My brother, newly-elected Deputy in the States of Jersey for the parish of St.Mary (pop. 1591), took me a week ago to a meeting in St. Helier organised by British and French NGOs to protest against tax havens. There was no government spokesman to defend Jersey’s policies; a few leftish politicians turned up, and even fewer bankers. The general line is that the storm will blow over after a few largely symbolic concessions. The Prosperos of the Jersey finance industry, and those of Bermuda, Gibraltar, Cyprus, Liechtenstein, the Cayman Islands and so on will be able to weave their profitable magic much as before.
[A]ll financial markets, products and participants must be subject to appropriate oversight or regulation, without exception and regardless of their country of domicile. This is especially true for those private pools of capital, including hedge funds, that may present a systemic risk. Furthermore we should tackle tax havens …
Angela Merkel and Jan Balkenende, Chancellor of Germany and PM of The Netherlands
We fully support the legislation … on offshore tax centres, and we look forward to working with you [the US Congress] as part of the broader effort to address international tax evasion and close the tax gap.
Timothy Geithner, US Secretary of the Treasury
We have also agreed to: … the relevant international bodies identify non-cooperative jurisdictions and to develop a tool box of effective counter measures.
G-20 Finance Ministers (their mangled syntax, not mine).
Is this growling mere displacement activity from politicians who are struggling with the harder challenges of restructuring their banks and concerting stimulus packages? Perhaps it is partly a diversion; but there’s quite enough substance to make this a sound as well as a popular policy. Here’s an intellectual framework for a ruthless Gleichschalterung from a very well-connected policy wonk:
There is the need and opportunity to close down all tax havens and regulatory havens. Tax havens are defined as countries that have bank secrecy….The anonymity provided by bank secrecy promotes tax evasion, tax avoidance (or fraud), money laundering and hiding the proceeds of criminal activity. Regulatory havens are nations that offer companies the opportunity to avoid global standards for reporting, governance, auditing, transparency, openness, etc. Tax havens and regulatory havens are key elements in the global regulatory and tax arbitrage games that have undermined government revenue bases and weakened global regulatory standards.
The means to put tax havens out of business are simple — forbid banks, other financial institutions, and private persons from doing business with and engaging in transactions with banks and other financial institutions located in countries that have bank secrecy. To take care of regulatory havens, don’t recognise and enforce contracts drawn up under their laws and do not recognise court judgements originating from tax havens.
Professor Willem Buiter, former member of the Bank of England Monetary Policy Committee, etc etc.
Buiter’s distinction between regulatory and tax havens is valuable. Closing the regulatory loopholes is easier and more urgent. The big countries can repatriate control of offshore banks either by enforcing a headquarters rule for subsidiaries, or by requiring a degree of cooperation from the offshore regulators indistinguishable from takeover. This will happen, and quickly.
Tax is a longer-term problem. Morally, the worst abuse is providing cover for looting by Third World kleptocrats and other criminal activities; but this is far less significant economically than the legal provision of tax shelters for the citizens and corporations of rich countries. You can make a case, based on the analogy with the protection Swiss banks offered wealthy German Jews in the 1930s, that secrecy for individuals protects the honest bourgeoisie of say Russia from expropriation by a lawless government. This justifies only an exception, not a rule. I can’t see any moral case for corporate tax evasion: the apparent result of a strange belief of rich-country CEOs that they have a fiduciary duty to their stockholders to exploit every loophole to pay as little tax as they can to the governments whose multiple services make their trading and profits possible.
There are two good reasons why Jersey should be panicking.
The populist anger at fat cats is getting stronger, not weaker, as the recession deepens: the row over the AIG bonuses is bigger than the one over Merrill Lynch’s. Opportunism is making an attack by big countries on tax havens look better politics all the time. Can you think of a single persuasive argument not to do it tomorrow?
Constitutionally the Channel Islands don’t have a leg a stand on. Rather like the Cayman Islands and Gibraltar, and unlike independent states like Cyprus, Luxembourg, and Liechtenstein, they are just relics of the British Empire – or if you want to be technical, of Rollo’s Duchy of Normandy (est. 911). They don’t have weak cards to play – rather none at all. Rollo’s successor in Buckingham Palace, advised by Gordon Brown Esq., can just rescind any damn privileges she likes. More important, the original rationale of King John’s bargain of 1204 with the Jerriais – you stay loyal in the face of French invasions, I’ll leave you alone – disappeared with the creation of a European polity after 1945. The tax breaks of Britain’s dependencies now depend only on sentimental tradition and the desire of the Foreign Office not to spend anything on the vestiges of empire. (It’s true that France shells out vast sums to support its havenless overseas départements in metropolitan comfort).
I’d really like to see Jersey survive as a self-governing democracy, not a British local authority hamstrung by levelling Whitehall interference. When I was a boy, it lived decently off horticulture and tourism. The bargain with the finance industry, which has turned the economy into a high-risk monoculture, now looks Faustian. Jersey’s leaders must now plan for a future in which every bank transfer of say more than £50,000 is reported to London’s well-fanged new regulator – “People should be very frightened of the FSA” – and the profits of corporations are apportioned for tax among the countries where they do business, on Californian lines.
Jersey lawyers and accountants have I suppose over the years learned some skills that will allow them to go on earning a living in such a Rawlsian future, managing funds and advising expatriates on prudent investments and wills. But the £206bn of deposits in Jersey banks at the end of 2008?
Deeper than did ever plummet sound
I’ll drown my book.
(Disclosure: as a long-term Jersey resident I have current bank accounts there and some investments in offshore funds, taken out when I was exempt from income tax anywhere).