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Title: The Never-Ending Assault on International Financial Centres


1
The Never-Ending Assault on International
Financial Centres
  • International Funds Conference
  • Cayman Islands, January 14, 2010

2
Issues to Discuss
  • Why is the offshore world being attacked?
  • Why do the goal posts keep moving?
  • The practical reason the attacks will never
    end.
  • The ideological reason the attacks will never
    end.

3
There Is a Simple Explanation
  • Asked why he robbed banks, Willie Sutton
    remarked, thats where the money is.
  • Some if not most politicians have the same
    attitude about tax havens.

4
Americas Dismal Fiscal Situation
  • In just eight years, President Bush increased the
    budget from 1.8 trillion to 3.5 trillion.
  • President Obama promised hope and change, but
    is doing the same thing.
  • In his first few months, 800 billion of
    so-called stimulus.
  • Hundreds of billions of new spending in his
    first budget.
  • Government-run health care?!?

5
Catching Up to Europe?
  • Today, the burden of the federal government is
    about 26 percent of GDP, up from 18.5 percent of
    GDP when Clinton left office.
  • The good news is that spending is artificially
    high because of financial sector bailouts and the
    recession, meaning the baseline level of
    federal government spending is about 23 percent
    of GDP.
  • The depressing news is the long-run budget
    outlook.

6
(No Transcript)
7
The Calm Before the Storm
  • Because of Social Security, Medicare, and
    Medicaid, federal spending is projected to jump
    from 22 percent-plus of GDP today to 45
    percent-67 percent of GDP after the baby boom
    generation is fully retired.
  • State and local governments will consume at a
    minimum another 15 percent of GDP.
  • Americas welfare state will be bigger than what
    France has today.

8
(No Transcript)
9
Battling the CEN Ideology
  • Opponents of tax competition and tax havens are
    motivated by an ideological belief in the theory
    of capital export neutrality (CEN), which holds
    that all tax planning (avoidance or evasion) must
    be eliminated.
  • According to the theory, economic efficiency is
    maximized when people make decisions in a world
    of identical tax rates.
  • At the very least, this requires worldwide
    taxation.

10
The Added Problem of Haig-Simons
  • The Haig-Simons theory of taxation presumes it is
    good to double tax income that is saved and
    invested.
  • In other words, tax both income and changes in
    net worth.
  • This requires tracking capital, not only
    domestically but also internationally.
  • To be comprehensive, the Haig-Simons system
    requires worldwide taxation.

11
Threats from the United States
  • A rejuvenated OECD anti-tax competition campaign,
    particularly with Democrats controlling Congress
    and the White House.
  • American support for expanded savings tax
    directive.
  • Anti-tax haven legislation in the US, such as the
    Levin/Obama proposal and Dorgan/Obama proposal.

12
Obamas Demagoguery
  • More than 12,000 companies are registered at
    Ugland House, and Obama says it is either the
    biggest building in the world or biggest tax scam
    in the world.

13
Cayman Islands vs. Delaware
14
The OECDs New Offensive
  • At the recent Global Tax Forum in Mexico, the
    OECD rejuvenated its campaign against tax
    avoidance and other forms of legal tax planning.
  • Opponents of tax competition generally have
    claimed that the goal is to eliminate tax
    evasion, but the theory used by the OECD
    capital export neutrality ultimately leads to
    full tax harmonization.

15
The Mexico City Surprise
  • At the recent Global Tax Forum in Mexico, the
    OECD tried to insert report language broadening
    its supposed mandate.
  • They sought to add the following clause In the
    context of the broader effort to fight tax
    evasion and avoidance and to remove harmful tax
    practices that facilitate such activities, the
    main objectives of the meeting are
  • The bureaucrats were unsuccessful, but they will
    not give up.

16
The Next Steps for the Statists
  • The OECD also has announced steps to persecute
    high-net-worth individuals with greater
    monitoring and demands for advance reporting of
    activities.
  • The European Commission is proposing to
    dramatically expand the savings tax directive,
    with a goal of automatic information sharing for
    all forms of capital income .
  • The expanded EUSTD would apply to individuals and
    entities.

17
The Next Steps for the Statists
  • The European Commission is pushing to harmonize
    the definition of corporate taxable income the
    so-called CCCTB, and the left more broadly wants
    worldwide formula apportionment.
  • The OECD is expanding the so-called Global Tax
    Forum to include more anti-tax competition
    jurisdictions.
  • We also can expect renewed efforts to curtail
    international company formation and open shipping
    registries.

18
How Should Cayman Protect Itself?
  • First, realize that you are in a protracted
    battle for survival.
  • Second, realize that you wear the white hats and
    Sarkozy, Merkel, Brown, and Obama wear the black
    hats.
  • Third, understand that every concession you make
    simply whets the appetite of your enemies.

19
Dont Feed an Alligator
20
Hell Want Another Meal Tomorrowand Bring a
Friend
21
Curtailing the Welfare State
  • How do we stop these terrible predictions from
    becoming a reality?
  • Public Choice makes spending restraint a
    political challenge.
  • At a minimum, spending should grow slower than
    GDP, causing the burden of government to fall
    over time.
  • Some nations have been successful with dramatic
    spending restraint.

22
Can We Elect Good People?
  • How often is there a Ronald Reagan or even a
    Bill Clinton in the White House?
  • How often are there people like Phil Gramm and
    Dick Armey in the House and Senate?
  • Will good people ever have a controlling
    majority?
  • And if good people get power, how do we avoid
    Lord Actons dilemma?

23
Washington Is a Cesspool
24
that Becomes a Hot Tub
  • (accessories not included)

25
The Solution Is Tax Competition
  • When taxpayers have the ability to shift economic
    activity to lower-tax jurisdictions and benefit
    from the better policy in those jurisdictions.
  • This forces governments to lower tax rates and
    reform tax regimes to attract (or prevent the
    loss of) economic activity.
  • Globalization is closely linked to tax
    competition.

26
The Reason Tax Rates Have Fallen
  • Even though the political system encourages bad
    policy, politicians are moving tax law in the
    right direction.
  • 26 flat tax nations.
  • Top income tax rates have dropped 26 percentage
    points.
  • Corporate tax rates have dropped by more than 20
    percentage points.
  • Significant reductions in double taxation.

27
Average OECD Top Tax Rates
28
Falling Corporate Tax Rates
  • Average corporate tax rate in 1980 48 percent.
  • Average corporate tax rate in 1990 42 percent.
  • Average corporate tax rate in 2000 34 percent.
  • Average corporate tax rate today 26 percent.
  • America is now an outlier on corporate tax.

29
Growing List of Flat Tax Nations
30
The Expanding Flat Tax Club
Jersey 1940 20 Percent Hong Kong 1947 15
Percent Guernsey 1960 20 Percent Jamaica 198
5 25 Percent Estonia 1994 21
Percent Latvia 1995 25 Percent Lithuania
1996 24 Percent Russia 2001 13
Percent Slovakia 2004 19 Percent Ukraine 200
4 15 Percent Iraq 2005 15 Percent Romania 20
05 16 Percent Georgia 2005 12
Percent Trinidad Tobago 2006 25
Percent Pridnestrovie 2006 10 Percent Kazakhstan
2007 10 Percent Mongolia 2007 10
Percent Kyrgyzstan 2007 10 Percent Macedonia
2007 10 Percent Montenegro 2007 15
Percent Mauritius 2007 15 Percent Bulgaria 2
008 10 Percent Albania 2008 10 Percent Czech
Republic 2008 15 Percent Fed. BH 2009 10
Percent Belarus 2009 12 Percent
31
Policy Now Moving the Other Way
  • Obama has proposed higher income taxes, payroll
    taxes, death taxes, and increased double taxation
    of dividends and capital gains.
  • He also has proposed a big energy tax.
  • And taxes to finance government-run healthcare.
  • The long-term threat is a value-added tax.
  • Will Obama give us tax reform?

32
The Barack Obama Flat Tax
What did you make last year?
Send it in
33
Higher Tax Rates Will Backfire
  • High tax rates reduce incentives to engage in
    productive behavior, meaning less work, saving,
    investment, and entrepreneurship.
  • This means less taxable income.
  • To determine the impact of a tax policy change on
    tax revenue, which effect dominates The rate
    change or the change in taxable income.
  • Obama will experience revenge of the Laffer Curve.

34
Tax Rates, the Rich, and Revenue
  • In 1980, there were 116,800 rich people.
  • Those rich people reported 36.2 billion of
    income to the IRS.
  • They paid 19.0 billion of income tax to the
    federal government.

35
Tax Rates, the Rich, and Revenue
  • In 1980, there were 116,800 rich people.
  • Those rich people reported 36.2 billion of
    income to the IRS.
  • They paid 19.0 billion of income tax to the
    federal government.
  • By 1988, there were 723,700 rich people.
  • Those rich people reported 353.0 billion of
    income to the IRS.
  • They paid 99.7 billion of income tax to the
    federal government.

36
George Stigler and Gary Becker
  • Stigler Competition among communities offers
    not obstacles but opportunities to various
    communities to choose the type and scale of
    government functions they wish.
  • Gary Becker "...competition among nations tends
    to produce a race to the top rather than to the
    bottom by limiting the ability of powerful and
    voracious groups and politicians in each nation
    to impose their will at the expense of the
    interests of the vast majority of their
    populations.

37
James Buchanan and Milton Friedman
  • James Buchanan "...tax competition among
    separate units...is an objective to be sought in
    its own right.
  • Milton Friedman "Competition among national
    governments in the public services they provide
    and in the taxes they impose is every bit as
    productive as competition among individuals or
    enterprises in the goods and services they offer
    for sale and the prices at which they offer them."

38
Vernon Smith
  • Tax competition is a very good thing.
    Competition in all forms of government policy is
    important. That is really the great strength of
    globalization tending to force change on the
    part of the countries that have higher tax and
    also regulatory and other policies than some of
    the more innovative countries. The way to get
    revenue is doing all you can to encourage growth
    and wealth creation and then that gives you more
    income to tax at the lower rate down the road.

39
Edward Prescott
  • With apologies to Adam Smith, its fair to say
    that politicians of like mind seldom meet
    together, even for merriment and diversion, but
    the conversation ends in a conspiracy against the
    public, or in some contrivance to raise taxes.
    This is why international bureaucracies should
    not be allowed to create tax cartels, which
    benefit governments at the expense of the people.

40
Edmund Phelps
  • Its kind of a shame that there seems to be
    developing a kind of tendency for Western Europe
    to envelope Eastern Europe and require of Eastern
    Europe that they adopt the same economic
    institutions and regulations and everything.  We
    want to have some role models... If all these
    countries to the East are brought in and
    homogenized with the Western European members
    then that opportunity will be lost.

41
What Does Adam Smith Say?
  • An inquisition into every mans private
    circumstances, and an inquisition which, in order
    to accommodate the tax to them, watched over all
    the fluctuations of his fortunes, would be a
    source of such continual and endless vexation as
    no people could support. The proprietor of stock
    is properly a citizen of the world, and is not
    necessarily attached to any particular country.
    He would be apt to abandon the country in which
    he was exposed to a vexatious inquisition, in
    order to be assessed to a burdensome tax, and
    would remove his stock to some other country
    where he could

42
Adam SmithContinued
  • either carry on his business, or enjoy his
    fortune more at his ease. By removing his stock
    he would put an end to all the industry which it
    had maintained in the country which he left.
    Stock cultivates land stock employs labour. A
    tax which tended to drive away stock from any
    particular country would so far tend to dry up
    every source of revenue both to the sovereign and
    to the society. Not only the profits of stock,
    but the rent of land and the wages of labour
    would necessarily be more or less diminished by
    its removal. Adam Smith, An Inquiry into the
    Nature Causes of the Wealth of Nations, 1776.

43
Even OECD Economists Admit
  • OECD economists have written that the ability to
    choose the location of economic activity offsets
    shortcomings in government budgeting processes,
    limiting a tendency to spend and tax
    excessively.
  • OECD economists note that legal tax avoidance
    can be reduced by closing loopholes and illegal
    tax evasion can be contained by better
    enforcement of tax codes. But the root of the
    problem appears in many cases to be high tax
    rates.

44
So Wheres the Harmful Part?
  • The OECD, European Commission, UN, and allies are
    motivated by greed for more tax revenue meaning
    more power, which is why they want an OPEC for
    politicians.
  • This is unseemly, so they claim their real
    interest is stopping harmful tax competition
    but have never offered any evidence.
  • Empirical and theoretical data supports tax
    competition.

45
Conclusion
  • Tax competition should be celebrated rather than
    persecuted.
  • In the real world, truth takes a back seat and
    might makes right.
  • The Cayman Islands and other international
    financial centres need to be aggressive as
    possible given their constraints.
  • Make the moral case, citing rampant corruption
    and human rights abuses around the world.
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