted by Professor Jason Sharman, of Griffith University Sydney, proves that Jersey has a better record of fighting this kind of activity than many larger countries, including the UK. Some commentators have observed the debate over tax transparency and tax competition looks very much like big countries with large budget deficits, (the high tax, high spend, large government countries, and their trading blocs and agencies) seeking to impose their view of the world on smaller less powerful nations. It is after all much more difficult to keep raising taxes if your citizens are mobile, and can move themselves and their wealth to a more attractive environment . Clearly there is a continuing sense of moral outrage as a result of countries sliding into recession, unemployment still rising, and already strained national budgets in the US and Europe coming under intense pressure, as a result of the financial crisis.This appears to be one of the key drivers for the continuing focus on tax havens.Given this backdrop it is not surprising that the subject of tax receipts and cross border activity has come to the fore, as cash strapped governments look for solutions. The truth though, however unpalatable, is that the crisis had its roots anchored firmly in debt taken on in the major western deficit economies.This had everything to do with central bank interest rate policy and financial supervision, and nothing whatever to do with Financial Centres, such as Jersey.So why the linkage with Tax Havens? or as they might be more appropriately titled, International Finance Centres or IFCs.The criticism is usually fed to the media and politicians by anti business groups, opposed to tax competition and free markets in mobile international capital. Ironically these critics are inclined to attack globalisation, multinationals of all types, and are the authors of the protectionist clamour that the G20 has vowed to avoid; I quote from the Berlin Summit:-All countries have a duty to resist protectionist tendencies and to work towards a tangible further opening of world trade Now it is true many banks and hedge funds have operations in international finance centres. They provide a cost effective, tax neutral administration platform in a well regulated environment. Blaming IFCs for what has happened in the US and UK makes no sense. There is no credible connection. Jersey competes for business on exactly the same basis as the 70 other countries who offer some kind of benign tax neutral regime to the overseas investor; that is on a mix of business expertise, political and social stability, modern infrastructure, good communications and sound regulation.Without international capital attracted on exactly the same basis; the US and UK, and many other nations could not hope to fund their significant budget deficits.Numerous studies undertaken by internationally respected academics including Professors Hines, Desai, Foley, Hejazi and others, evidence beyond question that IFCs are efficient allocators of capital.IFCs act as way stations, gathering capital from around the world where it is not needed, and then conduiting that capital to where it can most effectively deployed. Tax is paid on capital before it arrives in the way station, and it will be paid when it leaves the way station as it is invested and put to work.This allows large proximate onshore economies to operate the domestic tax systems they need without dislocation from the need to offer attractive tax treatment in their primary tax framework for foreign investment.This has been proven in numerous studies to increase economic activity, increase jobs and increase wealth creation, such that a boost to tax take is generatedThe G20 debate has initially focused on transparency and information exchange, and if the debate were simply about transparency and disclosure, then centres such as Jersey would have nothing to worry about. However, I believe the crisis may have weakened the commitment of the current UK and US administrations to economic freedoms, to free markets, to responsible capitalism, and to tax competition. Dirigiste is on the march, with the large centrally directed economies of the EU exerting their influence through measures such as the AIFM Directive, and enlargement of the EUSD, both in part designed to impose EU standards on third countries. However, it is self evident that 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. 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. 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 are likely to 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. Significantly, 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 tax grab will miss the target, as even if discriminatory measures are introduced against international finance centres, 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. 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 in the UK undertake. 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 behavior, 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 some NGO 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 recent studies by the University of Oxford Business Taxation group, and the Deloitte study, conducted as part of the Foot Review of British Offshore Financial centres; have exposed the tax hobbyists estimates of tax leakage as grossly overstated. 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 in the second quarter of 2009 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. Contrary to the myths propagated by detractors, Jerseys 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. I would contend that tax competition is good for all economies; it leaves more capital in the wealth creating side of the economy, acts as a brake on excessive government spending, and provides for greater investment activity thus completing a virtuous circle. There is no law of economics in my view which says the economic cake is finite. Recent work involving a comprehensive analysis of the body of research undertaken on IFCs over the last decade by a leading US Economist, Professor James R Hines, provides compelling evidence of the value centres like Jersey bring to large proximate economies. The Financial crisis has brought home the essential requirement to keep capital flowing to business whether it be debt or equity. The slowdown in the real economy has principally been caused by a lack of capital; the vital lubricant for all economic activity. The restoration of capital flows is the essential pre requisite for the recovery we all hope for. Centres like Jersey form efficient conduits and pipelines for internationally mobile capital; facilitating more effective and productive economic activity. Not only are we not part of the problem with respect to the Global Financial Crisis; we are an important part of the solution.